K&R--Questions & Answers

Size: px

Start display at page:

Download "K&R--Questions & Answers"

Justina Cameron
6 years ago
Views:

1 30. How much maintenance cost is included in the $12 unit cost of the Foot Stool? How much fixed cost is included in the $12 cost? The $12 is all variable cost, so there is NO fixed maintenance cost included. Variable maintenance is part of variable overhead, and depends upon budgeted DLH (see Q. 29). page 1 Q. 29: Maint yellow p. 22: Maint DLH per Fstool hrs. per DLH Expense rate Cutting 0.2 x 1/10 x 15 = $ 0.30 Finishing 0.4 x 1/20 x 15 = 0.30 Total variable maintenance cost per Foot Stool $ Show detailed calculations that explain the budgeted amount of $8,327 of service department overhead transferred to producing departments in July (page 20). This transferred amount includes maintenance costs only. Hint: Compute the budgeted maintenance cost charged to each department. Yellow pp p 18 Maint VC Yellow pp 18-21Total traceable Dept Bgt labor hrs per DLH Total maint VC Fixed Maint Maint cost S.Cut 510 x $ 1.50 = = $ 1, B.Cut 331 x $ 1.50 = = T.Cut 785 x $ 1.50 = 1, ,200 = 2, Fin 3,650 x $ 0.75 = 2, ,200 = 3, $ 8, or $8,327 Notice that the figures in "Fixed Maint" column are fixed from the viewpoint of the four producing departments, but are variable from the viewpoint of the maintenance department. 32. Compute the number of maintenance labor hours used by each factory department in July, and compare your total to the total hours given on page 21 of the budget schedules. Page 21: 555 hours to be used Computing the hours Question 29: Variable Fixed Maint Total Dept DLH (p 18) Maint hr ratio Maint hours Hours* Maint Hrs S.Cut 510 x 1/10 = = B.Cut 331 x 1/10 = = T.Cut 785 x 1/10 = = Fin 3,650 x 1/20 = = Except for rounding, the totals match. *Computing fixed maintenance hours -- Look at FOH data, yellow pp S.Cut $300/$15 per hour = B.Cut $450/$15 per hour = T.Cut $1,200/$15 per hour = Fin $1,200/$15 per hour = Describe the relationship between the monthly performance reports and the organization chart for the company. There is a performance report for each "box" on the organization chart.

2 34. How do the reports for the vice presidents and the president differ from those for the other managers? Reports for upper-level management include much less detail. If an upper level manager got all the details for all the departments, (s)he would not have time to do much besides read reports. Details are necessary for the lower level managers who are directly in charge of activities. Upper level managers usually don't need those details, and can always request a special report if it becomes necessary. 35. Prepare a schedule that shows the detailed computations for each cost variance in the report for the Stool Cutting Department. The report is on yellow page 7. There is no materials price variance because J. Smith has no responsibility for purchasing. MATERIALS Lumber 1 x 12 Act Q (used Std Q Std $ Std $ 10,400 (2,600 units, yellow p $4, p 1) (p 1) yellow p 18 $ 7,000 7, favorable usage variance LABOR yelow p > Act Q Act Q Std Q (590 from yellow p 18) Act $ Std $ Std $ (2,600 units, yellow p $0.20, p 1) (p 1) $ 4,435 $ 3,835 $ 3,380 (2,600 units, yellow p $ , p 1) 600 unfavorable rate variance (455) unfavorable efficiency variance Continued, next page

