Question No.

1
5 Marks

The following Table contains data for the Block Company for the year just ended. The company makes
industrial power drills. The Table shows the costs of the plastic housing separately from the costs of the
electrical and mechanical components. Answer each of the following questions independently.

A B A+B
Electrical and Plastic Industrial
Description Mechanical Housing Drills
Components*
-----------------------Amounts in $-----------------------
Sales: 100,000, units at $100 10,000,000
Variable costs:
Direct materials 4,400,000 500,000 4,900,000
Direct Labor 400,000 300,000 700,000
Variable factory overheads 100,000 200,000 300,000
Other variable costs 100,000 - 100,000
Sales commission, at 10% of sales 1,000,000 - 1,000,000
Total variable costs 6,000,000 1,000,000 7,000,000
Contribution margin 3,000,000
Total fixed costs 2,200,000 480,000 2,700,000
Operating income 300,000
*Not including the costs of plastic housing (column B).

1. During the year, a prospective customer in an unrelated market offered $82,000 for 1,000 drills.
The drills would be manufactured in addition to the 100,000 units sold. Block Company would pay
the regular sales commission rate on the 1,000 drills. The president rejected the order because “it
was below our costs of $97 per unit.” What would operating income have been if Block Company
had accepted the order?

2. A supplier offered to manufacture the year’s supply of 100,000 plastic housings for $12.00 each.
What would be the effect on operating income if the Block Company purchased rather than made
the housings? Assume that Block Company would avoid $350,000 of the fixed costs assigned to
housings if it purchases the housings.

3. Suppose that Block Company could purchase the housings for $13.00 each and use the vacated
space for the manufacture of a deluxe version of its drill. Assume that it could make 20,000 deluxe
units (and sell them for $130 each in addition to the sales of the 100,000 regular units) at a unit
variable cost of $90, exclusive of housings and exclusive of the 10% sales commission. The
company could also purchase the 20,000 extra plastic housings for $13.00 each. All the fixed costs
pertaining to the plastic housings would continue because these costs relate primarily to the
manufacturing facilities used. What would operating income have been if Block had bought the
housings and made and sold the deluxe units?
 Question No. 2
5 Marks

Vendmart Food Services Company operates and services snack vending machines located in restaurants,
gas stations, and factories in four southwestern states. The machines are rented from the manufacturer.
In addition, Vendmart must rent the space occupied by its machines. The following expense and revenue
relationships pertain to a contemplated expansion program of 80 machines.
Fixed monthly expenses follow:

Machine Rental: 80 machines @ $22.10 $1,768

Space rental: 80 locations @ $20.00 $1,600
Part-time wages to service the additional 80 machines $500
Other fixed costs $132
Total monthly fixed cost $4,000

Other data follow:

Per Unit (Snack) Per $100 of Sales

Selling price $ 1.00 100%
Cost of Snack $ 0.68 68%
 Contribution Margin $0.32 32%

These questions relate to the given data unless otherwise noted. Consider each question independently.

1. What is the monthly break-even point in number of units (snacks)? In dollar sales?

2. If 45,000 units were sold, what would be the company’s net income?

3. If the space rental cost was doubled, what would be the monthly break-even point in number of
units? In dollar sales?

4. Refer to the original data. If, in addition to the fixed space rent, Vendmart Food Services
Company paid the vending machine manufacturer $.07 per unit sold, what would be the
monthly breakeven point in number of units? In dollar sales?

5. Refer to the original data. If, in addition to the fixed rent, Vendmart paid the machine
manufacturer $.11 for each unit sold in excess of the break-even point, what would the new net
income be if 45,000 units were sold?
 Question No. 3
5 Marks

ConAgra produces meat products with brand names such as Healthy Choice, Armour, and Butterball.
Suppose one of the company’s plants processes beef cattle into various products. For simplicity, assume
that there are only three products: steak, hamburger, and hides, and that the average steer costs $700.
The three products emerge from a process that costs $100 per steer to run, and output from one steer
can be sold for the following net amounts:

Steak (100 pounds) $

400
Hamburger (500 pounds) 600
Hide (120 pounds) 100
Total $ 1,100
Assume that each of these three products can be sold immediately or processed further in another
ConAgra plant. The steak can be the main course in frozen dinners sold under the Healthy Choice label.
The vegetables and desserts in the 400 dinners produced from the 100 pounds of steak would cost
$110, and production, sales, and other costs for the 400 meals would total $330. Each meal would be
sold wholesale for $2.10.

The hamburger could be made into frozen Salisbury steak patties sold under the Armour label. The only
additional cost would be a $200 processing cost for the 500 pounds of hamburger. Frozen Salisbury
steaks sell wholesale for $1.70 per pound.

The hide can be sold before or after tanning. The cost of tanning one hide is $80, and a tanned hide can
be sold for $170.

