Solution manual managerial accounting 8e by hansen mowen ch 7

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER SUPPORT-DEPARTMENT COST ALLOCATION QUESTIONS FOR WRITING AND DISCUSSION Stage one assigns support-department costs to producing departments Costs are assigned using factors that reflect the consumption of the services by each producing department Stage two allocates the costs assigned to the producing departments (including service costs and direct costs) to the products passing through the producing departments Support-department costs are part of the cost of producing a product Knowing the individual product costs is helpful for developing bids and cost-plus prices GAAP require that all manufacturing costs be assigned to products for inventory valuation Allocating support-department costs makes users pay attention to the level of service activity consumed and also provides an incentive for them to monitor the efficiency of the support departments Without any allocation of supportdepartment costs, users may view services as a free good and consume more of the service than is optimal Allocating supportdepartment costs would encourage managers to use the service until such time as the marginal cost of the service is equal to the marginal benefit Since the user departments are charged for the services provided, they will monitor the performance of the support department If the service can be obtained more cheaply externally, then the user departments will be likely to point this out to management Knowing this, a manager of a support department will exert effort to maintain a competitive level of service The identification and use of causal factors ensures that support-department costs are accurately assigned to users This increases the legitimacy of the control function and enhances product costing accuracy a Number of employees; b Square footage; c Pounds of laundry; d Orders processed; e Maintenance hours worked; f Number of employees; and g Number of transactions processed 189 Allocating actual costs passes on the efficiencies or inefficiencies of the support department, something which the manager of the producing department cannot control Allocating budgeted costs avoids this problem 10 The direct method allocates the direct costs of each support department directly to the producing departments No consideration is given to the fact that other support departments may use services The sequential method allocates support-department costs sequentially First, the costs of the center providing the greatest service to all user departments, including other support departments, are allocated Next the costs of the second greatest provider of services are allocated to all user departments, excluding any department(s) that has already allocated costs This continues until all supportdepartment costs have been allocated The principal difference in the two methods is the fact that the sequential method considers some interactions among support departments and the direct method ignores interactions 11 Yes, the reciprocal method is more accurate because it fully considers interactions among support departments However, the reciprocal method is much more complex and can be difficult for managers to understand If the results are similar, the simpler method should be used 12 A joint cost is a cost incurred in the simultaneous production of two or more products At least one of these joint products must be a main product It is possible for the joint production process to produce a product of relatively little sales value relative to the main product(s); this product is known as a by-product 13 Joint costs occur only in cases of joint production A joint cost is a common cost, but a common cost is not necessarily a joint cost Many overhead costs are common to the products manufactured in a factory but not signify a joint production process To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES 7–1 a b c d e f g h support support