Chapter 5 (misc)
What is the activity base? (format: business, cost)
1. Accounting firm, Accountant salaries
2. Boba shop, Direct materials
3. Moving company, fuel
4. Gamestop, Employee commissions
5. Catering, Containers to transport food
1. Number of clients
2. Number of drinks produced
3. Number of miles driven
4. Number of items sold
5. Number of serving sizes
Emi. Co is trying to calculate unit breakeven. They sell keychains for $30 each and it costs them $16 to make each one. They also have to pay $30,000 for the factory over head and $15,000 for selling and admin each year.
Fixed expenses = $30,000 + $15,000 = $45,000
Contribution margin = $30 - $16 = $14
Breakeven = $45,000/$14 = 3215 units
False. Allocating common costs can make a profitable segment look unprofitable.
1. Direct labor hours
2. Designs used
3. Rent
4. Pattern cut-outs used
5. Catalogs sent
1. Direct labor hours: Unit-level activity
2. Designs used: Product-level activity
3. Rent: Organization-sustaining activity
4. Pattern cut-outs used: Batch-level activity
5. Catalogs sent: Customer-level activity
Emi Co. breaks even when they sell 800 units. This year they were able to sell 1350 units (they had a product go viral on tiktok). What is the margin of safety?
The following is listed in $/unit for 800 units:
Selling price $100
Variable expenses $68.75
Fixed expenses: $31.25
Breakeven:
Sales: $100 x 800 = $80,000
Actual:
Sales: $100 x 1350 = $135,000
Margin of saftey:
(Actual sales - Breakeven sales) / Actual sales
($135,000 - $80,000) / $135,000
= 40.74%
Emi. Co wants a target profit of $80,000. How much do they have to make in sales? They sell keychains for $30 each and it costs them $16 to make each one. They also have to pay $30,000 for the factory over head and $15,000 for selling and admin each year.
Target profit = CM - fixed expenses
CM = Target profit + fixed expenses
= $80,000 + $45,000
= $125,000
Units needed to get CM = $125,000 / ($16/unit)
= 8929 units
$ sales to get target profit = 8929 units x $30
= $267,870
List the product and period costs in variable costing and absorption costing
Variable costing:
Product - DM, DL, Variable MOH
Period - Fixed MOH, Variable S&A, Fixed S&A
Absorption costing:
Product - DM, DL, Variable MOH, Fixed MOH
Period - Variable S&A, Fixed S&A
Calculate the customer margin of Emi Co.'s top customer.
Sales: $33,400
Direct material: $8,000
Direct labor: $6,000
Shipping: $1,500
Product design: $3,000
Customer margin = $33,400 - $8,000 - $6,000 - $1,500 - $3,000
Find the degree of operating leverage for 1350 units. What does operating leverage measure?
The following is listed in $/unit for 800 units:
Selling price: $100
Variable expenses: $68.75
Fixed expenses: $31.25
Contribution Margin = ($100 - $68.75) x 1350 = $42,187.50
Fixed expenses = $31.35 x 800 = $25,000
Net operating income = $17,187.50
Degree of operating leverage = $2.45
The degree of operating leverage measures how a percentage change in sales volume will affect profits. (basically a shortcut to measure net operating income in some cases)
Emi Co. believes that if the marketing budget is increased by $5,000, they will get a 10% increase in sales. Should they make this change?
The information below is from last year at a sales volume of 800 units.
Sales: $40,000
Variable expenses: $26,000
Contribution margin: $14,000
Fixed Expenses: $8,680
Net Operating Income: $5,320
Sales: $40,000 x 10% = $44,000
Variable expenses: $26,000 * 10% = $28,600
Contribution margin: $44,000 - $28,600 = $15,400
Fixed Expenses: $8,680 + $5,000 = $13,680
Net Operating Income: $15,400 - $13,680 = $1,720
They should not make this change.
Emi Co. produced 45,000 units and sold 38,000 this year. What is the contribution margin?
