BA 905 MANAGERIAL ACCOUNTING

FIRST EXAM 1ST SEMESTER SY 2016-2017

Mr. Pol D. Medina, CPA, MSA
INSTRUCTION : Write your FINAL ANSWERS / REQUIREMENTS on sheets of yellow
paper / bond paper. Do not write at the back. Use separate sheets for your brief computations.
1. Aries Corporation has a machining capacity of 200,000 hours per year. Utilization of
capacity is normally 75%; it has been as low as 40% and as high as 90%. An analysis of the
accounting records revealed the following selected costs:

Vincente uses the high-low method to analyze cost behavior.

A. Classify each of the costs as being either variable, fixed, or semivariable.
B. Calculate amounts for the two unknowns in the preceding table.
C. Calculate the total amount that Viscount would expect at a 75% utilization rate for Cost A,
Cost B, and Cost C.
D. Develop an equation that Vincente can use to predict total cost for any level of hours
within its range of operation.
2. Taurus Corporation operates a small medical lab in Montana that conducts minor medical
procedures (including blood tests and x-rays) for a number of doctors. The lab consumes
various medical supplies and is staffed by two technicians, both of whom are paid a monthly
salary. In addition, there is an on-site office manager who is also paid by the month.
A. If the lab's patient count increases by 15%, will the lab's total operating costs increase by
15%? Explain.
B. Taurus is considering opening an additional lab in a new suburban medical building. What
will likely happen to the lab's level of fixed cost incurrence? Why?

3. The following selected data were taken from the accounting records of Gemini Industrial
Manufacturing:

Manufacturing overhead consists of three different costs; (1) machine supplies (variable), (2)
property taxes (fixed), and (3) plant maintenance (semivariable). July's overhead costs were
$170,000 for machine supplies,, $24,000 for property taxes, and $1.080,000 for plant
maintenance.
A. Determine the machine supplies and property taxes for May.
B. By using the high-low method, analyze Gemini's plant maintenance cost and calculate the
monthly fixed portion and the variable cost per machine hour.
C. Assume that present cost behavior patterns continue into future months. Estimate the total
amount of manufacturing overhead the company can expect in September if 56,000 machine
hours are worked.
4. Cancer Company needs to determine the variable utilities rate per machine hour in order to
estimate cost for August. Relevant information is as follows.

Cancer anticipates producing 5,000 units in August, each unit requiring 1.5 hours of machine
time. The company uses the high-low method to analyze costs.
A. Calculate the variable and fixed components of the utilities cost.
B. Using the data calculated above, estimate the utilities cost for August.

5. Leo Medical Clinic offers a number of specialized medical services. A review of data for
the year just ended revealed variable costs of $32 per patient day; annual fixed costs of
$480,000, which are incurred evenly throughout the year; and semivariable costs that
displayed the following behavior at the "peak" and "valley" of activity:
January (2,400 patient days): $258,400
August (2,900 patient days): $278,900
A. Calculate the total cost for an upcoming month (2,800 patient days) if current cost behavior
patterns continue. Leo uses the high-low method to analyze cost behavior.
B. There is a high probability that Leo's volume will increase in forthcoming months as
patients take advantage of new scientific advances. Can the data and methodology used in part
(a) for predicting the costs of 2,800 patient days be employed to estimate the costs for, say,
3,800 patient days? Why or why not?

6. Virgo Corporation extracts ore for eight different companies in Utah. The firm anticipates
variable costs of $65 per ton along with annual fixed overhead of $840,000, which is incurred
evenly throughout the year. These costs exclude the following semivariable costs, which are
expected to total the amounts shown for the high and low points of ore extraction activity:
March (850 tons): $39,900
August (1,300 tons): $46,200
A-1 uses the high-low method to analyze cost behavior.
A. Calculate the semivariable cost for an upcoming month when 875 tons will be extracted.
B. Calculate the total cost for that same month.
C. Virgo uses Libra Trucking to haul extracted ore. Libra's monthly charges are as follows:

1. From a cost behavior perspective, what type of cost is this?

2. If Virgo plans to extract 875 tons, is the company being very "cost effective" with respect to
Libra's billing rates? Briefly discuss.