producing producing support support producing producing i j k l m n o support support producing support producing support support support support support support support producing producing support i j k l m n o support producing producing support support support support 7–2 a b c d e f g h 7–3 a direct labor hours; number of employees b number of processing hours c labor hours; units produced d number of orders; materials cost e materials cost; orders received f orders shipped g number of employees h i j k square feet square feet kilowatt-hours number of employees; direct labor cost l square feet m machine hours; number of repair jobs n cubic feet 190 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–4 Charging rate = ($80 × 100 hours)/400 units = $20 per apartment unit Amount charged = ($80 × 130 hours) = $10,400 Amount actually charged apartment building owners: The Roost Magnolia House Oak Park Wisteria Lane Elm Street Total Number of Units 130 70 120 50 30 400 The Roost Magnolia House Oak Park Wisteria Lane Elm Street Total Number of Hours 35 10 45 15 25 130 × × Charge per Unit $20 20 20 20 20 Charge per Hour $80 80 80 80 80 = = Total Charges $ 2,600 1,400 2,400 1,000 600 $ 8,000 Total Charges $ 2,800 800 3,600 1,200 2,000 $ 10,400 The use of number of legal hours as the charging base is much better than the number of apartment units The number of legal hours is directly associated with the attorney’s charges The number of units is, apparently, a poor proxy for the use of legal services Two problems are immediately evident First, the use of the unit charge means that Stewart will only be charging actual legal fees when the number of units times the per-unit rate happens to equal the number of hours times the per-hour rate In this case, he will not recoup all of his spending on legal fees That occurred here, where Stewart charged the owners only $8,000 for legal fees, but paid the attorney $10,400 In other years, the amount charged the apartment owners will be more than the amount charged by the attorney Second, it is possible for apartment owners to have a smaller or larger proportion of units than of hours Even in the example above, we can see that Elm Street has a small percentage of units, but causes a larger proportion of legal fees 191 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–5 Single charging rate = ($320,000 + $400,000)/24,000 = $30/DLH Charge to the Used Car Sales Dept = $517 + ($30 × 12 DLH) = $877 DM = Actual DLH × Charging Rate + New Car Sales 1,000 $30 $ 3,100 Used Car Sales 4,700 30 7,860 Service 19,400 30 86,300 Total 25,100 $97,260 Total Charges $ 33,100 148,860 668,300 $850,260 7–6 Billing rate for maintenance = $193,200/4,200 = $46/maintenance hour $46 × 370 = $17,020 Total charged ($46 × 4,110) Actual cost Maintenance cost undercharged $ 189,060 190,060 $ 1,000 192 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–7 $460 = $46 × number of hours of maintenance Number of hours of maintenance = 10 hours The controller must have looked up the usage of maintenance by the Assembly Department, found that it had used 10 hours, and multiplied those hours by the single charging rate of $46 In that case, $460 would be correct Rate for routine maintenance = $48,000/2,000 = $24/routine maint hour Rate for technical maintenance = $145,200/2,200 = $66/tech maint hour New charge for Assembly Department = $24 × 10 routine hours = $240 When single charging rates are used by companies, they must be aware that changes in the way work is performed may require changes in the charging rate(s) In this case, the additional complexity caused by the computer-controlled equipment means that a single charging rate does not adequately control for the differences in cost caused by different departments Multiple charging rates a better job of charging the using department for the resources provided by the support departments 193 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–8 Allocation ratios for S1 based on