Question 1

Mastery Problem: Activity-Based Costing

WoolCorp

WoolCorp buys sheep's wool from farmers. The company began operations in January of this year, and is making decisions on product offerings, pricing, and vendors. The company is also examining its method of assigning overhead to products. Just been hired as a production manager at WoolCorp.

Currently WoolCorp makes two products: (1) raw, clean wool to be used as stuffing or insulation and (2) wool yarn for use in the textile industry.

The company would like to evaluate its costing methods for its raw wool and wool yarn.

Question Content Area

Single Plantwide Rate

WoolCorp is currently using the single plantwide factory overhead rate method, which uses a predetermined overhead rate based on an estimated allocation base such as direct labor hours or machine hours. The rate is computed as follows:

Single Plantwide Factory Overhead Rate = (Total Budgeted Factory Overhead) (Total Budgeted Plantwide Allocation Base)

WoolCorp has been using combing machine hours as its allocation base.

The company would like to consider activity-based costing. In order to understand their current system better, evaluate WoolCorp's current method of costing for raw wool and wool yarn. The production staff has compiled the following information for on the production of 450 pounds of either raw wool or wool yarn:

Factory Overhead Type	Budgeted Factory Overhead
Sorting	$25,600
Cleaning	38,400
Combing	1,200

	Raw Wool	Wool Yarn
Hours of combing machine use required	70	30

In the following table, use combing machine hours as the allocation base for assigning overhead costs to each product. When required, round your answers to the nearest dollar.

Single Plantwide Factory Overhead Rate: $fill in the blank 663bf1fce020f94_1 per combing hour

	Raw Wool	Wool Yarn
Allocated factory overhead cost	$fill in the blank 663bf1fce020f94_2	$fill in the blank 663bf1fce020f94_3

Question Content Area

Activity-Based Costing

In order to compare WoolCorp's current method with activity-based costing, interview the production staff and compile the following information, which relates to the costs for raw wool and wool yarn.

Type of Cost	Activity Base	Total Cost
Sorting	Hours of sorting	$25,600
Cleaning	Units of cleaning machine power	38,400
Combing	Hours of combing machine use	1,200

	Raw Wool	Wool Yarn
Hoursofsortingrequired	1,000	4,000
Unitsofcleaningmachinepowerrequired	1,920	4,480
Hoursofcombingmachineuserequired	70	30

In the following table, compute and enter the activity rate for each of the three activities. If required, round answers to the nearest cent.

Activity	Activity Rate
Sorting	$fill in the blank 39fdc3fc4079053_1	per sorting hour
Cleaning	$fill in the blank 39fdc3fc4079053_2	per unit of cleaning machine power
Combing	$fill in the blank 39fdc3fc4079053_3	per hour of combing machine use

In the following table, allocate the costs of sorting, cleaning, and combing based on the rates of activity consumed by each product's process. When required, round answers to the nearest dollar.

	Raw Wool	Wool Yarn
Sorting cost	$fill in the blank 39fdc3fc4079053_4	$fill in the blank 39fdc3fc4079053_5
Cleaning cost	fill in the blank 39fdc3fc4079053_6	fill in the blank 39fdc3fc4079053_7
Combing cost	fill in the blank 39fdc3fc4079053_8	fill in the blank 39fdc3fc4079053_9
Total cost	$fill in the blank 39fdc3fc4079053_10	$fill in the blank 39fdc3fc4079053_11

Final Question

After reviewing work on the Single Plantwide Rate and Activity-Based Costing panels, which of the costing method would recommend to WoolCorp, and why?

Activity-based costing method, because it recognizes differences in how each product uses factory overhead activities, yielding more accurate product costs.Single plantwide factory overhead rate method, because it is a tried-and-true method used for the entire life of the company.Since both the methods give the same costs for each product, there is no advantage to either method.The company should use whichever method is the cheapest to implement.

Question 2

Mastery Problem: Cost-Volume-Profit Analysis

Cost Behavior

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

Units Produced	Total Lumber Cost	Total Utilities Cost	Total Machine Depreciation Cost
15,000shelves	$165,000	$19,250	$140,000
30,000shelves	330,000	36,500	140,000
60,000shelves	660,000	71,000	140,000
75,000shelves	825,000	88,250	140,000

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

Lumber	Variable CostFixed CostMixed CostNone of these
Utilities	Variable CostFixed CostMixed CostNone of these
Depreciation	Variable CostFixed CostMixed CostNone of these

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N = Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with answers. Round variable portion of cost (per unit) answers to two decimal places.

