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MGT1 Additional Exercises

1. Mega-Air manufactures snowboards and incurred fixed and variable costs in 2011. It used variable costing and absorption costing to prepare income statements. 2. The All-Fixed Company manufactures fertilizer and has only fixed costs that do not vary with production. It prepared income statements for 2010-2011 using variable and absorption costing. 3. Pennsylvania Glass produces safety glass and has a bottleneck in its autoclave. It must determine the most profitable product per bottleneck hour and set prices so each product earns the same profit.

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158 views

MGT1 Additional Exercises

1. Mega-Air manufactures snowboards and incurred fixed and variable costs in 2011. It used variable costing and absorption costing to prepare income statements. 2. The All-Fixed Company manufactures fertilizer and has only fixed costs that do not vary with production. It prepared income statements for 2010-2011 using variable and absorption costing. 3. Pennsylvania Glass produces safety glass and has a bottleneck in its autoclave. It must determine the most profitable product per bottleneck hour and set prices so each product earns the same profit.

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OwlHead
Copyright
© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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MODMGT1

ADDITIONAL EXERCISES: COST-VOLUME-PROFIT ANALYSIS

Source: Horngren, C.T., Datar, S.M., & Rajan, M.V. (2013). Cost Accounting: A Managerial Emphasis, 14th
edition. Pearson Education Limited.

9-27. Variable and absorption costing and breakeven points.


Mega-Air, Inc. manufactures a specialized snowboard made for the advanced snowboarder. Mega-Air began
2011 with an inventory of 240 snowboards. During the year, it produced 900 boards and sold 995 for P750
each. Fixed production costs were P280,000 and variable production costs were P335 per unit. Fixed
advertising, marketing, and other general and administrative expenses were P112,000 and variable shipping
costs were P15 per board. Assume that the cost of each unit in beginning inventory is equal to 2011
inventory cost.

REQUIRED:
1. Prepare an income statement assuming Mega-Air uses variable costing.
2. Prepare an income statement assuming Mega-Air uses absorption costing. Mega-Air uses a denominator
level of 1,000 units. Production-volume variances are written-off to cost of goods sold.
3. Compute the breakeven point in units sold assuming Mega-Air uses the following:
a. Variable costing
b. Absorption costing (Production = 900 boards)
4. Provide proof of your preceding breakeven calculations.
5. Assume that P20,000 of fixed administrative costs were reclassified as fixed production costs. Would
this change affect breakeven point using variable costing? What if absorption costing were used?
Explain.
6. The company that supplies Mega-Air with its specialized impact-resistant material has announced a price
increase of P25 for each board. What effect would this have on the breakeven points previously
calculated?

9-29. Variable costing and absorption costing, the All-Fixed Company. (R. Marple, adapted)
It is the end of 2011. The All-Fixed Company began operations in January 2010. The company is so named
because it has no variable costs. All its costs are fixed; they do not vary with output.

The All-Fixed Company is located on the bank of a river and has its own hydroelectric plant to supply power,
light, and heat. The company manufactures a synthetic fertilizer from air and river water and sells its
product at a price that is not expected to change. It has a small staff of employees, all paid fixed annual
salaries. The output of the plant can be increased or decreased by adjusting a few dials on a control panel.

The following budgeted and actual data are for the operations of the All-Fixed Company. All-Fixed uses
budgeted production as the denominator level and writes off any production-volume variance to cost of
goods sold.
2010 2011a
Sales 20,000 tons 20,000 tons
Production 40,000 tons 0 tons
Selling price P20 per ton P20 per ton
Costs (all fixed):
Manufacturing P320,000 P320,000
Operating (non-manufacturing) P 60,000 P 60,000
a
Management adopted the policy, effective January 1, 2011, of producing only as much product as needed
to fill sales orders. During 2011, sales were the same as for 2010 and were filled entirely from inventory at
the start of 2011.

REQUIRED:
1. Prepare income statements with one column for 2010, one column for 2011, and one column for the
two years together, using (a) variable costing, and (b) absorption costing.
2. What is the breakeven point under (a) variable costing, and (b) absorption costing.
3. What inventory costs would be carried in the Statement of Financial Position on December 31, 2010 and
2011, under each method?
4. Assume that the performance of the top manager of the company is evaluated and rewarded largely on
the basis of reported operating income. Which costing method would the manager prefer? Why?
MODMGT1
ADDITIONAL EXERCISES: RELEVANT COSTING (UTILIZATION OF CONSTRAINED RESOURCES)

Source: Reeve, J.M., Warren, C.S., & Duchac, J. (2012). Principles of Managerial Accounting, 11th edition.
Cengage Learning Asia Pte. Ltd.

Exercise 9-21. Product decisions under bottlenecked operations


Pennsylvania Glass Company manufactures three types of safety plate glass: large, medium, and small. All
three products have high demand. Thus, the company is able to sell all the safety glass that it can make.
The production process includes an autoclave operation, which is a pressurized heat treatment. The
autoclave is a production bottleneck. Total fixed costs are P85,000 for the company as a whole. In
addition, the following information is available about the three products:

Large Medium Small


Unit selling price P140 P115 P100
Unit variable cost P110 P 94 P 88
Unit contribution margin P 30 P 21 P 12
Autoclave hours per unit 4 2 1
Total process hours per unit 8 6 3
Budgeted units of production 3,000 3,000 3,000

REQUIRED:
(a) Determine the contribution margin by glass type and the total company income from operations for the
budgeted units of production.
(b) Prepare an analysis showing which product is the most profitable per bottleneck hour.

Exercise 9-22. Product pricing under bottlenecked operations


Based on the data presented in Exercise 9-21, assume that Pennsylvania Glass wanted to price all products
so that they produced the same profit potential as the highest profit product.

REQUIRED: Determine the prices for each of the products so that they would produce a profit equal to the
highest profit product.

MODMGT1
ADDITIONAL EXERCISES: PRICING DECISIONS

Source: Hilton, R.W. & Platt, D.E. (2011). Managerial Accounting: Creating Value in a Global Business
Environment, Global edition. McGraw-Hill.

Problem 15-45. Time and Material Pricing


Patagonia Heating, Ltda. installs heating systems in commercial construction built in Chile and Argentina.
Jobs are priced using the time and materials method. The president of Patagonia Heating is pricing a job to
provide the heating systems for a small office complex in Santiago. He has made the following estimates:
Materials : P50,000
Labor hours : 500

The following predictions pertain to the company’s operations for the next year:
Labor rate, including fringe benefits : P16.00 per hour
Annual labor hours : 12,000 hours
Annual overhead costs:
Material handling and storage : P20,000
Other overhead costs : P132,000
Annual cost of materials used : P250,000

REQUIRED: Patagonia Heating adds a markup of P4.00 per hour on its time charges, but there is no markup
on material costs.
1. Develop formulae for the company’s (a) time charges, and (b) material charges.
2. Compute the price for the job described above.
3. What would be the price of the job if Patagonia Heating also added a markup of 10 percent on all
material charges (including material handling and storage costs)?

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