number of employees: Cutting = 120/(120 + 80) = 0.60 Sewing = 80/(120 + 80) = 0.40 Allocation ratios for S2 based on number of maintenance hours: Cutting = 15,000/(15,000 + 5,000) = 0.75 Sewing = 5,000/(15,000 + 5,000) = 0.25 Direct costs Allocate: S1 (200,000) S2 Total Support Departments S1 S2 $200,000 $ 140,000 — — $ 120,000 (140,000) $ Producing Departments Cutting Sewing $ 122,000 $ 90,500 80,000 105,000 $ 347,000 35,000 $ 205,500 7–9 Allocation ratios for S1 based on number of employees: S2 = 50/(50 + 120 + 80) = 0.20 Cutting = 120/(50 + 120 + 80) = 0.48 Sewing = 80/(50 + 120 + 80) = 0.32 Allocation ratios for S2 based on number of maintenance hours: Cutting = 15,000/(15,000 + 5,000) = 0.75 Sewing = 5,000/(15,000 + 5,000) = 0.25 Direct costs Allocate:S1 S2 Total Support Departments S1 S2 $ 200,000 $ 140,000 (200,000) 40,000 — (180,000) $ $ 194 Producing Departments Cutting Sewing $ 122,000 $ 90,500 96,000 64,000 135,000 45,000 $ 353,000 $ 199,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–10 Allocation ratios: Proportion of Output Used by Department S2 Cutting Sewing S1 — 0.2000 0.4800 0.3200 0.0566 — 0.7075 0.2358 S1 S2 S1 = S1 = S2 = S2 = S2 = S2 = 0.9887S2 = S2 = Direct costs + Share of S2 costs $200,000 + 0.0566(S2) Direct costs + Share of S1 costs $140,000 + 0.200(S1) $140,000 + 0.200 [$200,000 + 0.0566(S2)] $140,000 + $40,000 + 0.0113(S2) $180,000 $182,057 Substituting $180,057 for S2 into the S1 equation yields total S1 cost: S1 = $200,000 + 0.0566($182,057) = $200,000 + $10,304 = $210,304 Direct costs Allocated from: S1 S2 Total Support Departments S1 S2 $200,000 $140,000 Producing Departments Cutting Sewing $122,000 $ 90,500 (210,304) 10,304 $ 100,946 128,805 $351,751 *Difference due to rounding 195 42,061 (182,057) $ (4)* 67,297 42,929 $200,726 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–11 Baking Dept overhead rate = $150,000/6,250 = $24 per MHr Decorating Dept overhead rate = $42,000/6,000 = $7 per DLH Cost per batch: Direct materials Direct labor Overhead: Baking Dept (2 × $24) Total $55 42 48 $145 Cost per loaf = $145/100 = $1.45 Cost of Dearman wedding cake: Direct materials Direct labor Overhead: Baking Dept (1 × $24) Decorating Dept (8 × $7) Total cost $ 20 50 24 56 $150 Price = × $150 = $450 196 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–12 Allocation ratios: Firing 0.80 0.25 0.29 Shaping 0.20 0.75 0.71 Kilowatt-hours Square feet2 Direct labor hours3 based on kilowatt hours: 20,000/(20,000+80,000); 80,000/(20,000+80,000) based on square feet: 24,000/(24,000+8,000); 8,000/(24,000+8,000) based on direct labor hours: 10,000/(10,000+4,000); 4,000/(10,000+4,000) Cost assignment: Power Gen Factory HR $90,000 $$167,000 $84,000 Direct overhead costs Allocate: Power ($90,000) General Factory Human Resources Total after allocation $0 (167,000) $0 Departmental overhead rates: Shaping: $274,890/10,000 = $27.49 per DLH* Firing: $368,110/4,000 = $92.03 per DLH* *Rounded 197 Shaping $72,000 Firing $230,000 18,000 - 125,250 84,000 59,640 $0 $274,890 72,000 41,750 24,360 $368,110 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–13 Assume the support-department costs are allocated in order of highest to lowest cost: General Factory, Power, and Human Resources Square feet Kilowatt-hours Labor hours Power 0.05 — — GF — — — Direct costs $ 90,000 $167,000 General Factory : (0.05 × $167,000) 8,350 (8,350) (0.15 × $167,000) (25,050) (0.60 × $167,000) (100,200) (0.20 × $167,000) (33,400) Power2: (0.20 × $98,350) (19,670) (0.16 × $98,350) (15,736) (0.64 × $98,350) (62,944) Human Resources: (0.71 × $128,720) (0.29 × $128,720) Total $ $ based on square feet: Power = 2,000/(2,000+6,000+24,000+8,000) HR = 6,000/(2,000+6,000+24,000+8,000) Shaping = 24,000/(2,000+6,000+24,000+8,000) Firing = 8,000/(2,000+6,000+24,000+8,000) based on kilowatt hours : HR = 25,000/(25,000+20,000+80,000) Shaping = 20,000/(25,000+20,000+80,000) Firing = 80,000/(25,000+20,000+80,000) HR 0.15 0.20 — Shaping 0.60 0.16 0.71 Firing 