Cost	Fixed Portion of Cost	Variable Portion of Cost (per Unit)
Lumber	$fill in the blank 5eaaa500800401c_4	$fill in the blank 5eaaa500800401c_5
Utilities	fill in the blank 5eaaa500800401c_6	fill in the blank 5eaaa500800401c_7
Depreciation	fill in the blank 5eaaa500800401c_8	fill in the blank 5eaaa500800401c_9

High-Low

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

	Units Produced	Total Cost
January	4,360	units	$65,600
February	275		6,250
March	1,000		15,000
April	5,775		116,250
May	1,750		32,500
June	3,015		48,000

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the high-low method. Recall that Total Costs = (Variable Cost Per Unit x Number of Units Produced) + Fixed Cost. Complete the following table.

Total Fixed Cost	Variable Cost per Unit
$fill in the blank ab664906702c047_1	$fill in the blank ab664906702c047_2

2. With Total Fixed Cost and Variable Cost per Unit from the high-low method, compute the total cost for the following values of N (Number of Units Produced).

Number of Units Produced	Total Cost
3,500	$fill in the blank ab664906702c047_3
4,360	fill in the blank ab664906702c047_4
5,775	fill in the blank ab664906702c047_5

3. Why does the total cost computed for 4,360 units not match the data for January?

a. The high-low method is accurate only for months in which production is at full capacity.

b. The high-low method only gives accurate data when fixed costs are zero.

c. The high-low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

d. The high-low method gives accurate data only for levels of production outside the relevant range.

abcd

Contribution Margin

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements. Complete the following table from the data provided on the income statements. Each company sold 77,800 units during the year.

	Cover-to-Cover Company	Biblio Files Company
Contribution margin ratio (percent)	fill in the blank a18ff8044fe0064_1%	fill in the blank a18ff8044fe0064_2%
Unit contribution margin	$fill in the blank a18ff8044fe0064_3	$fill in the blank a18ff8044fe0064_4
Break-even sales (units)	fill in the blank a18ff8044fe0064_5	fill in the blank a18ff8044fe0064_6
Break-even sales (dollars)	$fill in the blank a18ff8044fe0064_7	$fill in the blank a18ff8044fe0064_8

Income Statement - Cover-to-Cover

Cover-to-Cover Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$389,000
Variable costs:
Manufacturing expense	$233,400
Selling expense	19,450
Administrative expense	58,350	(311,200)
Contribution margin		$77,800
Fixed costs:
Manufacturing expense	$5,000
Selling expense	4,000
Administrative expense	10,450	(19,450)
Operating income		$58,350

Income Statement - Biblio Files

Biblio Files Company Contribution Margin Income Statement For the Year Ended December 31, 20Y8
Sales		$389,000
Variable costs:
Manufacturing expense	$155,600
Selling expense	15,560
Administrative expense	62,240	(233,400)
Contribution margin		$155,600
Fixed costs:
Manufacturing expense	$79,250
Selling expense	8,000
Administrative expense	10,000	(97,250)
Operating income		$58,350

Sales Mix

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

Type of Bookshelf	Sales Price per Unit	Variable Cost per Unit
Basic	$5.00	$1.75
Deluxe	9.00	8.10

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called "Combined," the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $341,880. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Type of Bookshelf	Percent of Sales Mix	Break-Even Sales in Units	Break-Even Sales in Dollars
Basic	fill in the blank 5fb349072017ff3_1%	fill in the blank 5fb349072017ff3_2	$fill in the blank 5fb349072017ff3_3
Deluxe	fill in the blank 5fb349072017ff3_4%	fill in the blank 5fb349072017ff3_5	$fill in the blank 5fb349072017ff3_6

Target Profit

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales.

1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be? $fill in the blank 81b5f3093068fdf_1

2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be? $fill in the blank 81b5f3093068fdf_2

3. What would explain the difference between answers for (1) and (2)?

a. Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide operating income.

b. Cover-to-Cover Company's contribution margin ratio is lower, meaning that it's more efficient in its operations.

c. The companies have goals that are not in the relevant range.

d. The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

abcd

Question 3

Mastery Problem: Variable Costing for Management Analysis

Question Content Area

Absorption vs. Variable

Operating income is one of the most important items reported by a company. Depending on the decision-making needs of management, operating income can be determined using absorption costing or variable costing.