7. Sagittarius Corporation has three costs: A, which is variable; B, which is fixed; and C,
which is semivariable. The company uses the high-low method and extracted the following
data from its accounting records:
At 180,000 hours of activity, Cost A totaled $2,610,000.
At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000
hours, the high point, Cost C's fixed portion amounted to $1.75 per hour.
At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000.
A. Compute the variable portion (total) of Cost C at 140,000 hours of activity.
B. Compute Cost C (total) at 160,000 hours of activity.
C. Compute Cost B (total) at 160,000 hours of activity.
8. Scorpio Company is making plans for the introduction of a new product, which has a target
selling price of $7 per unit. The following estimates of manufacturing costs have been derived
for 6 million units, to be produced during the first year:
Direct material: $6,000,000
Direct labor: $2,100,000 (at $14 per hour)
Overhead costs have not yet been estimated, but monthly data on total production and
overhead for the past 12 months have been analyzed by using least-squares regression. The
major overhead cost driver is direct labor hours, with the following results:
Computed values:
Fixed overhead cost: $3,200,000
Coefficient of independent variable: $2.25
A. Prepare the company's regression equation (Y = a + bX) to estimate overhead.
B. Calculate the predicted overhead cost at an activity level of 6,300,000 units.
C. What is Scorpio's dependent variable in this case?

9. Aquarius Manufacturing, which began operations on January 1 of the current year,

produces an industrial scraper that sells for $325 per unit. Information related to the current
year's activities follows.

Aquarius carries its finished-goods inventory at the average unit cost of production. There
was no work in process at year-end.
A. Compute the company's average unit cost of production.
B. Determine the cost of the December 31 finished-goods inventory.
C. Compute the company's cost of goods sold.
D. If next year's production increases to 23,000 units and general cost behavior patterns do
not change, what is the likely effect on:
1. The direct-labor cost of $35 per unit? Why?
2. The fixed manufacturing overhead cost of $400,000? Why?
10. The following selected information was extracted from the 20x3 accounting records of
Pisces Products

*Seventy percent of the company's building was devoted to production activities; the
remaining 30% was used for selling and administrative functions.
Pisces beginning and ending work-in-process inventories amounted to $306,000 and
$245,000, respectively. The company's beginning and ending finished-goods inventories were
$450,000 and $440,000, respectively.
A. Calculate the conversion cost for the year.
B. Calculate the cost of goods manufactured.
C. Compute the cost of goods sold.
11. Mercury Company manufactures boats. During September, 2013, the company purchased
100 cellular phones at a cost of $130 each. Mercury withdrew 70 phones from the warehouse
during the month. Twenty of these phones were installed in salespersons cars and the
remaining 50 phones were put in boats manufactured during the month.
Of the boats put into production during September, 2013, 80% were completed and
transferred to the company's storage lot. Fifty percent of the boats completed during the
month were sold by September 30.

Determine the cost of cellular phones that would appear in each of the following accounts at
September 30, 2013:
Raw materials inventory
Work in process inventory
Finished goods inventory
Cost of goods sold
Selling expenses

12. Consider the descriptors that follow.

1. Is involved almost exclusively with past transactions and events.

2. Much of the information provided is directed toward stockholders, financial analysts,
creditors, and other external parties.
3. Tends to focus more on subunits within an entity rather than the organization as a whole.
4. May become involved with measures of customer satisfaction, and the amount of actual
cost incurred vs. budgeted targets.
5. Is heavily involved with the recordkeeping and reporting of assets, liabilities, and
stockholders' equity.
6. Focuses on planning, decision making, directing, and control.
7. Is heavily regulated.
8. A field that is becoming more "cross-functional" in nature.
9. Much of the field is based on costs and benefits.
Determine whether the descriptors are most closely associated with financial accounting or
managerial accounting.
13.

Match the items by writing the appropriate code letter

A.
B.
C.
D.
E.

Managerial accounting
Financial accounting
Planning
Directing
Controlling
1.
2.

F.
G.
H.
I.
J.

Work in process inventory

Direct materials
Manufacturing overhead
Period costs
Value chain

Indirect costs of manufacturing a product.

Primarily concerned with external users and reports pertain to the entity as a
whole.
3. Costs that are noninventoriable.
4. All business processes associated with providing a product or service.
5. The function of coordinating diverse activities to produce a smooth-running
operation.
6. The cost of products that are partially complete.
7. The function of keeping activities in accordance with plans.
8. Primarily concerned with internal users and reports pertain to subunits of the
entity.
9. Materials that can be physically and directly associated with manufacturing a
product.
10. The function of setting goals and objectives.

