UNIVERSITY OF MAKATI

STRATEGIC COST MANAGEMENT

MIDTERM EXAMINATION
PROF. ALBERT D CHAN, CPA, MBA
============================
PROBLEM 1
Temple, Inc. produces several models of clocks. An outside supplier has
offered to produce the commercial clocks for Temple for $420 each. Temple
needs 1,200 clocks annually. Temple has provided the following unit costs for
its commercial clocks:

Direct materials $ 100

Direct labor 120
Variable overhead 80
Fixed overhead (40% avoidable) 150

Prepare an incremental analysis which shows the effect of the make or buy
decision. Or Compute the Net Cost savings if commercial clock are bought?

Solution Brief Exercise 108

Incremental Analysis Incremental Effect
Cost to buy (1,200 x $420) ($504,000)
Cost savings:
Savings of
$100 x 1,200 = $120,000
DM
Savings of
$120 x 1,200 = 144,000
DL
Savings of
$80 x 1,200 = 96,000
VOH
Savings of 40% x $150 x 1,200
72,000
FOH =
Total cost savings +432,000
Net cost savings if commercial clock are
$ 72,000
bought

PROBLEM 2
Calc, Inc. owns a machine that produces baskets for the gift packages the
company sells. The company uses 800 baskets in production each month.
The costs of making one basket is $4 for direct materials, $3 for variable
manufacturing overhead, $2 for direct labor and $5 for fixed manufacturing
overhead. The unit cost is based on the monthly production of 800 baskets.
The company determined that 30% of the fixed manufacturing overhead is
avoidable. An outside supplier has offered to sell Calc the baskets for $12
each, and can supply all the units it needs.

1. Compute the relevant cost for make and Buy.

2. How much is the differential cost of Make and Buy?

Solution Brief Exercise 109

Incremental cost to buy (800 x $12) ($9,60
0)
Incremental cost savings:
DM ($4 x 800) +3,200
 VOH ($3 x 800) +2,400
DL ($2 x 800) +1,600
FOH ($5 x 30% x 800) +1,200
Additional cost to buy ($1,20
0)
or
Make Buy
Incremental cost to buy (800 x $12) $9,600
Incremental costs to make: DM ($4 x 800) $3,200
VOH ($3 x 800) 2,400
DL ($2 x 800) 1,600
FOH 4,000 2,800
Incremental cost to buy $11,200 $12,400

PROBLEM 3
Sam Company makes 2 products, footballs and baseballs. Additional
information follows:

Footbal Baseball
ls s
Units 2,000 3,000
Sales $60,000 $25,000
Variable costs 24,000 13,750
Fixed costs 10,000 5,250
Net income $26,000 $6,000
Yards of leather per unit 1.25 0.25
Profit per unit $13.00 $2.00
Contribution margin per unit $18.00 $3.75

Assume that Sam is able to order an additional 2,000 yards of leather and
wishes to maximize its income. Of the additional units it produces, at least
300 of each product are necessary for sales.

1. Compute the Contribution margin per yard.

2. How many units of each must be produced?

Solution Brief Exercise 113

Footballs Baseballs
Contribution margin per yard $18/1.25 = $14.40 $3.75/.25 = $15

Produce more baseballs since CM per constraint is more.

Footballs Baseballs
Minimum: 300 x 1.25 yds. = 375 yds. 300 footballs
Yards remaining for baseballs:
2,000 - 375 = 1,625 yards .
# of baseballs: 1,625/.25 yds. = 6,500 baseballs

PROBLEM 4
McIntosh Enterprises produces giant stuffed bears. Each bear consists of $12
of variable costs and $9 of fixed costs and sells for $45. A wholesaler offers
to buy 8,000 units at $14 each, of which McIntosh has the capacity to
produce. McIntosh will incur extra shipping costs of $1.25 per bear.
Determine the incremental income or loss that would result if the special
order was accepted.

Determine the incremental income or loss that McIntosh Enterprises

would realize by accepting the special order.

Solution Brief Exercise 118

Incremental revenue (8,000 x $14) $112,000
Incremental variable costs ($12 x 8,000) (96,000)
Incremental shipping costs ($1.25 x 8,000) (10,000)
Incremental profit if special order accepted $6,000

PROBLEM 5
During 2005 Nowak Corporation produced 60,000 units and sold 50,000 for
$10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed
manufacturing overhead was $120,000 ($2 per unit). Variable selling
andadministrative costs were $1 per unit sold, and fixed selling and
administrative costs were $30,000.

HOW MUCH IS THE NET INCOME (NET LOSS) UNDER VARIABLE

COTING

Solution 93 (5–7 min.)

Sales (50,000 X $10) $500,000
Variable cost of goods sold (50,000 X $4) $200,000
Variable selling and administrative expense (50,000 X $1) 50,000
250,000
Contribution margin 250,000
Fixed manufacturing overhead 120,000
Fixed selling and administrative expense 30,000 150,000
Net income $100,000

PROBLEM 6
During 2005 Nowak Corporation produced 60,000 units and sold 50,000 for
$10 per unit. Variable manufacturing costs were $4 per unit. Annual fixed
manufacturing overhead was $120,000 ($2 per unit). Variable selling and
administrative costs were $1 per unit sold, and fixed selling and
administrative costs were $30,000. Prepare an absorption costing income
statement.

Solution 94 (5–7 min.)

