ACC601 Managerial Accounting

Group Case 2 (100 points)

Instructions:

1. As a group, complete the following activities in good form. Use excel or
word only. Provide all supporting calculations to show how you arrived at
your numbers

2. Add only the names of group members who participated in the completion
of this assignment.

3. Submit only one copy of your completed work via Moodle. Do not send it to
me by email.

4. Due: No later than the last day of Module 4. Please note that your professor
has the right to change the due date of this assignment.

Part A: Fixed and Variable Cost

Stuart Manufacturing produces metal picture frames. The company’s income statements for the last two

years are given below:

Last year This year

Units sold …………………………………………… 50,000 70,000

Sales ………………………………………………….. $800,000 $1,120,000

Cost of goods sold ………………………………. 550,000 710,000

Gross margin ……………………………………… 250,000 410,000

Selling and administrative expense ……….. 150,000 190,000

Net operating income ………………………….. $100,000 $ 220,000

The company has no

beginning or ending inventories.

Required:

a. Estimate the company’s total variable cost per unit and its total fixed costs per year.
(Remember that this is a manufacturing firm.)

b. Compute the company’s contribution margin for this year.

Part B: Cost-Volume-Profit Analysis

Belli-Pitt, Inc, produces a single product. The results of the company’s operations for a typical month are

summarized in contribution format as follows:

Sales …………………………….. $540,000

Variable expenses ………….. 360,000

Contribution margin ………. 180,000

Fixed expenses ……………… 120,000

Net operating income …….. $ 60,000

The company produced and sold 120,000 kilograms of product during the month. There were no

beginning or ending inventories.

Required:

a. Given the present situation, compute
1. The break-even sales in kilograms.
2. The break-even sales in dollars.
3. The sales in kilograms that would be required to produce net operating income of

$90,000.
4. The margin of safety in dollars.

b. An important part of processing is performed by a machine that is currently being leased for
$20,000 per month. Belli-Pitt has been offered an arrangement whereby it would pay $0.10
royalty per kilogram processed by the machine rather than the monthly lease.
1. Should the company choose the lease or the royalty plan?
2. Under the royalty plan compute break-even point in kilograms.
3. Under the royalty plan compute break-even point in dollars.
4. Under the royalty plan determine the sales in kilograms that would be required to

produce net operating income of $90,000.

Part C: Relevant Cost/Special Order

Gottshall Inc. makes a range of products. The company’s predetermined overhead rate is $19 per direct

labor-hour, which was calculated using the following budgeted data:

Variable manufacturing overhead ……. $225,000

Fixed manufacturing overhead ………… $630,000

Direct labor-hours ………………………….. 45,000

Component P0 is used in one of the company’s products. The unit cost of the component

according to the company’s cost accounting system is determined as follows:

Direct materials ………………………………….. $21.00

Direct labor ………………………………………… 40.80

Manufacturing overhead applied …………… 32.30

Unit product cost ………………………………… $94.10

An outside supplier has offered to supply component P0 for $78 each. The outside supplier is

known for quality and reliability. Assume that direct labor is a variable cost, variable

manufacturing overhead is really driven by direct labor-hours, and total fixed manufacturing

overhead would not be affected by this decision. Gottshall chronically has idle capacity.

Required:

Is the offer from the outside supplier financially attractive? Why?

Part D: Relevant Cost/Make or Buy Decision

Part U67 is used in one of Broce Corporation’s products. The company’s Accounting Department reports

the following costs of producing the 7,000 units of the part that are needed every year.

Per Unit

Direct materials …………………………………… $8.70

Direct labor ………………………………………… $2.70

Variable overhead ……………………………….. $3.30

Supervisor’s salary ………………………………. $1.90

Depreciation of special equipment ………… $1.80

Allocated general overhead…………………… $5.50

An outside supplier has offered to make the part and sell it to the company for $21.40 each. If

this offer is accepted, the supervisor’s salary and all of the variable costs, including direct labor,

can be avoided. The special equipment used to make the part was purchased many years ago

and has no salvage value or other use. The allocated general overhead represents fixed costs of

the entire company. If the outside supplier’s offer were accepted, only $6,000 of these allocated

general overhead costs would be avoided.

Required:

a. Prepare a report that shows the effect on the company’s total net operating income of
buying part U67 from the supplier rather than continuing to make it inside the company.

b. Which alternative should the company choose?

Part E: Relevant Cost/Sell or Process Further

Farrugia Corporation produces two intermediate products, A and B, from a common input. Intermediate

product A can be further processed into end product X. Intermediate product B can be further

processed into end product Y. The common input is purchased in batches that cost $36 each and

the cost of processing a batch to produce intermediate products A and B is $15. Intermediate

product A can be sold as is for $21 or processed further for $14 to make end product X that is

sold for $32. Intermediate product B can be sold as is for $44 or processed further for $28 to

make end product Y that is sold for $64.

Required:

a. Assuming that no other costs are involved in processing potatoes or in selling products, how
much money does the company make from processing one batch of the common input into
the end products X and Y? Show your work!

b. Should each of the intermediate products, A and B, be sold as is or processed further into an
end product? Explain.

Part F: Relevant Cost/Dropping a Product

The management of Woznick Corporation has been concerned for some time with the financial

performance of its product V86O and has considered discontinuing it on several occasions. Data from

the company’s accounting system appear below:

Sales ………………………………………………………. $150,000

Variable expenses …………………………………….. $72,000

Fixed manufacturing expenses …………………… $50,000

Fixed selling and administrative expenses …… $33,000

In the company’s accounting system all fixed expenses of the company are fully allocated to products.

Further investigation has revealed that $30,000 of the fixed manufacturing expenses and $13,000 of the

fixed selling and administrative expenses are avoidable if product V86O is discontinued.

A. According to the company’s accounting system, what is the net operating income earned by product

V86O?

B. What would be the effect on the company’s overall net operating income if product V86O were

dropped?