14.Pluto, Inc. manufactures cosmetic products that are sold through a network of sales agents.
The agents are paid a commission of 12.5% of sales. The income statement for the year
ending December 31, 2013, is as follow.
PLUTO, INC.
Income Statement
Year Ending December 31, 2013
Sales
$130,000
Cost of goods sold
Variable
$58,500
Fixed
14,350
72,850
Gross margin
57,150
Selling and marketing expenses
Commissions
$16,250
Fixed costs
17,100
33,350
Operating income
$ 23,800
The company is considering hiring its own sales staff to replace the network of agents. It will
pay its salespeople a commission of 10% and incur additional fixed costs of $13 million.
(a) Under the current policy of using a network of sales agents, calculate Pluto, Inc.'s breakeven point in sales dollars for the year 2013.
(b) Calculate the company's break-even point in sales dollars for the year 2013 if it hires its
own sales force to replace the network of agents.
(c) Calculate the degree of operating leverage at sales of $130 million if (1) Pluto, Inc. uses
sales agents, and (2) Pluto, Inc. employs its own sales staff.
15. Mars Service has over 200 auto-maintenance service outlets nationwide. It provides
primarily two lines of service: oil changes and brake repair. Oil change-related services
represent 75% of its sales and provide a contribution margin ratio of 20%. Brake repair
represents 25% of its sales and provides a 60% contribution margin ratio. The company's
fixed costs are $12,000,000 (that is, $60,000 per service outlet).
(a) Calculate the dollar amount of each type of service that the company must provide in
order to break even.
(b) The company has a desired net income of $45,000 per service outlet. What is the dollar
amount of each type of service that must be provided by each service outlet to meet its
target net income per outlet?
16.Jupiter Co. of Kosovo is contemplating a major change in its cost structure. Currently, all
of its drafting work is performed by skilled draftsmen. Alec Jupiter the owner, is considering
replacing the draftsmen with a computerized drafting system.
However, before making the change, Alec would like to know the consequences of the
change, since the volume of business varies significantly from year to year. Shown below are
CVP income statements for each alternative.

Sales
Variable costs
Contribution margin
Fixed costs
Net income

Manual System
$1,500,000
1,200,000
300,000
150,000
$150,000

Computerized System
$1,500,000
900,000
600,000
450,000
$150,000

(a) Determine the degree of operating leverage for each alternative.

(b) Which alternative would produce the higher net income if sales increased by $300,000?

17. Uranus Farms reports the following results for the month of November:
Sales (10,000 units)
$600,000
Variable costs
420,000
Contribution margin
180,000
Fixed costs
110,000
Net income
$ 70,000
Management is considering the following independent courses of action to increase net
income.
1. Increase selling price by 5% with no change in total variable costs.
2

2. Reduce variable costs to 66 % of sales.

3. Reduce fixed costs by $10,000.
If maximizing net income is the objective, which is the best course of action?
18.The income statement for Saturn Machine Company for 2012 appears below.
SATURN MACHINE COMPANY
Income Statement
For the Year Ended December 31, 2012

Sales (40,000 units)........................................................................................

$1,000,000
Variable expenses...........................................................................................
700,000
Contribution margin.......................................................................................
300,000
Fixed expenses...............................................................................................
360,000
Net income (loss)...........................................................................................
$ (60,000)
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 2012?
2. How many additional units would the company have had to sell in 2013 in order to earn
net income of $45,000?
3. If the company is able to reduce variable costs by $2.50 per unit in 2013 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 $45,000?
19. Neptune, Inc. developed the following information for its product:
Per Unit
Sales price
$90
Variable cost
63
Contribution margin
$27
Total fixed costs

$1,080,000

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 $210,000.
20. Brie Larson operates a bed and breakfast hotel in a resort area near Lake Montagut.
Depreciation on the hotel is $60,000 per year. Jane employs a maintenance person at an
annual salary of $32,000 and a cleaning person at an annual salary of $24,000. Real estate
taxes are $10,000 per year. The rooms rent at an average price of $60 per person per night
including breakfast. Other costs are laundry and cleaning service at a cost of $10 per person
per night and the cost of food which is $5 per person per night.
(a) Determine the number of rentals and the sales revenue Brie needs to break even using the
contribution margin technique.
(b) If the current level of rentals is 3,500, by what percentage can rentals decrease before
Jane has to worry about having a net loss?
(c) Brie is considering upgrading the breakfast service to attract more business and increase
prices. This will cost an additional $3 for food costs per person per night. Brie feels she
can increase the room rate to $66 per person per night. Determine the number of rentals
and the sales revenue Brie needs to break even if the changes are made.