0.20 0.64 0.29 $84,000 $ 72,000 $230,000 25,050 100,200 33,400 19,670 15,736 62,944 (91,391) 91,391 (37,329) $ $279,327 Allocation Ratios for HR department based on direct labor hours : Shaping 10,000/(10,000+4,000) Firing 4,000/(10,000+4,000) Shaping: $279,327/10,000 = $27.93 per DLH* Firing: $403,576/4,000 = $90.92 per DLH* *Rounded 198 37,329 $363,673 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–29 Continued Fixed overhead rates: Mixing: $254,290/30,000 = $8.48 per DLH* Cooking: $195,980/10,000 = $19.60 per MHr* Packaging: $154,650/50,000 = $3.09 per DLH* Variable overhead rates: Mixing: $69,432/30,000 = $2.31 per DLH* Cooking: $77,238/10,000 = $7.72 per MHr* Packaging: $99,820/50,000 = $2.00 per DLH* *Rounded Sequential method: Fixed cost allocation ratios (descending order of magnitude): Maint Custod Pers Cafe Mix Cost Driver* Items 0.200 0.016 0.080 0.024 0.224 Machine hours 0.200 Square feet — — 0.069 0.049 0.392 Employees (1) — — — 0.091 0.364 Employees (2) — — — — 0.400 Cook 0.216 0.500 0.294 0.182 0.200 Pack 0.240 0.300 0.196 0.364 0.400 *Note: Items are used to allocate accounting costs; machine hours to allocate maintenance; square feet to allocate custodial services; and employees to allocate both personnel costs and cafeteria costs 216 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–29 Continued Allocation of fixed costs (expressed in thousands of dollars): Pers Cafe Mixing Cooking Packaging Main Cust Direct costs $100 $80.000 $70.000 $20.000 $120.000 $60.000 $25.000 Accounting: (0.200 × $130) 26 (0.016 × $130) 2.080 (0.080 × $130) 10.400 (0.024 × $130) 3.120 (0.224 × $130) 29.120 (0.216 × $130) 28.080 (0.240 × $130) 31.200 Maintenance: (0.2 × $126) 25.200 (0.5 × $126) 63.000 (0.3 × $126) 37.800 Custodial: (0.069 × $82.08) 5.664 (0.049 × $82.08) 4.022 (0.392 × $82.08) 32.175 (0.294 × $82.08) 24.132 (0.196 × $82.08) 16.088 Personnel: (0.091 × $86.064) 7.832 (0.364 × $86.064) 31.327 (0.182 × $86.064) 15.664 (0.364 × $86.064) 31.327 Cafeteria: (0.4 × $34.974) 13.990 (0.2 × $34.974) 6.995 (0.4 × $34.974) 13.990 Total $251.812 $197.871 $155.405 Note: Total of post-allocation fixed costs does not equal pre-allocation total due to rounding error 217 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–29 Continued Allocation ratios for variable costs: Cost Personnel Accounting Cost Driver Machine hours Employees (1) 0.137 0.178 Employees (2) 0.206 Items Mixing 0.200 0.274 0.317 0.329 Cooking 0.500 0.137 0.159 0.318 Packaging 0.300 0.274 0.317 0.353 Note 1: Custodial services was not included as it had no direct variable costs Note 2: The order of allocation was based on the magnitude of direct variable costs as follows: maintenance, cafeteria, personnel, and cost accounting Note 3: Employees is the base for allocating cafeteria and personnel Employees (1) pertains to cafeteria and employees (2) to personnel 218 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–29 Continued Allocation of variable costs: Direct costs Maintenance: (0.200 × $100,000) (0.500 × $100,000) (0.300 × $100,000) Cafeteria: (0.137 × $40,000) (0.178 × $40,000) (0.274 × $40,000) (0.137 × $40,000) (0.274 × $40,000) Personnel: (0.206 × $25,480) (0.317 × $25,480) (0.159 × $25,480) (0.317 × $25,480) Accounting: (0.329 × $28,869) (0.318 × $28,869) (0.353 × $28,869) Total Cafe $40,000 Pers Cost Acc Mixing Cook Pack $20,000 $16,500 $20,000 $10,000 $40,000 20,000 50,000 30,000 5,480 7,120 10,960 5,480 10,960 5,249 8,077 4,051 8,077 9,498 9,180 10,191 $68,535 $78,711 $99,228 Note: Total of post-allocation variable costs does not equal pre-allocation total due to rounding error 219 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–29 Concluded Overhead rates: Fixed rates: Mixing: Cooking: Packaging: $251,812/30,000 = $8.39 per DLH* $197,871/10,000 = $19.79 per MHr* $155,405/50,000 = $3.11 per DLH* Variable rates: Mixing: $68,535/30,000 = $2.28 per DLH* Cooking: $78,711/10,000 = $7.87 per MHr* Packaging: $99,228/50,000 = $1.98 per DLH* *Rounded