ACCT 203DL Assignment 4 – Management Accounting

ACCT 203DL Assignment 4 – Management Accounting, Cost Behavior, & CVP

Questions From chapter 14

1. Briefly describe variable, fixed, and mixed costs.  Explain how each change in total as production activity increases.

2. Explain the term “relevant range” of production activity.  Why is the relevant range an important consideration when estimating total costs?
3. Distinguish between cost estimation and cost prediction.
4. Why is a scatter diagram helpful when used in conjunction with other methods of cost estimation?
5. Identify two advantages of least-squares regression analysis as a cost estimation technique.

From chapter 15

6. Identify the important assumptions that underlie cost-volume-profit analysis

7. Explain the limitation of basic cost-volume-profit analysis as it relates to an organization’s sales mix.
8. Distinguish between a contribution income statement and a functional income statement.
9. Explain the term “contribution margin.”  How is it used in computing the unit break-even point?
10. How is the break-even equation modified to take into consideration the sales required to earn a desired profit?
11. What is “operating leverage”? How are profit opportunities and the risk of losses affected by operating leverage?


Problem 1
The J. Page Furniture Company has the following information available regarding costs at various levels of monthly production:

Production volume (units)    16,000 Units    22,000 Units
Direct materials    $  70,000    $100,000
Direct labor    66,000    90,000
Indirect materials    21,000    30,000
Supervisors’ salaries    12,000    12,000
Depreciation on plant and equipment    10,000    10,000
Maintenance    32,000    44,000
Utilities    15,000    21,000
Insurance on plant and equipment    1,600    1,600
Property taxes on plant and equipment          2,000          2,000
Total    $229,600    $310,600


a. Identify each of the costs above as being variable, fixed, or mixed.

b. Develop an equation for total monthly production costs using the high-low method of cost estimation, and predict total costs for a monthly production volume of 18,000 units

Problem 2
The STC Supply manufactures memory cards that sell to wholesalers for $4.00 each.  Variable and fixed costs are as follows:

Variable Costs per card:            Fixed Costs per Month:   
Direct materials    $0.60
Direct labor    0.50
Factory overhead      0.50
$1.60        Factory overhead    $14,000
Selling and admin.      0.30        Selling and admin.        6,000
Total    $1.90        Total    $20,000

STC Supply produced and sold 20,000 cards during October 2014.  Assume the company had no beginning or ending inventories.

a. Prepare a contribution income statement for the month of October.
b. Determine STC Supply’s monthly break-even point in units.
c. Determine the effect on monthly profit of a 1,000 unit increase in monthly sales.
d. If STC Supply is subject to an income tax of 40 percent, determine the dollar sales volume required to earn a monthly after-tax profit of $30,000.

Problem 3
Assume Paper Mate company is planning to introduce a new executive pen that can be manufactured using either a capital-intensive method or a labor-intensive method.  The estimated manufacturing costs for each method are as follows:

Direct materials per unit    $5.00    $8.00
Direct labor per unit    $5.00    $12.00
Variable manufacturing overhead per unit    $4.00    $2.00
Fixed manufacturing overhead per year    $2,440,000.00    $700,000.00

Paper Mate’s market research department has recommended an introductory unit sales price of $40.  The incremental selling costs are predicted to be $500,000 per year, plus $2 per unit sold.


a. Determine the annual break-even point in units if Paper Mate uses the:
i. Capital-intensive manufacturing method
ii. Labor-intensive manufacturing method
b. Determine the annual unit volume at which paper Mate is indifferent between the two manufacturing methods.
c. Management wants to know more about the effect of each alternative on operating leverage.
i. Compute operating leverage for each alterative at a volume of 250,000 units.
ii. Which alternative has the highest operating leverage? Why?

Here’s the SOLUTION

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