21. Vikander Pizza delivers pizzas to dormitories and apartments near a major state university.
The company's annual fixed costs are $48,000. The sales price averages $9, and it costs the
firm $3 to make and deliver each pizza.
A. How many pizzas must Vikander sell to break even?
B. How many pizzas must the company sell to earn a target profit of $54,000?
C. If budgeted sales total 9,900 pizzas, how much is the company's safety margin in dollars?
D. Vikanders assistant manager, an accounting major, has suggested that the firm should try
to increase the contribution margin per pizza. Explain the meaning of "contribution margin" in
layman's terms.

22. Redmayne takes tourists on helicopter tours of Bahamas. Each tourist buys a $150 ticket;
the variable costs average $60 per person. Redmayne has annual fixed costs of $702,000.
A. Compute the average number of tours the company must conduct per month to break even.
B. Compute the average sales revenue needed per month to produce a target average profit of
$36,000 per month.
C. Calculate the contribution margin ratio.
D. Determine whether the actions that follow will increase, decrease, or not affect the
company's break-even point.
1. A decrease in tour prices.
2. The termination of a salaried clerk (no replacement is planned).
3. A decrease in the number of tours sold.
23. The information that follows was obtained from the accounting records of Streep
Manufacturing during a period when the company sold 100,000 units.

A. Compute the company's per-unit contribution margin and break-even point in units.
B. How many units must Streep sell to produce a target profit of $550,400?
C. Assume that Streep was able to reduce the variable cost per unit by $4. What selling price
could management charge if it desired to maintain the current break-even point?
D. Depreciation charges of $640,000 are included in the firm's fixed costs of $6,016,000. If
these charges were to increase by 10%, what effect, if any, would this cost increase have on
the company's contribution margin?
24. Bullock Company is considering the development of two products: no. 65 or no. 66.
Manufacturing cost information follows.

Regardless of which product is introduced, the anticipated selling price will be $50 and the
company will pay a 10% sales commission on gross dollar sales. Thomlinson will not carry an
inventory of these items.
A. What is the break-even sales volume (in dollars) on product no. 66?
B. Which of the two products will be more profitable at a sales level of 25,000 units?
C. At what unit-volume level will the profit/loss on product no. 65 equal the profit/loss on
product no. 66?

25. Kidman Company manufactures an engine for carpet cleaners called the "Brad" Budgeted
cost and revenue data for the "Brad" are given below, based on sales of 40,000 units.

Cost of goods sold consists of $810,000 of variable costs and $310,000 of fixed costs.
Operating expenses consist of $30,000 of variable costs and $70,000 of fixed costs.
A. Calculate the break-even point in units and sales dollars.
B. Calculate the safety margin (in dollars).
C. Kidman received an order for 6,000 units at a price of $25.00. There will be no increase in
fixed costs, but variable costs will be reduced by $0.54 per unit because of cheaper packaging.
Determine the projected increase or decrease in profit from the order, assuming there is no
opportunity costs.
26. Blanchet recently sold 70,000 units, generating sales revenue of $4,900,000. The
company's variable cost per unit and total fixed cost amounted to $20 and $2,800,000,
respectively. Management is in the process of studying the dollar impact of various
transactions and events, and desires answers to the following independent cases:
Case no. 1: Management wants to lower the firm's break-even point to 52,000 units. If all
other costs remain constant, what must happen to fixed costs to achieve this objective?
Case no. 2: The company anticipates a $2 hike in the variable cost per unit. If all other costs
remain constant and management desires to maintain the firm's current break-even point, what
must happen to Blanchet's selling price? If selling price remains constant, what must happen
to the firm's total fixed costs?
A. Answer the two cases raised by management.
B. Determine the impact (increase, decrease, or no effect) of the following operating changes
on the items cited:
1. An increase in variable selling costs on income.
2. A decrease in direct material cost on the unit contribution margin.
3. A decrease in the number of units sold on the break-even point.