3 35, continued OVERHEAD Act Q Act Q Std Q Act $ Std $ Std $ (2,600 units, yellow p $0.20, p 1) (p 1) $ 2,655 $ 2,340 (2,600 units, yellow p $0.90, p 1) 3,600 3,600 bgt FOH, yellow page 18 Yellow p 18 $ 5,900 $ 6,255 $ 5, favorable spending variance (315) unfavorable efficiency variance 36. Do any of the factory departments have a semifixed cost behavior pattern in overhead costs? [Semifixed costs have a variable component and a fixed component.] Justify your answer. All of the departments have some semifixed costs on OH: S. Cut. Yellow P 18 Supplies $800 + $3/DLH Maintenance $300 + $1.50/DLH B. Cut,Yellow P 19 Indirect Labor $907 + $.29/DLH Supplies $513 + $.67/DLH Maintenance $450 + $1.50/DLH T. Cut, Yellow P 20 Scrap $1,270 + $.05/DLH Indirect Labor $850 + $.10/DLH Maintenance $1,200 + $1.50/DLH Supplies $540 + $.25/DLH Finish, Yellow P 21 Supplies $520 + $.75/DLH Maintenance $1,200 + $1.50/DLH Indirect Labor $720 + $.30/DLH Maint, yellow p 22 Maint. Supplies $420 + $5.00 per maintenance labor hour 37. Fixed overhead for table cutting is $6,800 for July. What are the components of the $6,800? This is given on yellow p check it out there.

4 38. What do you think are the two or three most significant factors contributing to the failure of the company to achieve its profit target (before taxes) for July? Explain. The president's report, yellow p 1, indicates that income before income taxes is approximately $19,000 below budget. The president's report also gives some clues about the reasons for the problem: a. Marketing costs are out of control. Looking at the slightly more detailed report for the marketing vice-president, we see that the largest part of the problem occurred in the vicepresident's own area, which had an unfavorable cost variance of $5,800. b. Production overhead is far over budget. Looking at the plant manager's report (yellow p 6), we see that there was a drastic problem in overhead spending for the table cutting department ($7,746 unfavorable overhead spending variance). c. Labor was much more expensive than expected. On yellow p 6, the plant manager's report indicates that the greatest problem was in the finishing department, which reports an unfavorable labor efficiency variance of $4, How were the variances for Joe Brown (yellow p 12) computed? Using the format we originally used, which begins with the price variance rather than the volume variance: PRICE VARIANCE MI for actual units, actual prices [bgt VC's]: Actual sales at actual prices (yellow p 23) $ 72,000 Actual units sold times budgeted prices Units (p78) Bgt prices S 610 x $ = $ 9,760 B 300 x $ = $ 15,000 T 470 x $ = $ 49,350 Actual units at budgeted prices $ 74,110 PRICE VARIANCE - UNFAVORABLE $ (2,110) MIX VARIANCE Average unit margin p 25 ($24,988/1400) Units (yellow page 23) Bgt Unit Margin) S 610 x $ = $ 1, B 300 x $ = $ 7, T 470 x $ = $ 15, ,380 $ 24, Average margin per unit Difference in unit margins 0.21 Actual units sold 1,380 MIX VARIANCE - FAVORABLE $ 289

5 39, continued VOLUME VARIANCE Budgeted unit sales (p 25) 1,400 Actual units sold 1,380 Units below budget 20 Average unit margin $17.85 VOLUME VARIANCE - UNFAVORABLE (357) COST VARIANCE bgt for actual volume actual (y p 23) variance VC's Transportation (.02*74,110) $ 1,482 1, Commissions (.05*74,110) 3,706 3, FC's Ad/Promo (p 25) (100) Administration (p 25) COST VARIANCE - FAVORAB 48 TOTAL VARIANCE - UNFAVORABLE $ (2,130) 40. K&R management has found a way to reduce the time required for maintenance work by 10%. (With better organization, maintenance workers will be able to work faster.) If this new approach is incorporated into the budget schedules, what will be the impact on the budgeted product contribution for benches for October? Show computations to support your answer. Maintenance costs will be reduced for the producing departments because the maintenance time required will be less. For benches: In cutting, maintenance is now $1.50 per DLH x 0 = This cost will be reduced by 10% In finishing, maintenance is now $.75 per DLH x 1 = This cost will be reduced by 10% Cost reduction per bench is $ (0.0375) $ (0.0600) $ (0.0975) per bench Budgeted bench sales, Oct 1,360 Cost reduction $ (132.60) Product contribution will incr $