Sales (50,000 X $10) $500,000
Cost of goods sold (50,000 X $6) 300,000
Gross margin 200,000
Variable selling and administrative expense (50,000 X $1) 50,000
Fixed selling and administrative expense 30,000 80,000
Net income $120,000

PROBLEM 7
Haldi Corporation sells three different sets of sportswear. Sleek sells for $30
and has variable costs of $18; Smooth sells for $50 and has variable costs of
$28; Potent sells for $90 and has variable costs of $45. The sales mix of the
three sets is: Sleek, 50%; Smooth, 30%, and Potent, 20%. What is the
weighted-average unit contribution margin?
Solution 95 (6–8 min.)
Sleek: 50% X ($30 - $18) = $6.00
Smooth 30% X ($50 - $28) = 6.60
Potent 20% X ($90 - $45) = 9.00
Weighted-average unit contribution margin $21.60

PROBLEM 8
Key Co. manufactures beanies. The budgeted units to be
produced and sold are below:

Expected Expected Sales

Production
August 3,100 2,900
September 2,800 3,900
It takes 24 yards of yarn to produce a beanie. The company's
policy to maintain yarn at the end of each month equal to 5% of
the next month's production needs and to maintain a finished
goods inventory at the end of each month equal to 20% of next
month's anticipated production needs. The cost of yarn is $0.20 a
yard. At August 1, 3,720 yards of yarn were on hand. Prepare a
materials purchases budget for the August:

Solution Brief Exercise 164

Units to be produced 3,100
Yards needed per unit 24
Yards needed for production 74,400
Add: Desired materials ending inventory (yards)
3,360
(5%*2,800*24)
Less: Beginning inventory on hand (yards)
(3,720)
(5%*3,100*24)
Yards needed to purchase 74,040
Cost per yard $0.20
Budgeted cost of purchases $14,808

PROBLEM 9
Johnson Company budgeted the following information for 2008:
May June July
Budgeted purchasesPhp104,000Php110,000Php102,000

 Cost of goods sold is 40% of sales. Accounts payable is used only for
inventory acquisitions.
 Johnson purchases and pays for merchandise 60% in the month of
acquisition and 40% in the following month.
 Selling and administrative expenses are budgeted at Php40,000 for May
and are expected to increase 5% per month. They are paid during the
month of acquisition. In addition, budgeted depreciation is Php10,000 per
month.
 Income taxes are Php38,400 for July and are paid in the month incurred.
Instructions
Compute the amount of budgeted cash disbursements for July.

Solution 154 (5 min.)

Cash disbursements:
Cash paid for July purchases (60% × Php102,000) Php 61,200
Cash paid for June purchases (40% × Php110,000) 44,000
Cash paid for July selling and admin (Php40,000 × 1.05 × 1.05)
44,100
Cash paid for income taxes 38,400
Total cash disbursements Php187,700

PROBLEM 10
AlCo’s sales are all on account to customers. The company’s collection
pattern is: 70% collected in the month of sale; 25% collected in the month
following sale; and the remaining 5% is uncollectible. The accounts
receivable balance on March 31 was $30,000, all of which was collectible.
The cash balance at the beginning of April was $21,000. Forecasted sales
information follows:

Forecasted sales for January $110,00

0
Forecasted sales for February 130,000
Forecasted sales for March 90,000
Forecasted sales for April 100,000
Forecasted sales for May 120,000

Determine the amount of cash to be collected during the month of

March.
Solution Brief Exercise 166

Cash collected from February sales: $130,000 x $32,50

25% = 0
Cash collected from March sales: $90,000 x 70% = 63,000
Cash to be collected during March $95,50
0

PROBLEM 11
The budget components for McLeod Company for the quarter ended June 30
appear below. McLeod sells trash cans for $12 each. Budgeted sales of trash
cans for the next four months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
McLeod desires to have trash cans on hand at the end of each month equal to 20 percent of the
following month’s budgeted sales in units. On March 31, McLeod had 4,000 completed units on
hand. The number of trashcans to be produced in April and May are 26,000 and 46,000,
respectively. Seven pounds of plastic are required for each trash can. At the end of each month,
McLeod desires to have 10 percent of the following month’s production material needs on hand.
At March 31, McLeod had 18,200 pounds of plastic on hand. The material used in production
costs $0.60 per pound. Each trashcan produced requires 0.10 hours of direct labor. How
many trashcans should McLeod produce during the month of June?

Solution Brief Exercise 167

Units needed for June sales 30,000

+ Desired ending inventory (20%*25,000) 5,000
Total units needed 35,000
Less beginning inventory on hand (20%*30,000) (6,000)
Units to be produced during June 29,000

PROBLEM 12
The budget components for McLeod Company for the quarter ended June 30
appear below. McLeod sells trash cans for $12 each. Budgeted sales and
production of trash cans for the next four months are:
Sales Production
April 20,000 units 26,000 units
May 50,000 units 46,000 units
June 30,000 units 29,000 units
July 25,000 units 20,000 units
McLeod desires to have trash cans on hand at the end of each month equal to 20 percent of the
following month’s budgeted sales in units. On March 31, McLeod had 4,000 completed units on
hand. The number of trashcans to be produced in April and May are 26,000 and 46,000,
respectively. Seven pounds of plastic are required for each trash can. At the end of each month,
McLeod desires to have 10 percent of the following month’s production material needs on hand.
At March 31, McLeod had 18,200 pounds of plastic on hand. The material used in production
costs $0.60 per pound. Each trashcan produced requires 0.10 hours of direct labor. Determine
how much the materials purchases budget will be for the month ending April 30.

Solution Brief Exercise 168

Production of trash cans expected during April (given) 26,000
Pounds of plastic per trash can 7
Total pounds of plastic needed for sales production 182,000
Add ending plastic inventory desired (10%*46,000*7) 32,200
Total pounds of plastic needed 214,200
Less beginning inventory of plastic on hand (given) (18,200)
Pounds of plastic to be purchased 196,000
Cost per pound of plastic $0.60
Cost of direct materials purchases $117,60
0

END