ACCT 102 Spring 2020 Exam 1 Practice Exam A Solutions PDF

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ACCT102 Spring 2021 - Prof. Matthew Bloomfield...

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ACCOUNTING 102 Exam 1 Practice Exam A

SOLUTION

Accounting 102, Practice Exam A

Part 1

Solution

(24 points)

For each of the questions below, circle the letter corresponding to the best answer. (Each question is worth 4 points.) 1.

2.

3.

A firm is considering making investments to increase production capacity. Which of the following would NOT be important to consider? a)

Where the process is currently bottlenecked.

b)

The existing level of capacity.

c)

How many units of product customers are willing to buy.

d)

Whether investments would affect the firm’s cost structure.

e)

All of the above would be important to consider.

f)

None of the above should be considered.

Which one of the following best represents a sunk cost? a)

The current salvage value of a machine.

b)

The amount previously paid to acquire a machine.

c)

The replacement cost of a machine.

d)

A reduction in current tax payable arising from the depreciation on a machine.

e)

All of the above represent sunk costs.

Fiona is considering moving from San Francisco to New York to join a Big 4 accounting firm. To do so, she will incur various costs and will need to give up her freelance accounting services business. Which of the following is an opportunity cost to Fiona of this move? a)

The cost of her one-way flight from San Francisco to New York.

b)

Monthly rent for her one-bedroom apartment in New York.

c)

The amount she will pay to have her suits dry-cleaned for her first week of work.

d)

The income she will no longer receive from her freelance accounting services business.

e)

The amount she will be charged to join a professional accounting association.

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A

4.

5.

6.

Solution

Which of the following will reduce a firm’s contribution margin per unit but have no impact on gross margin per unit? a)

A decrease in variable direct labor costs.

b)

An increase in variable direct labor costs.

c)

A decrease in variable selling costs.

d)

An increase in fixed manufacturing overhead.

e)

An increase in selling price.

f)

None of the above.

If a product’s selling price and unit variable cost both increase 20%, the unit contribution margin is positive, and fixed costs do not change, then: a)

Both the contribution margin per unit and the contribution margin ratio decrease.

b)

Both the contribution margin per unit and the contribution margin ratio are unchanged.

c)

The contribution margin per unit increases and the contribution margin ratio is unchanged.

d)

The contribution margin per unit increases and the contribution margin ratio decreases.

e)

None of the above.

Which of the following statements about fixed costs is true? a)

A fixed cost represents a fixed proportion of total costs.

b)

A fixed cost has a direct relationship with output.

c)

The average fixed cost per unit is unchanged as output increases.

d)

A fixed cost remains the same within the relevant range.

e)

None of the above.

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A

Part 2 1.

(9 points)

Solution

(19 points) Last year, Tim & Co. sold 90,000 bottles of soda. This year, sales volume dropped by 20%, but pre-tax profits fell by 50%. What is Tim & Co.’s breakeven sales volume, in units? Tim & Co.’s cost structure and prices have not changed. Tim sells only one product.

Units

Sales volume this year = 90,000 x (1-0.20) = 72,000 90,000*(p-vc)-f = 2*(72000*(p-vc)-f) => f = 54,000(p-vc) => 54,000 = f/(p-vc) Thus, 54,000 units

2.

(10 points)

The following financial data apply to a product your company is thinking of introducing: Variable Manufacturing Cost per Unit Direct materials $1.50 Direct manufacturing labor $0.80 Variable manufacturing overhead $0.70 Your company pays its direct manufacturing employees based on the number of units they make. Variable manufacturing overhead varies with respect to units produced. Production of this product will require $150,000 in fixed overhead costs. Each unit is expected to sell for $5. The company has estimated a margin of safety of 15,000 units based on expected sales of this product. Given the information above and this margin of safety, what is the expected total revenue from sales of this product?

