Question 1(20 marks)

Pyre Mills, Inc. is a producer of men's and women's clothing. The company uses standard costs for all its products. The standard costs and actual costs per one unit of product for a recent period are given below:

Direct material:

Standard: 4.0 square meters at $5.40 per square meter

Actual: 4.4 square meters at $5.05 per square meter

Direct labour:

Standard: 1.6 hours at $6.75 per hour

Actual: 1.4 hours at $7.30 per hour

During this period, the company produced 4,800 units of this product

There was no inventory of materials on hand at the beginning of the period. During the period, 26,000 square meters of material were purchased, and 21,120 square meters were used in production.

Required:

a.For direct materials, compute the price and quantity variances for the period.Indicate for each variance if it is favourable or unfavourable. Provide a reasonable explanation for the quantity variance.

(5 marks)

b.For direct labour, compute the rate and efficiency variances for the period.Indicate for each variance if it is favourable or unfavourable.Provide a reasonable explanation for the rate variance.(5 marks)

Question 3 (10 marks)

GlowCompany is presently making a light that is used as a component in one of its products. Annual required production is 40,000 units. The unit product costs for the light are:

Direct materials.................................................$6

Direct labour......................................................3

Variable manufacturing overhead.........................1

Supervisor's salary.............................................1

General factory overhead2

Total unit product cost..................................$13

An external supplier has offered to supply this component for $15 each.If the offer is accepted, Glow will save the supervisor's salary and save 25% of the general factory overhead.

Required:Should this offer be accepted?Show calculations to support your answer.

Question 4 (10 marks)

Flame Limited, a private fire department, is trying to decide whether to overhaul an older fire truck or sell it and buy a new one.State how much better off Flame will be if they choose your alternative.Use a 10 year life expectancy for both alternatives.Data follow (you decide which data is relevant)

New TruckOverhaul old truck

Annual revenues$100,000$70,000

Annual cash operating costs20,00028,000

Cost of new truck$155,000

Depreciation expense for new truck12,500 per year

Cost of overhaul of old truck60,000

Current depreciation expense of old truck3,000 per year

Residual value of new truck in 10 years30,000

Value of old truck if sold now12,000

Residual value of old truck in 10 years$ 0

Required:Ignoring the time value of money, determine if Flame Ltd. should purchase the new truck or overhaul the old one.Two marks for the correct answer (purchase or overhaul), and eight marks for correct calculations.Clearly label your items and calculations for marks on this question.

Question 5 (20 marks)

AAA Co. produces electric blankets. The cost of producing and selling one blanket at the company's normal activity level of 75,000 units per month is as follows:

Direct Materials

$30.00

Direct Labour

5.90

Variable Manufacturing Overhead

2.40

Fixed Manufacturing Overhead

17.20

Variable Selling & Administrative Expense

1.80

Fixed Selling & Administrative Expense

6.30

The normal selling price of the product is $75.00 per unit.

A request has been received from an overseas customer for 2,300 units to be delivered this month at a special discounted price of $66.10. This order would have no effect on the company's normal sales and would not change any of the fixed costs. The variable selling and administrative expense would be $1.00 less per unit on this order than on normal sales.

Required:

Each of the three scenarios below is independent of the others.

a) There is sufficient idle capacity to produce the units. By how much would this special-order increase or decrease the company's operating income for the month?

b) AAA is already operating at capacity when the special order is received. If AAA decided to accept this order to expand into this geographic area, compared to the current level of sales (75,000 units at full capacity) how much would operating income decrease as a result of shifting the 2,300 domestic sales to the overseas buyer?

c) There is not enough idle capacity to produce all the units for the overseas customer, and accepting the special order would require cutting back on production of 1,300 units for regular customers. What would be the minimum acceptable price per unit for the special order for operating income to remain the same as current levels (75,000 domestic sales).