Selling price computation: a With direct method: Prime costs Overhead* Total costs Markup (30%) Price $ 60,000 77,220 $137,220 41,166 $178,386 *($8.48 + $2.31)1,000 + ($19.60 + $7.72)1,500 + ($3.09 + $2.00)5,000 b With sequential method: Prime costs $ 60,000 Overhead* 77,610 Total costs $137,610 Markup (30%) 41,283 Price $178,893 *($8.39 + $2.28)1,000 + ($19.79 + $7.87)1,500 + ($3.11 + $1.98)5,000 The methods assign costs differently and produce different prices for the batch of chocolate bars The difference in price is over $500 This amount could be significant, depending on the competitive conditions facing the firm Assuming that the sequential method provides more accurate cost assignments, this method should be used if the increased accuracy is important for the firm’s well-being Otherwise, the firm should use the much simpler direct method 220 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–30 Baton Rouge ($781,000/$4,641,000)($146,500)* Kilgore ($750,000/$4,641,000)($146,500) Longview ($912,000/$4,641,000)($146,500) Paris ($1,098,000/$4,641,000)($146,500) Shreveport ($1,100,000/$4,641,000)($146,500) = $24,653 = $23,675 = $28,789 = $34,660 = $34,723 *($18)(4,250) + $70,000 = $146,500 Share of Purchasing Department fixed costs based on 2005 revenues: Baton Rouge ($675,000/$4,500,000)($70,000) = $10,500 Kilgore ($720,000/$4,500,000)($70,000) = $11,200 Longview ($900,000/$4,500,000)($70,000) = $14,000 Paris ($1,125,000/$4,500,000)($70,000) = $17,500 Shreveport ($1,080,000/$4,500,000)($70,000) = $16,800 Baton Rouge Kilgore Longview Paris Shreveport Variable Cost ($18)(1,475) ($18)(1,188) ($18)(500) ($18)(525) ($18)(562) = $26,550 = $21,384 = $9,000 = $9,450 = $10,116 + + + + + + Fixed Cost $10,500 $11,200 $14,000 $17,500 $16,800 = = = = = = Total $37,050 $32,584 $23,000 $26,950 $26,916 Method allocates cost on the basis of the cost driver which causes it and would be more likely to encourage managers to use Purchasing Department time efficiently Method assigns purchasing costs according to a base that may not be causally related Therefore, an apartment complex with stable rentals from one year to the next may still experience wild fluctuations in allocated cost due to changing rental patterns of other apartment complexes 221 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–31 Direct overhead Maintenance: (1/8)($500,000) (7/8)($500,000) Power: (1/6)($225,000) (5/6)($225,000) Setups: (40/200)($150,000) (160/200)($150,000) General Factory: (0.272)($625,000) (0.728)($625,000) Total Department A $200,000 Department B $ 800,000 62,500 437,500 37,500 187,500 30,000 120,000 170,000 $500,000 455,000 $ 2,000,000 Dept A overhead rate: $500,000/200,000 = $2.50 per DLH Dept B overhead rate: $2,000,000/120,000 = $16.67 per MHr (rounded) 222 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–31 Continued Allocation order: General Factory, Maintenance, Power, Setups, A, and B Allocation Ratios Maint Power Setups Dept A Dept B G.F — 0.125 0.200 0.025 0.177 0.473 — — 0.150 0.050 0.100 0.700 — — — — 0.167 0.833 — — — — 0.200 0.800 G.F Maint Power Setups Dept A Dept B Direct $ 625,000 $ 500,000 $ 225,000 $ 150,000 $200,000 $ 800,000 G.F (625,000) 78,125 125,000 15,625 110,625 295,625 Maint — (578,125) 86,719 28,906 57,813 404,687 Power — — (436,719) — 72,932 363,787 Setups — — — (194,531) 38,906 155,625 Total $ $ $ $ $480,276 $2,019,724 Alloc from: G.F Maint Power Setups Dept A overhead rate: ($480,276/200,000) = $2.40 per DLH* Dept B overhead rate: ($2,019,724/120,000) = $16.83 per MHr* *Rounded Prime cost Overhead: ($2.40 × 5,000) ($16.83 × 500) ($2.40 × 400) ($16.83 × 3,000) $140,415 Markup (50%) Total bid revenue Units Bid price Job SS $120,000 Job TT $ 50,000 12,000 8,415 960 50,490 $101,450 70,208 $210,623 ÷ 14,400 $ 14.63 50,725 $152,175 ÷ 1,500 $ 101.45 Although the difference is small, it appears to make the bids more attractive The use of the sequential method to allocate support-department costs to producing departments