Review for Final Exam

Question 1. Exercises E5-4 (page 241)

Question 2. Comotex manufactures T-shirts. During its first year of business, the
company incurred the following costs:
Variable cost per T-shirt
Direct Materials $ 6.85
Direct labor 2.15
Variable manufacturing overhead 1.20
Variable selling & administrative expenses 0.50

Fixed cost per month

Fixed manufacturing overhead $ 15,570
Fixed selling and administrative expenses 5,650

Comotex charges $38 for each T-shirt that it sells. During the first month of operation,
it made 4,350 T-shirts and sold 3,570.
Requirements:
1. Assuming Comotex uses variable costing, calculate the variable manufacturing cost
per unit for last month.
2. Prepare a variable costing income statement for last month.
3. Assuming Comotex uses full absorption costing, calculate the full manufacturing
cost per unit for last month.
4. Prepare a full absorption costing income statement.
5. Compare the two income statements and explain any differences.
6. Suppose next month Comotex expects to produce 3,900 T-shirts and sell 4,100.
Without any calculations, explain whether variable or full absorption costing will
show a higher income.
Question 3
Fred Carson delivers parts for several local auto parts stores. He charges clients $1.8
per mile driven. Fred has determined that if he drives 1,000 miles in a month, his
average operating costs is $1.5 per mile. If he drives 2,000 miles in a month, his
average operating cost is $1.2 per mile.
Requirements:
1. Use the high-low method, determine Fred’s monthly cost equation.
2. Determine how many miles Fred needs to drive to break even.
3. Assume Fred drove 1,200 miles last month. Without making any additional
calculations, determine whether he earned a profit or a loss last month.
4. Determine how many miles Fred must drive to earn $1,800 profit.
5. Prepare a contribution margin income statement assuming Fred drove 2,500 miles
last month. Use this information to calculate Fred’s degree of operating leverage.
Question 4.
Stone River Furniture Company manufactures wood furniture for home offices and
living rooms. A segmented income statement for three of its products lines is shown
as follows:
Single (2,000 Double (500 Entertainment (1,000
Desk Units) Desk Units) Stand Units)
Per Total Per Total Per Unit Total
Unit Unit
Sales $400 $800,000 $600 $300,000 $900 $900,000
revenue
Variable 200 400,000 400 200,000 400 400,000
costs
Contribution 200 400,000 200 100,000 500 500,000
margin
Fixed costs 250,000 125,000 125,000
Operating 150,000 (25,000) 375,000
profit

Requirements: Perform an incremental analysis for each of the following

independent scenarios.
1. The local high school has approached Stone River with an offer to buy 500 single
desks at a special order price of $300. In addition to the variable costs of filling the
order, it would cost $12,500 to modify the desks to fit the school’s classrooms.
a. If the company has the capacity to fill the special order without affecting
normal sales, how much incremental profit (loss) would be made on the special order?
b. If the company has the idle capacity to produce 200 desks and would be
forced to cancel the sale of 300 desks sold through normal channels, how much
incremental profit (loss) would be made on the special order?
2. The company is considering outsourcing production of the entertainment unit to
another manufacturer who has agreed to supply it for $550 per unit. In addition to the
variable cost savings, the company could eliminate $100,000 in fixed costs by
outsourcing. What is the incremental profit (loss) of outsourcing?
3. The company is considering dropping the double desk line because it is
unprofitable. Only $50,000 of the fixed costs are directly attributable to the double
desk product and could be eliminated if the product is dropped. Dropping the double
desk line is expected to increase sales of the single desk model by 10%. What is the
incremental profit (loss) of dropping the double desk line?
4. The company is considering adding lighting and electrical outlets to the
entertainment unit. Doing so will increase variable costs by $50 per unit and fixed
costs by $25,000. Managers believe they can sell the enhanced model for $1,000, but
would only be able to sell 800 units of the higher-priced model. What is the
incremental profit (loss) of the enhanced model?