Select whether the following characteristics are most often associated with absorption costing or variable costing.

Required under generally accepted accounting principles (GAAP)	Absorption CostingVariable Costing
Often used for internal use in decision making	Absorption CostingVariable Costing
Cost of goods manufactured includes only variable manufacturing costs	Absorption CostingVariable Costing
Used in reports prepared for external users	Absorption CostingVariable Costing
Fixed factory overhead costs are not part of cost of goods manufactured	Absorption CostingVariable Costing
Both fixed and variable factory costs are included in cost of goods sold and inventory	Absorption CostingVariable Costing

Question Content Area

Absorption Statement

Absorption costing does not distinguish between variable and fixed costs. All manufacturing costs are included in the cost of goods sold.

Saxon, Inc. Absorption Costing Income Statement For the Year Ended December 31
Sales		$1,360,000
Cost of goods sold:
Cost of goods manufactured	$800,000
Ending inventory	(120,000)
Total cost of goods sold		(680,000)
Gross profit		$680,000
Selling and administrative expenses		(320,000)
Operating income		$360,000

Variable Statement

Under variable costing, the cost of goods manufactured includes only variable manufacturing costs. This type of income statement includes a computation of manufacturing margin.

Saxon, Inc. Variable Costing Income Statement For the Year Ended December 31
Sales		$1,360,000
Variable cost of goods sold:
Variable cost of goods manufactured	$560,000
Ending inventory	(84,000)
Total variable cost of goods sold		(476,000)
Manufacturing margin		$884,000
Variable selling and administrative expenses		(255,000)
Contribution margin		$629,000
Fixed costs:
Fixed manufacturing costs	$240,000
Fixed selling and administrative expenses	65,000
Total fixed costs		(305,000)
Operating income		$324,000

Method Comparison

Review the income statements on the Absorption Statement and Variable Statement, then complete the following table. The company's sales price per unit is $80, and the number of units in ending inventory is 3,000. There was no beginning inventory.

Item	Amount
Number of units sold	fill in the blank 7e134a04cfcf06d_1
Variable sales and administrative costperunit	$fill in the blank 7e134a04cfcf06d_2
Number of units manufactured	fill in the blank 7e134a04cfcf06d_3
Variable cost of goods manufacturedperunit	$fill in the blank 7e134a04cfcf06d_4
Fixedmanufacturingcostperunit	$fill in the blank 7e134a04cfcf06d_5

Question Content Area

Manufacturing Decisions

Whenever the units manufactured differ from the units sold, finished goods inventory is affected. In analyzing operating income, such increases and decreases could be misinterpreted as operating efficiencies or inefficiencies. Each decision-making situation should be carefully analyzed in deciding whether absorption or variable costing reporting would be more useful.

All costs are controllable in the long run by someone within a business. For a given level of management, costs may be controllable costs or noncontrollable costs.

The production manager for Saxon, Inc. is worried because the company is not showing a high enough profit. Looking at the income statements on the Absorption Statement and the Variable Statement, he notices that the operating income is higher on the absorption cost income statement. He is considering manufacturing another 10,000 units, up to the company's capacity for manufacturing, in the coming year. He reasons that this will boost operating income and satisfy the company's owner that the company is sufficiently profitable. Although the total units manufactured changes, assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same. Complete questions (1)-(4) that follow. If the answer is zero, enter "0".

1. Use the income statements on the Absorption Statement and Variable Statement to complete the following table for the original production level. Then prepare similar income statements at a production level 10,000 units higher and add that information to the table. Assume that total fixed costs, unit variable costs, unit sales price, and the sales levels are the same at both production levels.

Operating Income
Original Production Level-Absorption	Original Production Level-Variable	Additional 10,000 Units-Absorption	Additional 10,000 Units-Variable
$fill in the blank ca2cd7fe9003fd6_1	$fill in the blank ca2cd7fe9003fd6_2	$fill in the blank ca2cd7fe9003fd6_3	$fill in the blank ca2cd7fe9003fd6_4

2. What is the change in operating income from producing 10,000 additional units under absorption costing?

$fill in the blank ca2cd7fe9003fd6_5

3. What is the change in operating income from producing 10,000 additional units under variable costing?

$fill in the blank ca2cd7fe9003fd6_6

4. What would be recommendation to the production manager?

a. Do not produce the extra 10,000 units. The increase in operating income under absorption costing is due to fixed manufacturing costs being held in inventory, and the additional inventory will lead to higher handling, storage, financing, and obsolescence costs.