The costs are listed below:
Sales: $85/unit
DM: $25/unit
DL: $16/unit
Variable MOH: $3/unit
Variable S&A: $4/unit
Fixed MOH: $720,000
Fixed S&A: $204,000
Sales: $85 x 38,000 = $3,230,000
CM: ($25 + $16 + $3 + $4) *38,000 = $1,824,000
Contribution margin = $3,230,000 - $1,824,000= $1,406,000
Customer orders: 54%
Design changes: 31%
Other: 15%
Customer orders: 54% x $1,405,00 = $758,700
Design changes: 31% x $1,405,00 = $435,550
Other: 15% x $1,405,00 = $210,750
Emi Co. wants to make a profit of $120,000. Management believes this is attainable because cutting down on variable costs allowed their CM ratio to increase 5% from last year's 35%. Their fixed expenses are $50,000 which is the same as last year.
Profit = CM ratio x sales - fixed expenses
Sales = (profit + fixed expenses) / CM ratio
Sales = ($120,000 + $50,000) / (35%+5%)
Sales = $425,000
Emi Co. wants to motivate their employees. Employees will be paid by sales commissions. This will increase their unit sales by 20%. Employees will get $8 from every unit sold. $4,000 in fixed expenses will be eliminated. Should they implement this change?
The information below is from last year at a sales volume of 800 units.
Sales: $50/unit
Variable expenses: $32.5/unit
Contribution margin: $17.5/unit
Fixed Expenses: $8,680
Net Operating Income: $5,320
Unit sales: 800 x 20% = 960 units
Sales: $50 x 960 = $48,000
Variable expenses: ($32.5 + $8) x 960 = $38,880
Contribution margin: $48,000 - $38,880 = $9,120
Fixed Expenses: $8,680 - $4,000 = $4,680
Net Operating Income: $9,120 - $4,680 = $4,440
This change should not be implemented.
Emi Co. produced 45,000 units and sold 38,000 this year. What is the gross margin?
The costs are listed below:
Sales: $85/unit
DM: $25/unit
DL: $16/unit
Variable MOH: $3/unit
Variable S&A: $4/unit
Fixed MOH: $720,000
Fixed S&A: $204,000
Sales: $85 x 38,000 = $3,230,000
COGS: ($25 + $16 + $3 + ($720,000/45,000)) x 38,000 = $2,280,000
Gross margin = $3,230,000 - $2,280,000 = $950,000
Fill in the chart
(Excel)
(Excel)
Find the cost equation for maintenance using the high low method.
(Excel)
Excel
Emi Co. wants to be seen as a high-quality brand for jackets. They think that if they change their material supplier, they can raise their selling price by $20. As a result of this, there will be a decrease of 200 unit sales and each jacket will cost an additional $10 to make. Should they make this change?
The information below is from last year at a sales volume of 800 units.
Sales: $40,000
Variable expenses: $26,000
Contribution margin: $14,000
Fixed Expenses: $8,680
Net Operating Income: $5,320
$/unit conversion:
Sales/unit: $40,000/800 = $50 + $20 = $70
VE/unit: $26,000/800 = $32.50 + $10 = $42.50
Units sold: 800 - 200 = 600
Sales: 600 x $70 = $42,000
VE: 600 x $42.50 = $25,500
CM: $42,000 - $25,500 = $16,500
FE: $8,680
NOI: $16,500 - $8,680 = $7,820
Yes, they should make this change.
Hoodies are sold at $40/unit and cost $22 each to make. Knit sweaters cost $60/unit and cost $30 each to make.
Excel
Hoodie segment margin = $590,000
Divisional segment margin = $1,228,000
Name 3 limitations of ABC Costing. (Hint there are 5)
1. Substantial resources required to implement and maintain (it takes a lot of effort to keep track of the cost pools)
2. Desire to fully allocate all costs to products (some costs are not factored into the product margin like fixed costs)
3. Resistance to unfamiliar numbers and reports (abc costing is not typically used so it is hard to understand)
4. Potential misinterpretation of unfamiliar numbers (abc costing is a long process that needs each step to understand the next step)
5. Does not conform to GAAP so two costing systems may be needed (more money wasted)