Unit 9 Exercise

Question 1:

Pippa earns $68,000 annually as a marketing specialist in Mexico City, Mexico. She has applied for admission to the BBA program at Yorkville University. If accepted, she will resign and move to Halifax, Nova Scotia. Pippa has assembled the following data to make the decision:

Pippa?s current annual salary (2% raise expected next year)	$68,000
Annual tuition and fees	14,000
Annual book and supply expense	3,000
Monthly living expenses in Mexico City	800
Monthly living expenses in Halifax	1,600
Monthly auto expenses in Mexico City	350
Monthly auto expenses in Halifax	350
Cost of two business suits purchased just prior to resigning	600
Moving expenses	5,500

Required:

Calculate the following in the context of Pippa's decision:

Total sunk costs (if any)

Total differential or incremental costs (if any)

Total opportunity costs (if any

What is your best estimate of the total cost to Pippa?s of earning a BBA degree if it will take her 24 months to complete the program?

Question 2:

Copy and Paste, a document creation and copying company, has two departments, Design and Copying. The company?s most recent monthly contribution-format income statement follows:

Department	Total	Design	Copying
Sales	$1,000,000	$200,000	$800,000
Variable expenses	380,000	60,000	320,000
Contribution margin	620,000	140,000	480,000
Fixed expenses	540,000	180,000	360,000
Operating income (loss)	$80,000	$(40,000)	$120,000

A study indicates that $74,000 of the fixed expenses being charged to the Design Department are sunk costs or allocated costs that will continue even if the Design Department is dropped. In addition, the elimination of the Design Department would result in a 5% decrease in the sales of the Copying Department.

Required:

If the Design Department is dropped, what will be the effect on the operating income of the company as a whole? Should the Design department be dropped?

Question 3:

Alphabet Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $200,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the split-off point. Each product may be sold at the split-off point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are:

Product	Sales Value at Split-Off	Further Processing Costs	Sales Value After Further Processing
J	$180,000	$60,000	$230,000
K	$135,000	$105,000	$280,000
L	$95,000	$85,000	$160,000

The "Further Processing Costs" consist of variable and avoidable fixed costs.

Required:

Which product or products should be sold at the split-off point, and which product or products should be processed further? Show computations.

Question 4:

The following are the selling price, variable costs, and contribution margin for one unit of each of Banner Company?s three products: A, B, and C:

	Product
	A	B	C
Selling Price	$60	$90	$80
Variable costs:
Direct materials	27	14	40
Direct labour	12	32	16
Variable manufacturing overhead	3	8	4
Total variable cost	42	54	60
Contribution margin	$18	$36	$20
Contribution margin ratio	30%	40%	25%

Due to a strike in the plant of one of its competitors, demand for the company?s products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labour rate is $8 per hour, and only 3,000 hours of labour time are available each week.

Required:

Compute the amount of contribution margin that will be obtained per hour of labour time spent on each product.

Which orders would you recommend that the company work on next week?the orders for product A, product B, or product C? Show computations.

By paying overtime wages, more than 3,000 hours of direct labour time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? Explain.

Unit 9 Exercise Question 1: Pippa earns $68,000 annually as a marketing specialist in Mexico City, Mexico. She has applied for admission to the BBA program at Yorkville University. If accepted, she will resign and move to Halifax, Nova Scotia. Pippa has assembled the following data to make the decision: Pippa's current annual salary (2% raise expected next year) Annual tuition and fees $68,000 14,000 Annual book and supply expense 3,000 Monthly living expenses in Mexico City 800 Monthly living expenses in Halifax 1,600 Monthly auto expenses in Mexico City 350 Monthly auto expenses in Halifax 350 Cost of two business suits purchased just prior to resigning 600 Moving expenses 5,500 Required: 1. 2. Calculate the following in the context of Pippa's decision: a. Total sunk costs (if any) b. Total differential or incremental costs (if any) c. Total opportunity costs (if any What is your best estimate of the total cost to Pippa's of earning a BBA degree if it will take her 24 months to complete the program? Question 2: Copy and Paste, a document creation and copying company, has two departments, Design and Copying. The company's most recent monthly contributionformat income statement follows: Department Sales Variable expenses Total $1,000,000 380,000 Design Copying $200,000 $800,000 60,000 320,000 Contribution margin Fixed expenses 620,000 540,000 Operating income (loss) $80,000 140,000 480,000 180,000 360,000 $(40,000) $120,000 A study indicates that $74,000 of the fixed expenses being charged to the Design Department are sunk costs or allocated costs that will continue even if the Design Department is dropped. In addition, the elimination of the Design Department would result in a 5% decrease in the sales of the Copying Department. Required: 1. If the Design Department is dropped, what will be the effect on the operating income of the company as a whole? Should the Design department be dropped? Question 3: Alphabet Corp. manufactures three products from a common input in a joint processing operation. Joint processing costs up to the splitoff point total $200,000 per year. The company allocates these costs to the joint products on the basis of their total sales value at the splitoff point. Each product may be sold at the splitoff point or processed further. The additional processing costs and sales value after further processing for each product (on an annual basis) are: Product Sales Value at Further Processing Sales Value After Split-Off Costs Further Processing J $180,000 $60,000 $230,000 K $135,000 $105,000 $280,000 L $95,000 $85,000 $160,000 The "Further Processing Costs" consist of variable and avoidable fixed costs. Required: 1. Which product or products should be sold at the splitoff point, and which product or products should be processed further? Show computations. Question 4: The following are the selling price, variable costs, and contribution margin for one unit of each of Banner Company's three products: A, B, and C: Product A Selling Price B C $60 $90 $80 Direct materials 27 14 40 Direct labour 12 32 16 3 8 4 42 54 60 $18 $36 $20 30% 40% 25% Variable costs: Variable manufacturing overhead Total variable cost Contribution margin Contribution margin ratio Due to a strike in the plant of one of its competitors, demand for the company's products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labour rate is $8 per hour, and only 3,000 hours of labour time are available each week. Required: 1. Compute the amount of contribution margin that will be obtained per hour of labour time spent on each product. 2. Which orders would you recommend that the company work on next weekthe orders for product A, product B, or product C? Show computations. 3. By paying overtime wages, more than 3,000 hours of direct labour time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? Explain