b. Produce the extra 10,000 units. Operating income will be increased, and the production manager will receive praise for creating higher profits.

c. Do not produce the extra 10,000 units. Operating income does not change under absorption costing when the additional units are produced.

d. Produce the extra 10,000 units. It's always a good idea to have extra units on hand and keep the factory operating at capacity, even if all the units are not sold.

abcd

Question 4

Mastery Problem: Budgeting

Question Content Area

LearnCo

LearnCo manufactures and sells one product, an abacus for classroom use, with two models, the Basic model and the Deluxe model. The company began operations on January 1, 20Y1, and is planning for 20Y2, its second year of operations, by preparing budgets from its master budget.

The company is trying to decide how many units to manufacture, how much it might spend on direct materials and direct labor, and what their factory overhead expenses might be. In addition, the company is interested in budgeting for selling and administrative costs, and in creating a budgeted income statement showing a prediction of net income for 20Y2.

Have been asked to assist the controller of LearnCo in preparing the 20Y2 budgets.

Sales Budget

The sales budget often uses the prior year's sales as a starting point, and then sales quantities are revised for various factors such as planned advertising and promotion, projected pricing changes, and expected industry and general economic conditions. LearnCo has completed reviewing its prior year's sales and has prepared the following sales budget.

After reviewing LearnCo's sales budget, note that three numbers have been omitted. The company's controller has told you that the units sold for the Basic and Deluxe models are expected to be the same. Fill in the missing amounts.

LearnCo Sales Budget For the Year Ending December 31, 20Y2
Product	Unit Sales Volume	Unit Selling Price	Total Sales
Basic Abacus	fill in the blank c75d7cff3f96008_1	$7	$252,000
Deluxe Abacus	fill in the blank c75d7cff3f96008_2	fill in the blank c75d7cff3f96008_3	468,000
Totals	72,000		$720,000

Question Content Area

Production Budget

The production budget should be integrated with the sales budget to ensure that production and sales are kept in balance during the year. The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels.

Note that LearnCo has omitted six numbers from the following production budget and fill in the missing amounts. May need to use numbers from the sales budget prepared.

LearnCo Production Budget For the Year Ending December 31, 20Y2
	Units Basic	Units Deluxe
Expected units to be sold (from Sales Budget)	fill in the blank b80274f88fa104b_1	fill in the blank b80274f88fa104b_2
Desired ending inventory, December 31, 20Y2	1,000	3,000
Total units available	fill in the blank b80274f88fa104b_3	fill in the blank b80274f88fa104b_4
Estimated beginning inventory, January 1, 20Y2	(1,050)	(2,100)
Total units to be produced	fill in the blank b80274f88fa104b_5	fill in the blank b80274f88fa104b_6

Question Content Area

Direct Materials Purchases Budget

The direct materials purchases budget should be integrated with the production budget to ensure that production is not interrupted during the year.

Before make any changes to the budget, review the information on the following Direct Materials Data Table and enter the units to be produced from the Production Budget. After scanning the direct materials purchases budget (which follows the Direct Materials Data Table), observe that LearnCo has omitted quite a few numbers from the budget. Fill in the missing amounts. May need to use numbers from the Direct Materials Data Table, or from the sales budget and production budget prepared. When required, round answers to the nearest dollar.

Direct Materials Data Table
	Wood Pieces	Beads
Packages required per unit:
Basic abacus	1	2
Deluxe abacus	2	3
Cost per package:
Wood pieces	$0.25
Beads	$0.25
Unitstobeproduced (from Production Budget):
Basic abacus	fill in the blank 8e09bf07e04af8b_1
Deluxe abacus	fill in the blank 8e09bf07e04af8b_2

LearnCo Direct Materials Purchases Budget For the Year Ending December 31, 20Y2
	Direct Materials
	Wood Pieces	Beads	Total
Packages required for production:
Basic abacus	fill in the blank 8e09bf07e04af8b_3	fill in the blank 8e09bf07e04af8b_4
Deluxe abacus	fill in the blank 8e09bf07e04af8b_5	fill in the blank 8e09bf07e04af8b_6
Desired inventory, December 31, 20Y2	2,200	5,000
Total packages available	fill in the blank 8e09bf07e04af8b_7	fill in the blank 8e09bf07e04af8b_8
Estimated inventory, January 1, 20Y2	(3,500)	(4,500)
Total packages to be purchased	fill in the blank 8e09bf07e04af8b_9	fill in the blank 8e09bf07e04af8b_10
Unit price (per package)	$fill in the blank 8e09bf07e04af8b_11	$fill in the blank 8e09bf07e04af8b_12
Total direct materials to be purchased	$fill in the blank 8e09bf07e04af8b_13	$fill in the blank 8e09bf07e04af8b_14	$72,888