$

First calculate CM: $5 - $1.5 - $0.80 - $0.70 = $2/unit Next, calculate breakeven: B/E = $150,000/$2 = 75,000 units Then calculate expected sales based on MoS: B/E + MoS = 75,000 + 15,000 = 90,000 units Lastly, convert from expected sales quantity to revenue: 90,000 units x $5/unit = $450,000

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A

Part 3

Solution

(21 points)

Life on a Sunny Beach Company manufactures and sells three products: umbrellas, chairs, and towels. The selling prices are $35 for umbrellas, $20 for chairs, and $15 for towels. Variable manufacturing costs are $20 per unit for umbrellas and $10 per unit for chairs. In addition, variable selling costs are $2 per unit for umbrellas, while for chairs, the variable selling cost per unit equates to 30% of the variable manufacturing cost per chair. The contribution margin ratio for towels is 60%. 2 chairs and 3 towels are sold for each umbrella sold. Fixed costs comprise rent of the premises, and general and administrative costs, and are $297,000 in total. For financial reporting purposes, the fixed costs are allocated (i.e. charged) to the three product lines on the basis of the sales mix in terms of physical products sold. The tax rate is 40%. 1.

(9 points)

Calculate the contribution margin per unit for each of the three products manufactured and sold by Life on a Sunny Beach.

$

Umbrellas, CM per unit

$

Chairs, CM per unit

$

Towels, CM per unit

Umbrellas: $35 - $20 - $2 = $13 Chairs: $20 - $10 – ($10 x 0.3) = $7 Towels: 0.6 x $15 = $9

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A 2.

(12 points)

Solution

Calculate the number of units that must be sold of each product for Life on a Sunny Beach to earn an after-tax profit of $56,700.

Umbrellas

Chairs

Towels Bundle approach: Define a bundle as 1U + 2C + 3T CM of the bundle = (1 x $13) + (2 x $7) + (3 x $9) = $54 [$297,000 + ($56,700/(1-0.4))] / $54 = 7,250 bundles Umbrellas = 7,250 x 1 = 7,250 Chairs = 7,250 x 2 = 14, Towels = 7,250 x 3 = 21,750 Alternatively, weighted average CM per unit approach: $13 x (1/6) + $7 x (2/6) + $9 x (3/6) = $9 [$297,000 + ($56,700/(1-0.4))] / $9 = 43,500 units Umbrellas = 43,500 x 1/6 = 7,250 Chairs = 43,500 x 2/6 = 14,500 Towels = 43,500 x 3/6 = 21,750

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A

Part 4

Solution

(14 points)

Vandelay Industries sells two products: smart phones and tablets. The two products have largely separate production processes, but are both bottlenecked by a common process: quality control testing. Quality control testing is mandated by regulation, and cannot be avoided. It takes a quality control specialist 20 minutes to test a smart phone, and 30 minutes to test a tablet. At present, Vandelay Industries employs 1,000 quality control specialists, all of whom work 40 hours per week (all spent on testing). Quality control specialists are paid a fixed weekly rate. Vandelay charges $900 for tablets and $700 for smart phones, although the two both have the same variable cost to produce: $500/unit. Weekly demand for phones and tablets are 75,000 units and 65,000 units, respectively. 1.

(8 points)

Given existing production capacity, what is the best achievable total contribution margin?

$

Bottleneck resource available: 40*1,000=40,000 hours per week Phones: CM=700-500=200; CM/hour=200*3=$600 (rank second) Tablets: CM=900-500=400; CM/hour=400*2=$800 (rank first) 65,000/2=32,500 < 40,000 à Have sufficient capacity to satisfy demand for tablets, with 7,500 hours left. 7,500*3=22,500 Produce 65,000 tablets and 22,500 phones. TCM=65,000*400 + 22,500*200=$30,500,000

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A 2.

(6 points)

Solution

Suppose quality control testing represents the only capacity constraint Vandelay Industries faces. What is the most Vandelay Industries would be willing to pay (per week) to hire an additional quality control specialist? $ Additional workers would only facilitate testing of more phones (already satisfying capacity for tablets). A single worker would be able to test 40*3=120 phones per week. WTP = added total contribution margin = 120*200=$24,000

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A

Part 5

Solution

(22 points)

Try Me Now Inc. produces pop-up tasting counters that are used by sales representatives of various food and drink brands in supermarkets and shopping centers across the country. The costs of manufacturing and marketing pop-up tasting counters at the company’s normal volume of 3,000 units per year are shown below (fixed costs per unit were calculated by dividing total fixed costs by the 3,000 units). A regular selling price of $740 per unit should be assumed. Costs per unit for pop-up tasting counters:

1.

