DEPARTMENT OF BUSINESS AND ADMINISTRATION

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1 DEPARTMENT OF BUSINESS AND ADMINISTRATION BUS2003 Test 3 November 1, 2010 Name: Student Number: Instructions: Please answer the following questions on the examination test sheets. If you need more room, please use the back of the pages. Show your calculations in detail. Grading: Q1 Q2 Q3 Q4 Total /9 /14 / 13 / 19 /55

2 Question One: (9 marks; 1 mark each) Use the following to answer parts a-c: Maxwell Company has a total expense per unit of $2.00 per unit at the 16,000-unit level of activity, and total expense per unit of $1.95 at the 21,000-unit level of activity. a) What is the best estimate of the variable cost per unit for Maxwell Company? A) $0.56. B) $1.79. C) $1.95. D) $2.00. Ans: B b) What is the best estimate of the total fixed cost per period for Maxwell Company? A) $ 3,360. B) $29,190. C) $32,000 D) $40,950. Ans: A c) What is the best estimate of the total expected costs at the 19,000 level of activity for Maxwell Company? A) $37,050. B) $37,370. C) $38,000. D) $39,830. Ans: B

3 Use the following information to answer parts d-f: Porter Company has provided the following data for the second quarter of the most recent year: Sales $300,000 Fixed Manufacturing Overhead $ 55,000 Direct Labour $ 72,500 Fixed Selling Expenses $ 46,250 Variable Manufacturing Overhead $ 41,000 Variable Administrative Expenses $ 48,000 Direct Materials $ 51,500 Fixed Administrative Expenses $ 44,500 Variable Selling Expenses $ 49,750 Assume that direct labour is a variable cost and that there were no beginning or ending inventories. d) What was the total contribution margin of Porter Company for the second quarter? A) $ 37,250. B) $ 87,000. C) $176,000. D) $211,000. Ans: A e) What was the gross margin for Porter Company for the second quarter? A) $(12,500). B) $ 80,000. C) $ 131,500. D) $ 135,000. Ans: B f) Average maintenance costs are $1.50 per machine hour at an activity level of 8,000 machine hours and $1.20 per machine hour at an activity level of 13,000 machine hours. Assuming that this activity is within the relevant range, total expected maintenance cost for a budgeted activity level of 10,000 machine hours would be closest to which of the following? A) $11,433. B) $13,440. C) $15,000. D) $16,128. Ans: B

4 Use the following information to answer parts g-i: An income statement for Crandall's Bookstore for the first quarter of the current year is presented below: CRANDALL's BOOKSTORE Income Statement for the First Quarter of the Current Year Sales $800,000 Less: Cost of Goods Sold $560,000 Gross Margin $240,000 Less: Operating Expenses: Selling $98,000 Administrative $98,000 $196,000 Operating Income $ 44,000 On average, a book sells for $50. Variable selling expenses are $5.50 per book, with the remaining selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder being fixed. g). What is the contribution margin for Crandall's Bookstore for the first quarter? A) $128,000. B) $152,000. C) $240,000. D) $688,000. Ans: A h) Using the contribution approach, what is the operating income for the first quarter? A) $ 44,000. B) $128,000. C) $152,000. D) $240,000. Ans: A i) What is the cost formula for operating expenses with X equal to the number of books sold? A) Y = $84,000 + $7.00X. B) Y = $84,000 + $8.50X. C) Y = $98,000 + $7.00X. D) Y = $98,000 + $8.50X. Ans: A

5 Question Two: (14 marks) Part A (12 marks) The Accounting Department of Archer Company, a merchandising company, has prepared the following analysis: The Accounting Department feels that billing expense is a mixed cost, containing both fixed and variable cost elements. A tabulation has been made of billing expense and sales in units over the last several months, as follows: The Accounting Department now plans to develop a cost formula for billing expense so that a contribution-type income statement can be prepared for management's use. Required: a) Using the high-low method, provide the cost formula for billing expense. (4 marks) b) Assume that the company plans to sell 30,000 units during July at a selling price of $100 per unit. Prepare a budgeted income statement for the month, using the contribution format. Assume a 40% tax rate. (6 marks) c) Explain how devising cost formulas (cost models) can be useful for management decision making. (2 marks)

6 Question Two Solution Part A: a. Variable expense = $42,000 30,000 17,000 9,000 = $1.50 per unit (2 marks) Fixed expense = $42,000 - $1.50 x 17,000 = $16,500 OR = $30,000 - $1.50 x 9,000 = $16,500 (1 mark) Formula: X = units sold Billing expense = $1.50(X) + $16,500 (1 mark) b. Archer Company Budgeted Income Statement For the month of June Sales (30,000 x $100) $3,000, marks Variable Expenses: COGS (30,000 x $56) 1,680, marks Commissions (12% x $3,000,000) 360, marks Billing (30,000 x $1.50) 45, marks cwf Contribution Margin 915, marks Fixed Expenses: Advertising 300, marks Administrative 160, marks Depreciation 62, marks Billing 16, marks cwf Net Income before tax 376, marks Tax expense (40%) 150, marks Net Income 225, marks C. Cost formulas can be useful for predicting costs, making decision making easier because you know how the cost behaves allowing for sensitivity analysis. (2 marks)