6 41. K&R management feels that an increase of one percent in commissions paid to salespeople, along with a monthly increase of $3,000 in advertising expense, would increase dollar sales of all three products by five percent. If management's prediction is incorporated into the budget schedules, what would be the budgeted net income before taxes for the entire firm for the entire six-month period covered by the budget? A one percent increase in costs would lower the MI ratio by one percent. Current budgeted MI ratio, based on information from page 22: MI 648,748 = Sales 1,931,030 Less 1% decrease New bgt MI ratio Current budgeted sales (p 22) $ 1,931,030 Increasing budgeted amount by 5% 1.05 Revised sales level $ 2,027,582 Times revised MI ratio (above) Revised MI $ 660,910 Less FC's: Original (p 22) $ 521,020 Added (3,000*6) 18,000 Revised budgeted income (before taxes) $ 660, A customer offers to buy the partially completed Royal Bench for $40 after it has been processed through the Bench Cutting Department but before it has been through the Finishing Department. Assume K&R can sell all the finished units it wants at its regular price. Prepare an analysis to show if K&R should accept the $40 unit price. Proposed selling price $ per unit Costs to cut one bench 9.24 per unit (page 2) MI on proposed sales $ per unit Current MI per unit [not required, but see b below] Selling price $ VC to make (p 2) (22.00) Mkt VC's Transportation (1.00) 2% of sales Commissions (2.50) 5% of sales Current MI per unit $ Clearly, the offer should be accepted: a. Since regular sales would not be affected, any price greater than $9.24 is good for the company. b. Even if these sales DID cut into regular sales, the offer would still be attractive because the $30.76 MI on the special sale is greater than the $24.50 earned on regular sales. 43. At the beginning of July a customer offers to purchase 500 units of the Majestic Table at a price of $80, and the customer wants delivery before the end of July. Should K&R accept the offer? Show calculations to support your answer. Assume that there will be no transportation or commission costs for the 500 tables, and that the customer will pay cash. Revenue per unit $ 80 VC to make one unit 64

7 MI per unit 16 Units 500 MI on order $ 8,000 This special order offers a positive MI, but is there enough capacity to make these without cutting into regular sales. If there is enough capacity, then the order should be accepted. If not, then K&R must compare the MI on the order with the lost MI on lost sales. K&R's constraining factor is labor hours, as indicated on the Constraint Report, page 21. Labor hours required: (p 9) Units Hours per unit Total Table cutting 500 x 0.50 = 250 Finishing 500 x 1.00 = 500 The constraint report, page 21, shows that the finishing department has more than enough capacity (850 hours) but the table cutting department has only 15 hours available. The 235-hour deficit in bench cutting will result in lost regular sales of 470 units. MI on order (from above) $ 8,000 Lost MI on 470 regular sales: Price per unit $ Less VC's: Manufacture (p 9) (64.00) Transportation (2%*$105) (2.10) Commissions (5% of $105) (5.25) MI per unit $ Times 470 units 470 Lost MI on lost regular sales 15,816 Net decrease in MI and in profit $ (7,816) Forget this deal -- it's bad for the company! 44. Would your answer to the preceding question change if the offer were made in October with the condition that the company make delivery before the end of October? Explain. NO: K&R should still refuse. There is not adequate capacity in either cutting or in finishing. K&R would reduce its profits if it accepted the offer. 45. Which product is the most profitable to produce during the last three months of the year? Show computations to support your answer. The preferred product is the one that generates the most MI per unit of scarce resource, and the scarce resource is labor hours. The most serious constraint is finishing labor hours, so work with that. Finishing DLH MI per DLH in MI/unit* per unit finishing S $ / 0.40 = $ 7.20 B $ / 0.80 = $ T $ / 1.00 = $ *Selling price per unit minus VC to manufacture minus 7% of selling price (2% for transportation, 5% for commissions) For each labor hour in finishing, the table adds $33.65 to profits -- which is more than either of the other two products adds.

