Exam 1 Review Solutions

Business Learning Center, AIS 211
Fall 2017
Exam 1 Review Check Figures
Note: These questions are provided ONLY to give students extra practice on chapters already
covered. The topics covered here are not comprehensive and are not indicative of the breadth of
coverage on the examinations for the course.
Question 1: Jim sells steel clocks and steel stools. Fixed costs for his factory are 21,450. Jim
has decided on a target mix of 25% clocks and 75% stools. Below is the cost information for the
two products (assume Direct Labor is a variable cost):
Product Clock Stool
Selling Price $30 $50
Direct Materials 8 15
Direct Labor 4 6
a) Using, the target sales mix, determine the number of units that Jim just sell of each item to
breakeven for the month. (Round only your final answer for each item to the nearest whole
number)
205 clocks and 613 stools
b) Using the target sales mix, determine the number of units of clocks and stools that Jim must
sell to make a (pretax) target profit of 15% of sales revenue.
275 clocks and 825 stools
c) Using the target sales mix, determine the sales revenue required to earn (pretax) income equal
to 15% of sales revenue. $49,500
Question 2: Gidgets Glassware Company makes and sells sets of glassware. Gidgets sells each
glass for $15. There is no discount for buying a case. The following information reflects a
breakdown of costs at current production (Assume Direct Labor is a variable cost and round only
your final answer for each part):
Costs: Total Costs

Direct Materials $40,000
Direct Labor 25,000
Variable Manufacturing Overhead 10,000
Variable Selling Costs 6,000
Fixed Overhead 15,000
The glasses are sold in cases of 20. Each case requires 5 machine hours to manufacture. The
plant has a practical capacity of 2,500 machine hours per month, but current monthly production
consumes only about 80% of the capacity.
A glass collectors catalog arranged a meeting with Gidgets sales team to place an order
for 1600 glasses next month. It has requested a special stem that will cost Gidgets an additional
$0.50 a glass. However, no variable selling costs will be incurred for fulfilling this special order.
a) Determine the minimum (floor) price that Gidgets Glassware should charge for the order of
1,600 glasses. $15,800
b) Determine the minimum (floor) price, for the total order of glasses, if the order was for 2,600
glasses.cc $28,600
Question 3: Zinger Industries manufactures two products: YX56 and YZ83. The monthly
practical capacity is 5,000 machine hours. The following data applies for the current month (all
amounts are per unit):
YX56 YZ83
Maximum sales units 4,000 4,500
Machine hours 1.1 .8
Selling price $50 $40
Direct materials 10 8
Variable Manufacturing 9 7
overhead
Variable selling overhead 5 3
Fixed overhead 10 10
a) How many units of each product should Zinger produce to maximize profits this month?
4500 of YX83 and 1272 of YX56

Question 4: McKinnon Companys plant manager is considering buying a new machine to
replace an old grinding machine or overhauling the old one to ensure compliance with the plants
high-quality standards. The following data are available:
Old Grinding Machine

Original cost $50,000
Accumulated Depreciation 40,000
Annual operating costs 18,000
Current salvage value 4,000
Salvage value at end of 5 years 0
New Grinding Machine

Cost $70,000
Annual operating costs 13,000
Overhaul of Old Grinding Machine
Cost of overhaul $25,000
Annual operating costs after
Overhaul 14,000
a) What costs should the decision maker consider as sunk costs?

b) List all relevant costs and when they are incurred.
c) What should the plant manager do? Why?
(a) The original cost of $50,000 and accumulated depreciation of $40,000 are sunk, and
therefore irrelevant, when the choice is between overhauling the old machine and
replacing it with a new machine. Note that the annual operating costs (before
overhaul) of $18,000 are not sunk costs, yet they are irrelevant.
(b) Relevant costs include the acquisition cost of the new machine, the cost of
overhauling the old machine, current salvage of $4,000 for the old machine (all of
which are up-front costs), salvage value at the end of five years for the new and
overhauled machines, and the annual operating costs for both the new machine
and the overhauled old machine.
(c) Replacement Overhauling Difference

Net acquisition cost $66,000a $25,000 $41,000
Salvage value at the
end of 5 years (500) (200) (300)
Operating costs for

5 years 65,000b 70,000c (5,000)
Total relevant costs $130,500 $94,800 $35,700
a
$70,000 $4,000 = $66,000
b
$13,000 5 = $65,000
c
$14,000 5 = $70,000
It costs McKinnon Company $35,700 more with the new grinding machine than
overhauling the old one. Therefore, the plant manager should overhaul the old
grinding machine. However, this analysis is incomplete as it ignores the time
value of money, considered in net present value analysis, which is covered in
other courses.
Question 5: Kane Company is considering outsourcing a key component. A reliable supplier
has quoted a price of $64.50 per unit. The following costs of the component when manufactured
in-house are expressed on a per unit basis (assume Direct Labor is a variable cost):
Direct Materials $23.40

Direct Labor 16.10
Variable Overhead 26.70
Fixed Overhead 6.90
Total costs $73.10
a) What assumptions need to be made about the behavior of overhead costs for Kane in order to
analyze the outsourcing decision?
b) Should Kane Company outsource the component?
c) What other factors are relevant to this decision?
Assumptions need to be made about the avoidability of the fixed overhead costs if Kane
outsources the component.
(b) If the variable costs (direct materials, direct labor, and variable overhead) are all
avoidable, then Kane will certainly reduce costs by outsourcing the component.
Fixed overhead costs may be unavoidable if the facility cannot be converted to
alternative uses when the component is outsourced. However, even if the fixed
overhead costs are unavoidable, Kane would reduce costs by outsourcing. In this
case, the cost savings per unit if the component is outsourced would be:
Purchase price $64.50

Avoidable costs ($73.10 $6.90) 66.20
Savings per unit $1.70
(c) Other factors relevant to the decision are the suppliers ability to live up to
expected quality and delivery standards, and the likelihood of suppliers increasing
prices of components in the near future.

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Business Learning Center, AIS 211

Product Clock Stool

Selling Price $30 $50

205 clocks and 613 stools

275 clocks and 825 stools

Costs: Total Costs

Maximum sales units 4,000 4,500

Machine hours 1.1 .8

Selling price $50 $40

Variable selling overhead 5 3

4500 of YX83 and 1272 of YX56

Old Grinding Machine

New Grinding Machine

a) What costs should the decision maker consider as sunk costs?

(c) Replacement Overhauling Difference

Operating costs for

Direct Materials $23.40

Purchase price $64.50

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