gives more accurate overhead rates If the best competing bid was $4.10 lower than the original bid, then it would be $14.65 In this case, the sequential method of allocating overhead costs would provide a bid ($14.63) that is just below the competing bid Since the sequential method is more accurate, the $14.63 bid is a good one 223 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com MANAGERIAL DECISION CASES 7–32 Emma’s argument about the arbitrary nature of allocations has little merit Even if the allocation is arbitrary, changing it to exploit a customer is wrong Many allocations, however, are based on causal factors and reflect the consumption of resources If we accept cause and effect as a reasonable criterion for allocation, then switching to a factor that is less related to overhead consumption certainly will increase the inaccuracy of the product cost Emma should price the new order using the most accurate cost information available Thus, the current allocation scheme should be maintained The controller (Lenny) should refuse to change the allocation method and make every attempt to tactfully convince Emma of the impropriety of the recommended action Often, a simple comment questioning the propriety of an action is sufficient to dissuade According to the IMA Statement of Ethical Professional Practice, accountants should “refrain from engaging in any conduct that would prejudice carrying out duties ethically.” (III-2) The accountant should also abstain from engaging in or supporting any activity that might discredit the profession (III-3) By changing allocation procedures, the controller would obtain personal gain (a bonus) from unethical means Furthermore, Lenny has an obligation to communicate information fairly and objectively (IV-1) Choosing an allocation method that is known to be less accurate is not consistent with this requirement Lenny should pursue all levels of internal review until a satisfactory resolution is achieved Then, after exhausting all levels of internal review, Lenny should submit his resignation Reacting with anger and contacting the customer was not an appropriate action (as defined by the code for management accountants) According to the code, “Except where legally prescribed, communication of such problems to authorities or individuals not employed or engaged by the organization is not considered appropriate.” 224 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–33 Variable maintenance: $246,667/3,700 = $66.67*/flying hour Allocation Ratios for Fixed Costs 206B 206L-1 500D 0.32432 0.43243 0.24324 0.33333 0.33333 0.33333 0.32432 0.43243 0.24324 Maintenance Hangar rent Administrative Alloc of fixed costs: Maintenance—fixed: (0.32432 × $26,000) (0.43243 × $26,000) (0.24324 × $26,000) Hangar rent: (0.33333 × $18,000) (0.33333 × $18,000) (0.33333 × $18,000) Administrative: (0.32432 × $110,000) (0.43243 × $110,000) (0.24324 × $110,000) Total fixed costs 500D 206B 206L-1 $ 8,432 $11,243 $ 6,324 6,000 6,000 6,000 35,675 47,567 $50,107 Indirect fixed costs per unit: 500D: $50,107/1,200 = $41.76* per hour 206B: $64,810/1,600 = $40.51* per hour 206L-1: $39,080/900 = $43.42* per hour *Rounded 225 $64,810 26,756 $39,080 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–33 Continued 500D $ 77.70* 25.54* 41.76 66.67 $211.67 31.75 $243.42 211.67 $ 31.75 Direct costs—fixed* Direct costs—variable** Overhead—fixed Overhead—variable Cost per unit Markup* (15%) Bid price Less cost Profit/hour 206B $ 58.88* 23.96* 40.51 66.67 $190.02 28.50 $218.52 190.02 $ 28.50 206L-1 $195.41* 110.28* 43.42 66.67 $415.78 62.37 $478.15 415.78 $ 62.37 *Total direct fixed costs/Flying hours **Total direct variable costs/Flying hours Original expected profit (uses the original hours and the above bid prices and unit variable costs): Revenues: 1,200 × $243.42 = $292,104 ,600 × $218.52 = 349,632 900 × $478.15 = 430,335 Less variable costs Contribution margin Less direct fixed expenses Less indirect fixed expenses Income before