7 Part B Following are the results from two different simple regression analyses, estimating the costs of the purchasing department using number of purchase orders and number of vendors as potential cost drivers. Purchasing costs vs. Number of purchase orders Variable Coefficient t-statistic p-value Y-Intercept Number of purchase orders R-square = 0.79 Purchasing costs vs. Number of vendors Variable Coefficient t-statistic p-value Y-Intercept Number of vendors R-square = 0.53 Required: Which independent variable explains more of the variation in purchasing costs? Explain your choice. (2 marks) Question Two Solution Part B: Number of purchase orders (1 mark) is the better independent variable, based on the higher R- square statistic (1 mark). Question Three: (13 marks) Spencer Company's most recent monthly contribution format income statement is given below: Sales $50,000 Less: Variable Expenses $30,000 Contribution Margin $20,000 Less: Fixed Expenses $18,000 Operating Income 2,000 Tax expense 600 Net income $ 1,400

8 The company sells its only product for $10 per unit. There were no beginning or ending inventories. Required: Round to 4 decimal places in all calculations. a) What are total sales in dollars at the break-even point? (2 marks) b) What are total variable expenses at the break-even point? (2 marks) c) Calculate the margin of safely in sales dollars. (1 mark) d) How many units would have to be sold to achieve net income of $7,000? (2 marks) e) If unit sales were increased by 10% and fixed expenses were reduced by $2,000, what would be the company's expected operating income? (3 marks) f) If selling price per unit was increased to $11 and all other costs were unchanged from the original data, what would be the target sales, in dollars, to achieve an operating income of $5,000? (3 marks)

9 Question Three Solution: a. Contribution margin = $20,000/$50,000 = 0.40 or 40% (1 mark) Break even sales dollars = $18,000 / 0.40 = 45,000 (1 mark) b. $45,000 x (1-0.40) = $27,000 (2 marks) OR $45,000 $18,000 = $27,000 c. Margin of safety in sales dollars = $50,000 - $45,000 cwf = $5,000 (1 mark) d. Tax rate = 600/2,000 = 0.30 or 30% Target operating income = $7,000 / (1-0.30) = $10,000 (1 mark) Unit CM = $10 x 0.40 = $4 (1 mark) Target unit sales = $18,000 + $10,000 $4 = 7,000 units (1 mark) e. current unit sales = 50,000/10 = 5,000 new unit sales = 5,000 x 1.10 = 5,500 (1 mark) new fixed costs = $18,000-$2,000 = $16,000 (1 mark) Expected operating income = $4 x 5,500 16,000 = $6,000 (1 mark) f. new CM ratio = $11 - $6 = $5/unit = 5/11 = target sales = $18,000 + $5, = $50,605

10 Question Four: (19 marks) Lee Company, which has only one product, has provided the following data concerning its most recent month of operations:

11 The company produces the same number of units every month, although the sales in units vary from month to month. The company's variable costs per unit and total fixed costs have been constant from month to month. Required: a) What is the unit product cost for the month under variable costing? (2 marks) b) What is the unit product cost for the month under absorption costing? (3 marks) c) Prepare an income statement for the month using the contribution format and the variable costing method. (6 marks) d) Prepare an income statement for the month using the gross margin format and the absorption costing method. (5 marks) e) Reconcile the variable costing and absorption costing operating incomes for the month. (3 marks) Solution: a. Variable costing: Direct materials marks Direct labour marks VOH marks Total marks Note: deduct 0.5 marks for each item incorrectly included. b. Absorption costing Direct materials marks Direct labour marks VOH marks FOH (62,000/6,200) 10 1 mark Total marks Note: deduct 0.5 marks for each item incorrectly included. (c) & (d) Income statements Variable costing income statement Sales 1 mark $560,500 Less variable expenses: Variable cost of goods sold: Beginning inventory $7,100 Add variable manufacturing costs 440,200 Goods available for sale 447,300 Less ending inventory 28,400 Variable costs of goods sold 418,900 2 marks Variable selling and administrative 29,500 1 mark 448,400 Contribution margin 112,100 Less fixed expense: Fixed manufacturing overhead 62,000 1 mark Fixed selling and administrative 35,400 1 mark 97,400 Operating income $14,700

12 Absorption costing income statement Sales $560,500 Costs of goods sold: Beginning inventory $8,100 Add costs of good manufactured 502,200 Goods available for sale 510,300 Less ending inventory 32,400 2 marks 477,900 Gross margin 1 mark 82,600 Less selling and administrative expense: Variable selling and administrative 29,500 1 mark Fixed selling and administrative 35,400 1 mark 64,900 Operating Income $17,700 e. Reconciliation Variable costing operating income 0.5 marks $14,700 Add fixed manufacturing overhead costs costs deferred in inventory under absorption 1 mark 4,000 costing Deduct fixed manufacturing overhead costs released from inventory under absorption 1 mark 1,000 Absorption costing operating income 0.5 marks $17,000

YORK UNIVERSITY School of Administrative Studies. AP/ADMS Section A Summer 2013 Mid-Term Examination, Sunday, July 7 th, 12 noon 3 pm

LAST NAME FIRST NAME STUDENT NUMBER - - SIGN IN # YORK UNIVERSITY School of Administrative Studies AP/ADMS 2510 3.0 Section A Summer 2013 Mid-Term Examination, Sunday, July 7 th, 12 noon 3 pm Instructions: