ACC510 Grantham Week 2 Classifying Manufacturing Costs Paper homework questions attachedChapter 2:Exercises 2, 3, 4, 5, 10Chapter 3:Exercises 1, 4, 5, 7, 8

ACC510 Grantham Week 2 Classifying Manufacturing Costs Paper homework questions attachedChapter 2:Exercises 2, 3, 4, 5, 10Chapter 3:Exercises 1, 4, 5, 7, 8, 13, and case 33. W2 Assignment
Complete homework exercises in Word or Excel.
Chapter 2: Exercises 2, 3, 4, 5, 10
EXERCISE 2–2 Classifying Manufacturing Costs [LO 2–2] The PC Works assembles custom computers
from components supplied by various manufacturers. The company is very small and its assembly shop
and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed
below are some of the costs that are incurred at the company. Required: For each cost, indicate
whether it would most likely be classified as direct labor, direct materials, manufacturing overhead,
selling, or an administrative cost. The cost of a hard drive installed in a computer. The cost of advertising
in the Puget Sound Computer User newspaper. The wages of employees who assemble computers from
components. Sales commissions paid to the company’s salespeople. The wages of the assembly shop’s
supervisor. The wages of the company’s accountant. Depreciation on equipment used to test assembled
computers before release to customers. Rent on the facility in the industrial park.
EXERCISE 2–3 Classification of Costs as Product or Period Cost [LO 2–3] Suppose that you have been
given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy
cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned,
has approached a bank for a loan to help it finance its growth. The bank requires financial statements
before approving such a loan. You have been asked to help prepare the financial statements and were
given the following list of costs: Depreciation on salespersons’ cars. Rent on equipment used in the
factory. Lubricants used for machine maintenance. Salaries of personnel who work in the finished goods
warehouse. Soap and paper towels used by factory workers at the end of a shift. Factory supervisors’
salaries. Heat, water, and power consumed in the factory. Materials used for boxing products for
shipment overseas. (Units are not normally boxed.) Advertising costs. Workers’ compensation insurance
for factory employees. Depreciation on chairs and tables in the factory lunchroom. The wages of the
receptionist in the administrative offices. Cost of leasing the corporate jet used by the company’s
executives. The cost of renting rooms at a Florida resort for the annual sales conference. The cost of
packaging the company’s product. Page 51 Required: Classify the above costs as either product costs or
period costs for the purpose of preparing the financial statements for the bank.
EXERCISE 2–4 Fixed and Variable Cost Behavior [LO 2–4] Espresso Express operates a number of
espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and
the variable cost per cup of coffee served is $0.22.
Required: 1. Fill in the following table with your estimates of total costs and cost per cup of coffee at the
indicated levels of activity for a coffee stand. Round off the cost of a cup of coffee to the nearest tenth
of a cent.
Cups of Coffee Served in a Week
2,000 2,100 2,200
Fixed cost. . . . . . . . . . . . . . . . . . . . . . . . . .
?
?
?
Variable cost. . . . . . . . . . . . . . . . . . . . . . . .
?
?
?
Total cost . . . . . . . . . . . . . . . . . . . . . . . . . .
?
?
?
Average cost per cup of coffee served . . . . . .
?
?
?
2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number
of cups of coffee served in a week increases? Explain.
EXERCISE 2–5 High-Low Method [LO 2–5]
The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the
hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented
out for one day. The hotel’s business is highly seasonal, with peaks occurring during the ski season and
in the summer.
Month
Occupancy-Days
Electrical Costs
January. . . . . . . . . . . . . .
1,736
$4,127
February. . . . . . . . . . . . .
1,904
$4,207
March. . . . . . . . . . . . . . .
2,356
$5,083
April. . . . . . . . . . . . . . . .
960
$2,857
May . . . . . . . . . . . . . . . .
360
$1,871
June. . . . . . . . . . . . . . . .
744
$2,696
July . . . . . . . . . . . . . . . .
2,108
$4,670
August . . . . . . . . . . . . . .
2,406
$5,148
September . . . . . . . . . .
840
$2,691
October. . . . . . . . . . . . . .
124
$1,588
November . . . . . . . . . . . .
720
$2,454
December . . . . . . . . . . . .
1,364
$3,529
Required:
Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of
electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and the variable cost
to the nearest whole cent.
What other factors other than occupancy-days are likely to affect the variation in electrical costs from
month to month?
Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of
electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and the variable cost
to the nearest whole cent.
What other factors other than occupancy-days are likely to affect the variation in electrical costs from
month to month?
EXERCISE 2–10 Cost Behavior; Contribution Format Income Statement [LO 2–4, LO 2–6] Harris
Company manufactures and sells a single product. A partially completed schedule of the company’s total
and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given
below:
Units Produced and Sold
30,000
40,000
50,000
Variable costs. . . . . . . . . . . .