taxes $ 1,072,071 414,903 $ 657,168 (363,315) (154,000) $ 139,853 Note: The answer can also be obtained by multiplying the profit per hour for each helicopter by the original hours and summing (Any slight difference is due to rounding error.) *Rounded 226 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–33 Continued The actual revenues earned (for the first six months) were as follows: 299 × $243.42 = $ 72,783 160 × $218.52 = 34,963 204 × $478.15 = 97,543 $205,289 Actual costs incurred: Direct costs—fixed* Direct costs—variable** Overhead—variable*** Indirect fixed costs* Total 500D $46,623 7,636 19,934 206B $47,100 3,834 10,667 206L-1 $87,935 22,497 13,601 *Half of total annual costs **Per-unit variable costs × Actual flying hours ***Per-unit variable cost ($66.67) × Actual flying hours Income statement: Revenue Variable costs Contribution margin Fixed costs Loss $ 205,289 78,169 $ 127,120 258,658 $(131,538) Profit that should have been earned (for the first six months): Profit per hour 50% of projected hours 500D $ 31.75 × 600 $ 19,050 206B $ 28.50 × 800 $ 22,800 Total profit: $69,917 ($19,050 + $22,800 + $28,067) 227 206L-1 $ 62.37 × 450 $ 28,067 Total $181,658 33,967 44,202 77,000 $336,827 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–33 Continued Revenue: 450 × $243.42 = 600 × $218.52 = 800 × $478.15 = $109,539 131,112 382,520 $623,171 Costs: 500D $ 93,245 11,493 50,107 30,002 $184,847 Direct costs—fixed Direct costs—variable Overhead—fixed Overhead—variable Total 206B $ 94,200 14,376 64,810 40,002 $213,388 206L-1 $175,870 88,224 39,080 53,336 $356,510 Total $363,315 114,093 153,997 123,340 $754,745 Income statement: Revenue Variable costs Contribution margin Fixed costs Loss $ 623,171 237,433 $ 385,738 517,312 $(131,574) Variable maintenance: $246,667/3,700 = $66.67 per flying hour Allocation ratios for fixed costs (based on revised hours): Maintenance Hangar rent Administrative 500D 0.24324 0.33333 0.24324 206B 0.32432 0.33333 0.32432 206L-1 0.43243 0.33333 0.43243 500D $ 6,324 6,000 26,756 $39,080 206B $ 8,432 6,000 35,675 $50,107 206L-1 $11,243 6,000 47,567 $64,810 Allocation of fixed costs: Maintenance—fixed Hangar rent Administrative Total fixed costs 228 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 7–33 Concluded 500D: $39,080/450 = $86.84* per hour 206B: $50,107/600 = $83.51* per hour 206L-1: $64,810/800 = $81.01* per hour *Rounded Direct costs—fixed* Direct costs—variable** Overhead—fixed Overhead—variable Cost per unit 500D $207.21 25.54 86.84 66.67 $386.26 206B $157.00 23.96 83.51 66.67 $331.14 206L-1 $219.84 110.28 81.01 66.67 $477.80 *Direct fixed costs/Revised flying hours **Direct variable costs/Original flying hours Revenues needed = Total costs for revised hours + Original profit = [($386.26 × 450) + ($331.14 × 600) + ($477.80 × 800)] + $139,853 = $754,741 + $139,853 = $894,594 Let m = Markup Revenues needed = (1 + m)(Total costs for revised hours) = (1 + m)($754,741) $894,594 = (1 + m)($754,741) + m = $894,594/$754,741 + m = 1.185 m = 0.185 Thus, the revised prices are as follows: 500D: (1.185)($386.26) = $457.72* per hour 206B: (1.185)($331.14) = $392.40* per hour 206L-1: (1.185)($477.80) = $566.19* per hour *Rounded 229 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com RESEARCH ASSIGNMENTS 7–34 Answers will vary 7–35 Answers will vary 230 ... $ 240,000 Accounting $ 270 ,000 Laboratory $345,000 Tissue Pathology $456,000 13,500 (253,500) $ ( 270 ,000) $ 166 ,72 5 152,100 $663,825 89 ,77 5 101,400 $6 47, 175 Delivery: 2,000/(2,000+24 ,70 0+13,300)... 80,000/(11,000+20,000+80,000) = 0 .72 07 HR = $70 ,000 + 0.3333GF GF = $230,000 + 0.0991HR GF = $230,000 + 0.0991( $70 ,000 + 0.3333GF) 0.967GF = $236,9 37 GF = $245,023 HR = $70 ,000 + 0.3333GF HR = $70 ,000 + 0.3333($245,023)... $150,000 + 0.3($110,000 + 0. 076 9P) P = $150,000 + $33,000 + 0.0231P 0. 976 9P = $183,000 P = $1 87, 3 27 HR = HR = HR = HR = $110,000 + 0. 076 9P $110,000 + 0. 076 9($1 87, 3 27) $110,000 + $14,405 $124,405