Problems and Exercises in Introduction in Acctg and CVP/ Break even Analysis

Introduction to Managerial Accounting

1. Financial and managerial accounting are both concerned with the economic events of an enterprise.
Similarities between financial and managerial accounting do exist, but they do have a different focus.
Briefly distinguish between financial and managerial accounting as they relate to (1) the primary users, (2)
the type and frequency of reports, (3) the purpose of reports, and (4) the content of reports.
2. Briefly describe activity-based costing (ABC), value chain, lean accounting and enterprise risk
management (ERM).
3. You have been working as a staff accountant at Sanborn Industries for three months. Mr. Jones, the
accounting manager as well as your boss, has informed you that he has decided to change vendors for the
company’s office supplies. He notifies you that your company will now be utilizing the store owned by his
best friend. Mr. Jones is hopeful that this will bring in a significant profit for his friend’s business possibly
preventing the closing of his store. You receive the first invoice from that store and realize that the prices
are nearly double the amount that the company was paying when using a large retail chain. What should
you do about the situation?
4. At the most recent employee meeting, Tyler Hanes, marketing manager, expressed his discomfort with the
system. He said there was no guarantee that the second set of information was fair, since there were no
generally accepted principles for this kind of information. He also said that it was kind of like keeping two
sets of books—one following all legal requirements, and the other one actually used by the company.
Required:
1. Is it ethical to evaluate managers in the way described? Explain briefly.
2. Name at least two safeguards the company could build into its system to ensure the ethical
treatment of employees.

Ex. 1
Presented below are incomplete 2018 manufacturing cost data for Tardy Corporation.

Total Work in Work in Cost of Goods

Direct Materials Direct Manufacturing Manufacturing Process Process Manufactured
Used Labor Overhead Costs (1/1) (12/31)
(a) $38,000 $72,000 $48,000 ? $120,000 $96,000 ?
(b) $149,000 $53,000 $90,000 $292,000 ? $98,000 $331,000
(c) $53,000 $116,000 $121,000 $290,000 $463,000 ? $515,000

Instructions
Determine the missing amounts.

Ex. 2
The following costs and inventory data were taken from the accounts of Reser Company for 2018:
January 1, 2018 December 31, 2018
Inventories:
Raw materials $ 8,000 $ 7,000
Work in process 15,000 13,000
Finished goods 16,000 10,000

Costs incurred:
Raw materials purchases $93,000
Direct labor 42,000
Factory rent 8,000
Factory utilities 7,000
Indirect materials 4,000
Indirect labor 6,000
Selling expenses 5,000
Administrative expenses 12,000
Instructions
a. Prepare a schedule showing the amount of direct materials used in production during the year.
b. Compute the amount of manufacturing overhead incurred during the year.
c. Prepare a schedule of Cost of Goods Manufactured for Reser Company for the year ended December 31, 2018
in good form.
d. Prepare the Cost of Goods Sold section of the Income Statement for Reser Company for the year ended
December 31, 2018 in good form.
Exercise 3 PART I — SCARCE RESOURCE ALLOCATION
Genavine manufactures and sells two products. Relevant per unit data concerning each product are given below:
Product
X21 R45
Selling price $55 $88
Variable costs $30 $48
Machine hours 2.5 4.2
Instructions
(a) Compute the contribution margin per unit of limited resource for each product.
(b) Which product should be manufactured if 1,200 additional machine hours are available? Explain.

PART 2 — HIGH -LOW METHOD

Nugent Enterprise incurred the following high and low maintenance costs totals during 2014: $208,000 at 12,000
units of activity during March and $164,000 at 7,000 units during August.
Instructions: Answer parts (a) through (c) below, presenting carefully labeled supporting calculations in all cases.
(a) Use the high-low method to compute the variable cost per unit and the total fixed cost element of the mixed
cost component.
(b) Based on the above analysis, express the total maintenance cost in formula format.
(c) Compute the total maintenance cost for May when activity is 11,000 units.

PART 3 — COST-VOLUME-PROFIT
Walton Widgets manufactures a product that sells for $40 per unit. Walton incurs a variable cost per unit of $24 and
$1,400,000 in total fixed costs to produce this product. It is currently selling 92,000 units.
Instructions: Complete each of the following requirements, presenting labeled supporting computations.
(a) Compute and label the contribution margin per unit and contribution margin ratio.
(b) Using the contribution margin per unit, compute the break-even point in units.
(c) Using the contribution margin ratio, compute the break-even point in dollars.
(d) Compute the margin of safety and margin of safety ratio.
(e) Compute the number of units that must be sold in order to generate net income of $240,000 using the
contribution margin per unit.
(f) Should Walton Widgets give a commission to its salesmen based on 8% of sales, if it will decrease fixed
costs by $300,000 and increase sales volume 10%? Support your answer with labeled computations.