$180,000
?
?
Fixed costs. . . . . . . . . . . . . .
300,000
?
?
$480,000
?
?
Variable cost. . . . . . . . . . . . .
?
?
?
Fixed cost. . . . . . . . . . . . . . .
?
?
?
Total cost per unit. . . . . . . . . .
?
?
?
Total costs:
Total costs. . . . . . . . . . . . . . .
Cost per unit:
Required:
Complete the schedule of the company’s total and unit costs above.
Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per
unit. Prepare a contribution format income statement for the year.
Chapter 3: Exercises 1, 4, 5, 7, 8, 13, and case 33.
EXERCISE 3–1 Preparing a Contribution Format Income Statement [LO3–1]
Whirly Corporation’s most recent income statement is shown below:
Total
Per Unit
Sales (10,000 units). . . . . . . . . . . . . . . . . . . . . . . $350,000
$35.00
Variable expenses. . . . . . . . . . . . . . . . . . . . . . . . . 200,000
20.00
Contribution margin. . . . . . . . . . . . . . . . . . . . . . . 150,000
$15.00
Fixed expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000
Net operating income. . . . . . . . . . . . . . . . . . . . . $ 15,000
Required: Prepare a new contribution format income statement under each of the following conditions
(consider each case independently):
1. The sales volume increases by 100 units.
2. The sales volume decreases by 100 units.
3. The sales volume is 9,000 units.
EXERCISE 3–4 Computing and Using the CM Ratio [LO3–3]
Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable
expenses were $120,000, and fixed expenses were $65,000.
Required:
1. What is the company’s contribution margin (CM) ratio?
2. Estimate the change in the company’s net operating income if it were to increase its total sales
by $1,000.
EXERCISE 3–5 Changes in Variable Costs, Fixed Costs, Selling Price, and Volume [LO3–4]
Data for Hermann Corporation are shown below:
Per
Percent
Unit
of Sales
Selling price. . . . . . . . . . . . . . . . . . . .
$90
100%
Variable expenses. . . . . . . . . . . . . . . .
63
70%
Contribution margin . . . . . . . . . . . . . .
$27
30%
Fixed expenses are $30,000 per month and the company is selling 2,000 units per month.
Required:
1. The marketing manager argues that a $5,000 increase in the monthly advertising budget would
increase monthly sales by $9,000. Should the advertising budget be increased?
2. Refer to the original data. Management is considering using higher-quality components that
would increase the variable expense by $2 per unit. The marketing manager believes that the
higher-quality product would increase sales by 10% per month. Should the higher-quality
components be used?
EXERCISE 3–7 Compute the Level of Sales Required to Attain a Target Profit [LO3–6]
Lin Corporation has a single product whose selling price is $120 and whose variable expense is $80
per unit. The company’s monthly fixed expense is $50,000.
Required:
1. Using the equation method, solve for the unit sales that are required to earn a target profit of
$10,000.
2. Using the formula method, solve for the unit sales that are required to earn a target profit of
$15,000.
EXERCISE 3–8 Compute the Margin of Safety [LO3–7]
Molander Corporation is a distributor of a sun umbrella used at resort hotels. Data concerning the next
month’s budget appear below:
Selling price. . . . . . . . . . . . . . . . .
$30 per unit
Selling price. . . . . . . . . . . . . . . . .
$30 per unit
Variable expenses. . . . . . . . . . . . .
$20 per unit
Fixed expenses. . . . . . . . . . . . . . . .
$7,500 per month
Unit sales. . . . . . . . . . . . . . . . . . . .
1,000 units per month
Required:
1. Compute the company’s margin of safety.
2. Compute the company’s margin of safety as a percentage of its sales.
EXERCISE 3–13 Using a Contribution Format Income Statement [LO3–1, LO3–4]
Miller Company’s most recent contribution format income statement is shown below:
Total
Per Unit
Sales (20,000 units). . . . . . . . . . . . . . . . . . . . . .
$300,000
$15.00
Variable expenses. . . . . . . . . . . . . . . . . . . . . . . .
180,000
9.00
Contribution margin. . . . . . . . . . . . . . . . . . . . . .
120,000
$ 2.00
Fixed expenses. . . . . . . . . . . . . . . . . . . . . . . . . . .
70,000
Net operating income. . . . . . . . . . . . . . . . . . . . .
$ 50,000
Required:
Prepare a new contribution format income statement under each of the following conditions (consider
each case independently):
1. The number of units sold increases by 15%.
2. The selling price decreases by $1.50 per unit, and the number of units sold increases by 25%.
3. The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and the
number of units sold decreases by 5%.