Question Content Area

Direct Labor Cost Budget

Direct labor needs from the direct labor cost budget should be coordinated between the production and personnel departments so that there will be enough labor available for production.

Before make any changes to the budget, review the information on the following Direct Labor Data Table and enter the units to be produced from the Production Budget. After scanning the Direct Labor Cost Budget (which follows the Direct Labor Data Table), observe that LearnCo has omitted quite a few numbers from the budget. Fill in the missing amounts. May need to use numbers from the Direct Labor Data Table, or from the sales budget, production budget, and direct materials purchases budget prepared. When required, round answers to the nearest dollar.

Direct Labor Data Table
	Gluing	Assembly
Hours required per unit:
Basic abacus	0.10	0.10
Deluxe abacus	0.10	0.20
Labor hourly rate:
Gluing	$13
Assembly	$17
Units to be produced (from Production Budget):
Basic abacus	fill in the blank de4568068faf029_1
Deluxe abacus	fill in the blank de4568068faf029_2

LearnCo Direct Labor Cost Budget For the Year Ending December 31, 20Y2
	Gluing	Assembly	Total
Hours required for production:
Basic abacus	fill in the blank de4568068faf029_3	fill in the blank de4568068faf029_4
Deluxe abacus	fill in the blank de4568068faf029_5	fill in the blank de4568068faf029_6
Total	fill in the blank de4568068faf029_7	fill in the blank de4568068faf029_8
Hourly rate	$fill in the blank de4568068faf029_9	$fill in the blank de4568068faf029_10
Total direct labor cost	$fill in the blank de4568068faf029_11	$fill in the blank de4568068faf029_12	$281,280

Question Content Area

Factory Overhead Cost Budget

The factory overhead cost budget should be integrated with the production budget to ensure that production is not interrupted during the year. This budget may be supported by departmental schedules, which normally separate factory overhead costs into fixed and variable costs so that department managers may monitor and evaluate costs during the year. For simplicity, LearnCo has not separated costs in this manner.

After reviewing the following factory overhead cost budget, note that LearnCo has completed the budget with the exception of one amount. Fill in the missing amount.

LearnCo Factory Overhead Cost Budget For the Year Ending December 31, 20Y2
Indirect factory wages	$5,400
Power and light	fill in the blank a2e0e5fbdf98fbf_1
Depreciation of plant and equipment	1,450
Total factory overhead cost	$18,100

Question Content Area

Cost of Goods Sold Budget

The cost of goods sold budget integrates the direct materials purchases budget, direct labor cost budget, and factory overhead cost budget. Estimated and desired inventories for direct materials, work in process, and finished goods must also be integrated into the cost of goods sold budget.

Complete the preparation of the cost of goods sold budget for LearnCo, using information that follows provided by the controller, and using the previous budgets have prepared.

LearnCo Cost of Goods Sold Budget For the Year Ending December 31, 20Y2
Finished goods inventory, January 1, 20Y2			$9,870
Work in process inventory, January 1, 20Y2		$2,010
Direct materials:
Direct materials inventory, January 1, 20Y2	$2,000
Direct materials purchases	fill in the blank 14443c030042fac_1
Cost of direct materials available for use	$fill in the blank 14443c030042fac_2
Direct materials inventory, December 31, 20Y2	(1,800)
Cost of direct materials placed in production	$fill in the blank 14443c030042fac_3
Direct labor	fill in the blank 14443c030042fac_4
Factory overhead	fill in the blank 14443c030042fac_5
Total manufacturing costs		fill in the blank 14443c030042fac_6
Total work in process during period		$fill in the blank 14443c030042fac_7
Work in process inventory, December 31, 20Y2		(1,250)
Cost of goods manufactured			fill in the blank 14443c030042fac_8
Cost of finished goods available for sale			$fill in the blank 14443c030042fac_9
Finished goods inventory, December 31, 20Y2			(1,500)
Cost of goods sold			$fill in the blank 14443c030042fac_10

Question Content Area

Selling/Admin. Expenses Budget

The sales budget is often used as the starting point for the selling and administrative expenses budget. For example, a budgeted increase in sales may require more advertising expenses. LearnCo has prepared its selling and administrative expenses budget as follows. This budget is merely reviewed by for use on the budgeted income statement.