PART 4 — OPERATING LEVERAGE

The following CVP income statements are available for Liu Company and Sadji Company.
Lui Company Sadji Company
Sales revenue $800,000 $800,000
Variable costs 325,000 195,000
Contribution margin 475,000 605,000
Fixed costs 375,000 505,000
Net income $100,000 $100,000
Instructions
(a) Compute the degree of operating leverage for each company.
(b) Prepare a CVP income statement for each company, assuming that sales revenue decreases by 30%.

PROBLEM 2
Snara Company accumulates the following data concerning a mixed cost, using miles as the activity level.
Miles Driven Total Cost Miles Driven Total Cost
January 10,000 $15,000 March 9,000 $12,500
February 8,000 $14,500 April 7,500 $13,000
Instructions
Compute the variable and fixed cost elements using the high-low method.

PROBLEM 3
Sam Company makes 2 products, footballs and baseballs. Additional information follows:
Footballs Baseballs
Units 4,000 2,500
Sales $60,000 $25,000
Variable costs 36,000 7,000
Fixed costs 9,000 9,000
Net income $15,000 $ 9,000
Profit per unit $3.75 $3.60
Instructions
Sam has unlimited demand for both products. Therefore, which product should Sam tell his sales people to
emphasize?
4. Air Filter, Inc., sells its products for $6 per unit. It has the following costs:

Rent.......................................... $100,000
Factory labor............................ $1.20 per unit
Executive salaries under contract
$89,0000
Raw material............................ $.60 per unit

Separate the expenses between fixed and variable cost per unit. Using this information and the sales price per unit of
$6, compute the break-even point.

5. Eaton Tool Company has fixed costs of $200,000, sells its units for $56, and has variable costs of $31 per
unit.
a. Compute the break-even point.
b. Ms. Eaton comes up with a new plan to cut fixed costs to $150,000. However, more labor will now be
required, which will increase variable costs per unit to $34. The sales price will remain at $56. What is the new
break-even point?
c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to
the old plan)?

PROBLEM 1
Determine the missing amounts.

Contribution Margin Contribution Margin

Unit Selling Price Unit Variable Costs
per Unit Ratio
1 $300 $210 A. B.
.
2 $600 C. $120 D.
.
3 E. F. $400 40%
.

Ex. 4
The income statement for Baxter Company for 2008 appears below.
BAXTER COMPANY
Income Statement
For the Year Ended December 31, 2008
——————————————————————————————————————————
Sales (40,000 units)................................................................................................................ $1,000,000
Variable expenses.................................................................................................................. 700,000
Contribution margin............................................................................................................... 300,000
Fixed expenses....................................................................................................................... 330,000
Net income (loss)................................................................................................................... $ (30,000)

Instructions
Answer the following independent questions and show computations using the contribution margin technique to
support your answers:
1. What was the company's break-even point in sales dollars in 2008?
2. How many additional units would the company have had to sell in 2009 in order to earn net income of
$30,000?
3. If the company is able to reduce variable costs by $2.50 per unit in 2009 and other costs and unit revenues
remain unchanged, how many units will the company have to sell in order to earn a net income of $35,000?
I
Ex. 5
Lane Company has prepared the following cost-volume-profit graph: H
B
E
A

G
C

D
Instructions
For the items listed below, enter to the left of the item, the letter in the graph which best corresponds to the item.

____ 1. Activity base

____ 2. Break-even point
____ 3. Dollars
____ 4. Fixed costs
____ 5. Loss
____ 6. Profit
____ 7. Revenues
____ 8. Total costs
____ 9. Variable costs

Ex. 6
Rush Company developed the following information for its product:
Per Unit
Sales price $90
Variable cost 54
Contribution margin $36

Total fixed costs $1,080,000

Instructions
Answer the following independent questions and show computations using the contribution margin technique to
support your answers.
1. How many units must be sold to break even?
2. What is the total sales that must be generated for the company to earn a profit of $60,000?
3. If the company is presently selling 45,000 units, but plans to spend an additional $108,000 on an
advertising program, how many additional units must the company sell to earn the same net income it is now
making?
4. Using the original data in the problem, compute a new break-even point in units if the unit sales price is
increased 20%, unit variable cost is increased by 10%, and total fixed costs are increased by $135,000.