5–1.

Briefly explain how a traditional, volume-based

product-costing system operates.
5–2. Why was Patio Grill Company’s management being
misled by the traditional product-costing system? What
mistakes were being made?
5–3. Explain how an activity-based costing system operates.
5–4. What are cost drivers? What is their role in an activitybased
costing system?
5–5. List and briefly describe the four broad categories of
activities identified in stage one of an activity-based
costing system.
5–6. How can an activity-based costing system alleviate the
problems Patio Grill Company’s management was having
under its traditional, volume-based product-costing
system?
5–7. Why do product-costing systems based on a single,
volume-based cost driver tend to overcost high-volume
products? What undesirable strategic effects can such
distortion of product costs have?
5–8. How is the distinction between direct and indirect costs
handled differently under volume-based versus activitybased
costing systems?
5–9. Explain the concept of a pool rate in activity-based
costing. (Refer to Exhibit 5–6 .)
5–10. Briefly explain two factors that tend to result in product
cost distortion under traditional, volume-based productcosting
systems.
5–11. List three factors that are important in selecting cost
drivers for an ABC system.
5–12. What is the role of activity dictionary in an ABC

14-1 Describe seven steps in the decision-making process and the managerial accountant’s
role in that process.
14-2 Explain the relationship between quantitative and qualitative analyses in decision making.
14-3 List and explain two criteria that must be satisfied by relevant information.
14-4 Identify relevant costs and benefits, giving proper treatment to sunk costs,
opportunity costs, and unit costs.
14-5 Prepare analyses of various special decisions, properly identifying the relevant
costs and benefits.
14-6 Analyze manufacturing decisions involving joint products and limited resources.
14-7 Explain the impact of an advanced manufacturing environment and activity-based
costing on a relevant-cost analysis.
14-8 Formulate a linear program to solve a product-mix problem with multiple
constraints (appendix).

PROBLEM
ScholarPak Company produced and sold 70,000 backpacks during the year just ended at an average
price of $30 per unit. Variable manufacturing costs were $12 per unit, and variable marketing costs were
$6 per unit sold. Fixed costs amounted to $540,000 for manufacturing and $216,000 for marketing.
There was no year-end work-in-process inventory. (Ignore income taxes.)
Required:
1. Compute ScholarPak’s break-even point in sales dollars for the year.
2. Compute the number of sales units required to earn a net income of $540,000 during the year.
3. ScholarPak’s variable manufacturing costs are expected to increase by 10 percent in the coming
year. Compute the firm’s break-even point in sales dollars for the coming year.
4. If ScholarPak’s variable manufacturing costs do increase by 10 percent, compute the selling price
that would yield the same contribution-margin ratio in the coming year.

Cases
Susquehanna Medical Center operates a general hospital in northeastern Pennsylvania. The m edical
center also rents space and beds to separately owned entities rendering specialized services, such as
Pediatrics and Psychiatric Care. Susquehanna charges each separate entity for common services, such
as patients’ meals and laundry, and for administrative services, such as billings and collections. Space
and bed rentals are fixed charges for the year, based on bed capacity rented to each entity. Susquehanna
Medical Center charged the following costs to Pediatrics for the year ended June 30, 20x5:
Patient Days (variable) Bed Capacity (fixed)
Dietary ..................................................................................... $ 720,000 — Janitorial .................................. — $ 84,000
Laundry ...................................................................................... 360,000 —
Laboratory .................................................................................. 540,000 —
Pharmacy ................................................................................... 420,000 —Repairs and maintenance .. ............... — 36,000
General and administrative ........... — 1,560,000
Rent ................... ....................... — 1,800,000
Billings and collections ................................................................ 360,000 —
Total ....................................................................................... $2,400,000 $3,480,000
During the year ended June 30, 20x5, Pediatrics charged each patient an average of $360 per day,
had a capacity of 60 beds, and had revenue of $7.2 million for 365 days. In addition, Pediatrics directly
employed personnel with the following annual salary costs per employee: supervising nurses, $30,000;
nurses, $24,000; and aides, $10,800.
Susquehanna Medical Center has the following minimum departmental personnel requirements,
based on total annual budgeted patient days:
Annual Patient Days Supervising Nurses Nurses Aides
Up to 22,000 .......................................................................................... 4 10 20
22,001 to 26,000 ................................................................................... 5 14 25
26,001 to 29,200 ................................................................................... 5 16 31
Pediatrics always employs only the minimum number of required personnel. Salaries of supervising
nurses, nurses, and aides are therefore fixed within ranges of annual patient days.
Pediatrics operated at 100 percent capacity on 90 days during the year ended June 30, 20x5.
Administrators estimate that on these 90 days, Pediatrics could have filled another 20 beds above capacity.
Susquehanna Medical Center has an additional 20 beds available for rent for the year ending June
30, 20x6. Such additional rental would increase Pediatrics’ fixed charges based on bed capacity. (In the
following requirements, ignore income taxes.)
Required:
1. Calculate the minimum number of patient days required for Pediatrics to break even for the year
ending June 30, 20x6, if the additional 20 beds are not rented. Patient demand is unknown, but
assume that revenue per patient day, cost per patient day, cost per bed, and salary rates will remain
the same as for the year ended June 30, 20x5.
2. Assume that patient demand, revenue per patient day, cost per patient day, cost per bed, and salary
rates for the year ending June 30, 20x6, remain the same as for the year ended June 30, 20x5.
Prepare a schedule of Pediatrics’ increase in revenue and increase in costs for the year ending June
30, 20x6. Determine the net increase or decrease in Pediatrics’ earnings from the additional 20
beds if Pediatrics rents this extra capacity from Susquehanna Medical Center.
(CPA, adapted)

Lake Champlain Sporting Goods Company, a wholesale supply company, engages i ndependent sales
agents to market the company’s products throughout New York and Ontario. These agents currently
receive a commission of 20 percent of sales, but they are demanding an increase to 25 percent of sales
made during the year ending December 31, 20x4. The controller already prepared the 20x4 budget
before learning of the agents’ demand for an increase in commissions. The budgeted 20x4 income statement
is shown below. Assume that cost of goods sold is 100 percent variable cost.