4. The selling price increases by 12%, variable expenses increase by 60 cents per unit, and the
number of units sold decreases by 10%.
CASE 3-33 Cost Structure; Break-Even and Target Profit Analysis [LO3–4, LO3–5, LO3–6]
Pittman Company is a small but growing manufacturer of telecommunications equipment. The company
has no sales force of its own; rather, it relies completely on independent sales agents to market its
products. These agents are paid a sales commission of 15% for all items sold.
Pittman Company Budgeted Income Statement For the Year Ended December 31
Sales. . . . . . . . . . . . . . . . . . .
$16,000,000
Manufacturing expenses:
Variable. . . . . . . . . . . . . . . . . . . . .
$7,200,000
Fixed overhead. . . . . . . . . . . . . . .
2,340,000
Gross margin. . . . . . . . . . . . . . . . .
9,540,000
6,460,000
Selling and administrative expenses:
Commissions to agents. . . . . . . . . . . . . . . 2,400,000
Fixed marketing expenses. . . . . . . . . . . 1,20,000*
Fixed administrative expenses. . . . . . .
1,800,000
4,320,000
Net operating income . . . . . . . . . . . . . .
2,140,000
Fixed interest expenses . . . . . . . . . . .
540,000
Income before income taxes. . . . . . . . . .
1,600,000
Income taxes (30%). . . . . . . . . . . . . . . . .
480,000
Net income. . . . . . . . . . . . . . . . . . . . . .
$ 1,120,000
‘Primarily depreciation on storage facilities
As Barbara handed the statement to Karl Vecci, Pittman’s president, she commented, “I went ahead and
used the agents’ 15% commission rate in completing these statements, but we’ve just learned that they
refuse to handle our products next year unless we increase the commission rate to 20%.”
“That’s the last straw,” Karl replied angrily. “Those agents have been demanding more and more, and
this time they’ve gone too far. How can they possibly defend a 20% commission rate?”
“They claim that after paying for advertising, travel, and the other costs of promotion, there’s nothing
left over for profit,” replied Barbara.
“I say it’s just plain robbery,” retorted Karl. “And I also say it’s time we dumped those guys and got our
own sales force. Can you get your people to work up some cost figures for us to look at?”
“We’ve already worked them up,” said Barbara. “Several companies we know about pay a 7.5%
commission to their own salespeople, along with a small salary. Of course, we would have to handle all
promotion costs, too. We figure our fixed expenses would increase by $2,400,000 per year, but that
would be more than offset by the $3,200,000 (20% × $16,000,000) that we would avoid on agents’
commissions.”
Salaries:
Sales manager. . . . . . . . . . . . . . . .
$ 100,000
Salespersons. . . . . . . . . . . . . . . .
600,000
Travel and entertainment. . . .
400,000
Advertising. . . . . . . . . . . . . . . .
1,300,000
Total. . . . . . . . . . . . . . . . . . . .
$2,400,000
Super,” replied Karl. “And I noticed that the $2,400,000 is just what we’re paying the agents under the
old 15% commission rate.”
“It’s even better than that,” explained Barbara. “We can actually save $75,000 a year because that’s
what we’re having to pay the auditing firm now to check out the agents’ reports. So our overall
administrative expenses would be less.”
“Pull all of these numbers together and we’ll show them to the executive committee tomorrow,” said
Karl. “With the approval of the committee, we can move on the matter immediately.”
Required:
1. Compute Pittman Company’s break-even point in dollar sales for next year assuming:
a. The agents’ commission rate remains unchanged at 15%.
b. The agents’ commission rate is increased to 20%.
c. The company employs its own sales force.
2. Assume that Pittman Company decides to continue selling through agents and pays the 20%
commission rate. Determine the volume of sales that would be required to generate the same net
income as contained in the budgeted income statement for next year.
3. Determine the volume of sales at which net income would be equal regardless of whether Pitt-man
Company sells through agents (at a 20% commission rate) or employs its own sales force.
4. Compute the degree of operating leverage that the company would expect to have on December 31
at the end of next year assuming:
a. The agents’ commission rate remains unchanged at 15%.
b. The agents’ commission rate is increased to 20%.
c. The company employs its own sales force.
Use income before income taxes in your operating leverage computation.
5.Based on the data in requirements 1-4 above, make a recommendation as to whether the company
should continue to use sales agents (at a 20% commission rate) or employ its own sales force. Give
reasons for your answer.
(CMA, adapted)
1 One additional assumption often used in manufacturing companies is that inventories do not change.
The number of units produced equals the number of units sold.
5 This also assumes the company has no production constraint. If it does, the sales commissions should
be modified. See the Profitability Appendix at the end of the book.

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