Variable materials Variable labor Variable overhead Fixed overhead Total manufacturing costs

100 150 50 120 420

Variable marketing costs Fixed marketing costs Total marketing costs

50 140 190

Total unit costs

610

(6 points)

What is Try Me Now’s expected profit per year at normal volume of 3,000 units?

$

($740 - $610) x 3,000 units = $390,000

Accounting 102, Practice Exam A

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Accounting 102, Practice Exam A

2.

(8 points)

Solution

A proposal is received from an outside contractor who will make and ship 1,000 pop-up tasting counters per year directly to Try Me Now’s customers as orders are received from Try Me Now’s salesforce. Try Me Now’s fixed marketing costs would be unaffected, but its variable marketing costs would be cut by 20 percent for these 1,000 units produced by the contractor. Try Me Now’s plant would operate at two-thirds of its normal level, resulting in fixed manufacturing costs being cut by 30 percent. Based purely on economic considerations, should the proposal be accepted for a price (that is, payment to the contractor) of $425 per unit? Justify your answer with computations. YES

NO

Profit, status quo: $390,000 (from above) Profit with this proposal: CM from regular sales of 2,000 units: ($740 - $100 - $150 - $50 - $50) x 2,000 units = $780,000 CM from contractor sales of 1,000 units: ($740 - $425 – (0.8 x $50)) x 1,000 units = $275,000 Sum the two CM totals and subtract fixed marketing & overhead costs: $780,000 + $275,000 – ($140 x 3,000) – ($120 x 3,000 x 70%) = $780,000 + $275,000 - $420,000 - $252,000 = $383,000 $7,000 worse off with the proposal, so DO NOT accept.

Alternative way to arrive at answer. Variable manufacturing costs are $300 per unit, fixed manufacturing costs are $120 x 3,000 = $360,000. Variable marketing costs are $140 per unit and fixed marketing costs are $140 x 3,000 = $420,000. If the proposal is accepted, the company will avoid the following costs: Variable manufacturing costs (1,000 x $300) Fixed manufacturing costs ($360,000 x 30%) Variable marketing (1,000 x $50 x 20%) Total cost savings Units proposed to be outsourced Per unit savings Since $418 is < $425, DO NOT accept.

Accounting 102, Practice Exam A

300,000 108,000 10,000 418,000 1,000 418

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Accounting 102, Practice Exam A

3.

(8 points)

Solution

Assume all of the same facts given previously, except that the idle facilities would be used to produce 800 modified pop-up tasting counters per year. These modified counters could be sold for $900 each, while the variable manufacturing costs would be $550 per unit. Variable marketing costs would be $100 per unit. Fixed marketing and manufacturing costs would be unchanged whether the original 3,000 regular counters were manufactured or the mix of 2,000 regular counters plus 800 modified counters. What is the maximum purchase price per unit that Try Me Now should be willing to pay the outside contractor? $_____________ Profit with 2,000 regular and 800 modified sales: CM from regular sales of 2,000 units: ($740 - $100 - $150 - $50 - $50) x 2,000 units = $780,000 CM from sales of 800 modified units: ($900 - $550 - $100) * 800 units = $200,000 Sum the two CMs and subtract fixed marketing & overhead costs: $780,000 + $200,000 - $420,000 – ($120 x 3,000 = $360,000) = $200,000 Will be willing to pay up to a price that brings profit back to the status quo of $390,000 So $200,000 (from above) + ($740 - $X - $40) x 1,000 units = $390,000 $200,000 + $740,000 - $1,000X - $40,000 = $390,000 $900,000 - $1,000X = $390,000 $510,000 = $1,000X X = $510 => maximum willing to pay

Alternative way to arrive at answer. Incremental effect of additional facts: Selling price of additional units Variable manufacturing costs 550 Variable marketing costs 100 Contribution margin per unit Units sold Additional contribution margin ($) Additional fixed costs relative to above Additional profit Units of original product outsourced Additional profit per unit outsourced

900 650 250 800 200,000 108,000 92,000 1,000 92

Thus, $92 from here + the $418 from 2 = $510 per unit.

Accounting 102, Practice Exam A

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