27. Hatchcox Company is studying the impact of the following:

1. An increase in sales price.
2. An increase in the variable cost per unit.
3. An increase in the number of units sold (note: each unit produces a $6 contribution margin).
4. A decrease in fixed costs.
5. A proposed change in the method of compensation for salespeople, away from commissions
based on gross sales dollars and toward higher monthly salaries.
Determine the impact of each of these operating changes on Hatchcox's per-unit contribution
margin and break-even point by completing the chart that follows. Your responses should be
Increase (INC), Decrease (DEC), No Effect (NE), or Insufficient Information to Judge (II).

28. Goldstone Company is studying the impact of the following:

1. An increase in sales price on the break-even point.
2. A decrease in fixed costs on the contribution margin.
3. An increase in the contribution margin on the break-even point.
4. A decrease in the variable cost per unit on the sales volume needed to achieve Goldstone's
$68,000 target profit.
5. An increase in sales commissions on the contribution margin and the break-even point.
6. A decrease in anticipated advertising outlays on fixed cost and the break-even point.
Determine the impact of these operating changes (increase, decrease, no effect) on the item(s)
noted.
29. Armani Company manufactures and sells three products: Good, Better, and Best. Annual
fixed costs are $3,315,000, and data about the three products follow.

A. Determine the weighted-average unit contribution margin.

B. Determine the break-even volume in units for each product.
C. Determine the total number of units that must be sold to obtain a profit for the company of
$234,000.
D. Assume that the sales mix for Good, Better, and Best is changed to 50%, 30%, and 20%,
respectively. Will the number of units required to break-even increase or decrease? Explain.
Hint: Detailed calculations are not needed to obtain the proper solution.

30. Boss Corporation sells three products: J, K, and L. The following information was taken
from a recent budget:

Total fixed costs are anticipated to be $2,450,000.

A. Determine Boss sales mix.
B. Determine the weighted-average contribution margin.
C. Calculate the number of units of J, K, and L that must be sold to break even.
D. If Boss desires to increase company profitability, should it attempt to increase or decrease
the sales of product K relative to those of J and L? Briefly explain.
31. Hugo Corporation reported sales revenues of $1,850,000 for the period just ended. Cost of
goods sold, selling expenses, and administrative expenses totaled $1,200,000, $280,000, and
$170,000, respectively. A detailed analysis of the latter three amounts revealed respective
fixed cost components of $780,000, $60,000, and $130,000.
A. Determine the amounts, if any, that Hugo would report on a traditional income statement
for (1) gross margin, (2) contribution margin, and (3) income.
B. Determine the amounts, if any, that Hugo would report on a contribution income statement
for (1) gross margin, (2) contribution margin, and (3) income.
C. Which of the two income statements (traditional or contribution) is more useful for
studying a company's cost-volume-profit relationships?
32. Gio Enterprises is studying the addition of a new product that would have an expected
selling price of $180 and expected variable cost of $120. Anticipated demand is 9,000 units.
A new salesperson must be hired because the company's current sales force is working at
capacity. Two compensation plans are under consideration:
Plan 1: An annual salary of $38,000 plus 10% commission based on gross sales dollars
Plan 2: An annual salary of $180,000 and no commission
A. What is meant by the term "operating leverage"?
B. Calculate the contribution margin and income of the two plans at 9,000 units.
C. Compute the operating leverage factor of the two plans at 9,000 units. Which of the two
plans is more highly leveraged? Why?
D. Assume that a general economic downturn occurred during year no. 2, with product
demand falling from 9,000 to 7,200 units. By using the operating leverage factors, determine
and show which plan would produce a larger percentage decrease in income.

33. Once upon a time, two brothers (Angelo and Joshua) dreamt about owning and operating
companies in the same line of business. Angelo believed in maintaining a very large, highly
efficient manual labor force; Joshua, on the other hand, favored automated-production
processes. One business was located in Madison and the other was located in Austin. Recent
data follow.

A. Which of the two businesses, Madison or Austin, has the higher level of (1) variable cost
and (2) higher level of fixed cost? Explain how you determined your answer.
B. Determine the probable owner of the firm located in (1) Madison and (2) Austin. Briefly
explain your logic.
C. Compute the operating leverage factor for Madison and Austin.
D. Suppose that both Madison and Austin had the opportunity to increase sales by 10%.
Which of the two locations would experience a larger percentage change in net income?
Why?