LearnCo Selling and Administrative Expenses Budget For the Year Ending December 31, 20Y2
Selling expenses:
Sales salaries expense	$45,000
Advertising expense	15,000
Travel expense	5,400
Total selling expenses		$65,400
Administrative expenses:
Officers' salaries expense	$85,000
Office salaries expense	35,000
Office rent expense	26,000
Office supplies expense	6,400
Miscellaneous administrative expenses	1,600
Total administrative expenses		154,000
Total selling and administrative expenses		$219,400

Budgeted Income Statement

The budgeted income statement is prepared by integrating the sales budget, cost of goods sold budget, and selling and administrative expenses budget. Additional information that may be helpful in preparing the budgeted income statement are on the following Budgeted Income Statement Data Table.

Review the Budgeted Income Statement Data Table, then complete the budgeted income statement that follows the table. Round the computed amount for income tax to the nearest whole dollar.

Budgeted Income Statement Data Table
Interest revenue for the year	$2,000
Interest expense for the year	$1,500
LearnCo's income tax rate	40%

LearnCo Budgeted Income Statement For the Year Ending December 31, 20Y2
Revenue from sales		$fill in the blank d7021ffae04a039_1
Cost of goods sold		fill in the blank d7021ffae04a039_2
Gross profit		$fill in the blank d7021ffae04a039_3
Selling and administrative expenses:
Selling expenses	$fill in the blank d7021ffae04a039_4
Administrative expenses	fill in the blank d7021ffae04a039_5
Total selling and administrative expenses		fill in the blank d7021ffae04a039_6
Operating income		$fill in the blank d7021ffae04a039_7
Other revenue and expense:
Interest revenue	$fill in the blank d7021ffae04a039_8
Interest expense	fill in the blank d7021ffae04a039_9	fill in the blank d7021ffae04a039_10
Income before income tax		$fill in the blank d7021ffae04a039_11
Income tax		fill in the blank d7021ffae04a039_12
Net income		$fill in the blank d7021ffae04a039_13

Question Content Area

Final Questions

Budgeting affects the planning, directing, and controlling functions of management. LearnCo wishes to determine the sensitivity of some of its budget values to changes in the economy.

Using the information on the completed budgets, answer the following questions. Consider each question separately, assuming that all other data remains the same, including the level of production of each model.

1. LearnCo believes that sales of the Deluxe Abacus model may decrease in 20Y2. If Deluxe abacus sales are zero, what will be the effect on LearnCo's income before income tax? For simplicity, ignore any change in Cost of Goods Sold.

a. If LearnCo sells zero Deluxe Abacus units in 20Y2, it will break even (i.e., the company will have zero income before income tax).

b. LearnCo will have a net loss before income tax if it sells zero Deluxe Abacus units in 20Y2.

c. LearnCo will still have positive income before income tax if it sells zero Deluxe Abacus units in 20Y2.

abcb

2. LearnCo's vendor for bead packages is expected to double its price per package of beads. If this occurs, what will be the effect on income before income tax?

a. If the price for bead packages doubles, LearnCo will break even (i.e., the company will have zero income before income tax).

b. LearnCo will have a loss before income tax if the price for bead packages doubles.

c. LearnCo will still have positive income before income tax if the price for bead packages doubles.

abcc

3. LearnCo is aware that its labor prices for the Gluing part of the manufacturing process may increase to $15.00 per hour due to changes in minimum wage laws in its state. If this occurs, what will be the effect on LearnCo's income before income tax?

a. LearnCo will still have positive income before income tax if Gluing labor costs increase to $15.00 per hour.

b. If Gluing labor costs increase to $15.00 per hour, LearnCo will break even (i.e., the company will have zero income before income tax).

c. LearnCo will have a loss before income tax if Gluing labor costs increase to $15.00 per hour.

abca

4. LearnCo's controller believes that the company can decrease its selling expenses by 10% and its administrative expenses by 15%. How much would income before income tax increase if these expense cuts are implemented? Round answer to the nearest dollar.

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