8 46. The manager of the West Sales Territory asked you to the following questions: a. What is the July break-even point for my sales territory? Total fixed costs (p 24) $ 16,370 = $ 47,523 MI ratio (48,828/141,750) b. What sales levels must I generate to product monthly contributions of $30,000, $40,000, and $50,000 in December? Fixed costs plus target profit, divided by MI ratio, equals necessary sales level. To earn $30,000: 17, ,000 = $ 102,736 (64,131/182,700) To earn $40,000: 17, ,000 = $ 163,154 (64,131/182,700) To earn $50,000: 17, ,000 = $ 191,643 (64,131/182,700) c. If an additional sales person would cost the same as Mary Smith, how much would monthly sales have to increase to cover the cost of the added sales person? Mary costs $13,920 (page 28) Using the average MI ratio from b, above: $ 13,920 = $ 39, Total sales increase required (320,395,/918,780) $ 39, = $ 6, Monthly sales increase required 6 d. What price should I charge for the Majestic Table in July if I want to earn a contribution of $40,000? Assume unit sales will be unaffected by the price change. Look at p 37: Tables in West Territory. 3, ,000 = $ per unit MI required 950 Setting up an equation: The.07 is the sum of transportation Selling price (selling price) = $45.81 (2%) commissions (5%). Selling price = $

9 e. Which product should I drop if I have to drop one product? Why? Present computations in a orderly form to answer the questions of the territory manager. Assuming that all traceable fixed costs are avoidable, simply compare product margins in the West Territory, pages 33, 35, and 37. Since the Foot Stool has the lowest product margin, it would be the one to drop. 47. Another company has offered to produce all the Foot Stools K&R Products, Inc., needs at a unit price of $ K&R would eliminate all production costs traceable to the product if it decides to buy from the outside producer. Should K&R accept the offer? Give computations to support your answer. "Old" MI per footstool $ (from Q 45) Since K&R will be paying $12.50 for a footstool that it now makes for $12 (page 1), the new MI would be 50 cents less, or $2.38 per unit. New MI per unit $ 2.38 Times expected unit sales 22,505 Total MI with new arrangement $ 53,562 Less marketing FC's: (23,000) + (18,600) = (41,600) New profit (loss) $ 11,962 K&R is certainly better off by buying the product from the outside because the prodeuct contribution rises from only $1,614 to $11,962 for the six months. Note: In the short run, depreciation is not avoidable -- but it is avoidable in the long run. I left off the entire $21,600 of production fixed costs because, taking a long-term view, I assumed that all were avoidable. You could, of course, have taken a different view and left the depreciation ($1,610 x 6) as an unavoidable FC. 48. At what unit price would it be worthwhile for K&R to buy from the outside supplier described in Question 47? Justify your answer. Still using a long-term view, in which depreciation and all other production FC's avoidable: Product margin increase, from Q 47 $ 24,751 = $ 1.10 Maximum increase Unit sales volume from p 29 22,505 per unit Current price $ Maximum increase per unit 1.10 Maximum price $ 13.60

10 49. Suppose the supplier described in Question 47 offers to make the Foot Stool for $14 per unit. K&R would then use the existing production facilities to make a new product that would generate a monthly contribution of $15,000. Prepare an analysis to show whether the company should buy the Foot Stool from the outside company under these circumstances. Increased VC ($14 - $12) $ 2.00 Times unit volume (page 33) 22,505 Increase in total cost $ 45,010 CM on the new product ($15,000 x 6) 90,000 Net INCREASE in profit $ 44,990 Go for it! Product margin (and profits) increase almost $45, This questioni omitted.

K&R would just need to buy the amount required for December production 312 page 15

K&R would just need to buy the amount required for December production 312 page 15 51. K&R management has decided to change its budgeted pattern for ending inventory of raw materials. Instead of the current pattern (whatever it may be), K&R would plan to keep a constant ending inventory