Required:

1. Compute the total profit if all three products are sold at the split-off point.

2. Compute the total profit if all three products are processed further before being sold.

3. Which products should be sold at the split-off point? Which should be processed further?

4. Compute the total profit if your plan in number 3 is followed.

6-B4 Sell or Process Further
ConAgra produces meat products with brand names such as Healthy Choice, Armour, and
Butterball. Suppose one of the company’s plants processes beef cattle into various products. For
simplicity, assume that there are only three products: steak, hamburger, and hides, and that the
average steer costs $700. The three products emerge from a process that costs $100 per steer to
run, and output from one steer can be sold for the following net amounts:

Assume that each of these three products can be sold immediately or processed further in another
ConAgra plant. The steak can be the main course in frozen dinners sold under the Healthy
Choice label. The vegetables and desserts in the 400 dinners produced from the 100 pounds of
steak would cost $110, and production, sales, and other costs for the 400 meals would total $330.
Each meal would be sold wholesale for $2.10.
The hamburger could be made into frozen Salisbury steak patties sold under the Armour label.
The only additional cost would be a $200 processing cost for the 500 pounds of hamburger.
Frozen Salisbury steaks sell wholesale for $1.70 per pound.
The hide can be sold before or after tanning. The cost of tanning one hide is $80, and a tanned
hide can be sold for $170.
1. Compute the total profit if all three products are sold at the split-off point.
2. Compute the total profit if all three products are processed further before being sold.
3. Which products should be sold at the split-off point? Which should be processed further?
4. Compute the total profit if your plan in number 3 is followed.

Answer
1- If the three products are sold at split off
So the three products emerge from a process that costs $100 per steer and output from one steer
can be as:
Steak (100 pound) + Hamburger (500 pound) + Hide (120 pound) = 400+600+100=1,100 $
But there is a joint cost =100+700 = 800$ per steer
So total profit for selling 3 products from 1 steer = 1,100-800= 300$
2- Total profit for 3 products if they were processed further will be as
Total meals came from 100 pound of Steak = 400
Total sales for 400 meals = 2.1 * 400 =840$
Total cost processing for 400 meals = 330+110= 440$
Frozen Salisbury steaks from 1 pound Hamburger = 1.70$
Total sales from 500 pound of Hamburger = 1.7 * 500= 850$
Total cost to process 500pound of Hamburger = 200$
The cost of tanning 1 hide = 80 $
Total sales for 1 tanned hide = 170 $

Product Steak Hamburgers Hide Total

Sales 840 850 170 1,860
Separable costs 440 200 80 720
Joint Costs 800
Total profit 400 650 90 340
So total profit for 3 products if we take into consideration the joint cost will be 340 $

3- for Steak
Sales at split off Processing Difference
Sales 400 840 440
Costs after split off 0 (440) (440)
Net income 400 400 0
So processing further for Steak will not affect the net income, but other qualitative factors may
be taken into consideration here.

For Hamburger
Sales at split off Processing Difference
Sales 600 850 250
Costs after split off 0 (200) (200)
Net income 600 650 50
So processing further for Hamburger will increase the total net income by 50 $, this means that
company should process further.

For Hide
Sales at split off Processing Difference
Sales 100 170 70
Costs after split off 0 (80) (80)
Net income 100 90 (10)
So processing further for Hide will decreases the total net income by 10 $, this means that
company should sell at split off.
4- Total profit if steak and hamburger process further and hid sell at split off point will be
= 400+650+100 – 800 = 350$
So total profit for 3 products according to this plan if we take into consideration the joint cost
will be 350 $.

ASSIGNMENT NO. 4
5 Marks

The Country Store is a retail outlet for a variety of hardware and housewares. The owner is eager to
prepare a budget and is especially concerned with her cash position. The company will have to borrow
in order to finance purchases made in preparation for high expected sales during the busy last quarter of
the year. When the company needs cash, borrowing occurs at the end of a month. When cash is
available for repayments, the repayment occurs at the end of a month. The company pays interest in
cash at the end of every month at a monthly rate of 1% on the amount outstanding during that month.

The owner has gathered the data shown in the Table below to prepare the simplified budget. In
addition, she will purchase equipment in October for $19,750 cash and pay dividends of $4,000 in
December.

You are required to prepare the Country Store’s master budget for the months of October, November,
and December.
Table
Balance Sheet as at September 30, 20X1 Budgeted sales
Assets September (actual) $ 60,000
Cash $ 9,000 October $ 70,000
Accounts receivable $ 48,000 November $ 85,000
Inventory $ 12,600 December $ 90,000
Plant and equipment (net) $ 200,000 January 20X2 $ 50,000

Total Assets $ 269,600

Other data:
Liabilities and stockholders’ equity Required minimum cash balance $ 8,000
Interest payable $0 Sales mix, cash/credit
Note payable $0 Cash sales 20%
Accounts payable $ 18,300 Credit sales (collected the following 80%
month)
Capital stock $ 180,000 Gross profit rate 40%
Retained earnings $ 71,300 Loan interest rate (interest paid in 12%
cash monthly)
Total liabilities and stockholders’ equity $ 269,600
Inventory paid for in
Budgeted expenses Month purchased 50%
Salaries and wages $ 7,500 Month after purchase 50%
Freight out as a percent of sales 6% Salaries and wages, freight out,
advertising, and other expenses are
paid in cash in the month incurred
Advertising $ 6,000
Depreciation $ 2,000
Other expenses as a percent of sales 4%
Minimum inventory policy as a percent 30%
of next month’s cost of goods sold