PLEASE SHOW ALL WORK Project #1: Laredo Co. manufactures two types of bookshelve

Question

PLEASE SHOW ALL WORK

Project #1:

Laredo Co. manufactures two types of bookshelves: plain and hand-carved. The

following information about the production process is available:

............................................................................Plain.....................Hand-Carved

Number produced--------------------------------------------------120,000------------------- 75,000

Machine hours -------------------------------------------------------95,000------------------- 25,000

Inspection hours------------------------------------------------------ 7,000 -------------------35,000

Revenues --------------------------------------------------------$4,800,000 -------------$4,400,000

Direct costs----------------------------------------------------- $3,800,000------------- $3,100,000

Total factory overhead is $1,200,000. Of this overhead, $500,000 is related to utilities and the remainder

is related to quality control.

a. Determine the total overhead cost assigned to each type of bookshelf using machine hours as the

allocation base. Calculate the gross profit per unit for each product.

b. Determine the total overhead cost assigned to each type of bookshelf if overhead is assigned using

allocation bases appropriate to the overhead costs. Calculate the gross profit per unit of each product.

c. Explain why the unit cost for each model is different between the two methods of allocation.

Project #2:

The ABC Company sells two products, A and B, with contribution margin ratios of 40 and 30 percent

and selling prices of $5 and $2.50 a unit. Fixed costs amount to $72,000 a month. Monthly sales average

30,000 units of product A and 40,000 units of product B.

Required:

a. Assuming that three units of product A are sold for every four units of product B, calculate the dollar

sales volume necessary to break-even.

b. As part of its cost accounting routine, ABC Company assigns $36,000 in fixed costs to each product

each month. Calculate the break-even dollar sales volume for each product.

c. ABC Company is considering spending an additional $9,700 a month on advertising, giving more

emphasis to product A and less emphasis to product B. If its analysis is correct, sales of product A

will increase to 40,000 units a month, but sales of product B will fall to 32,000 units a month.

Recalculate the break-even sales volume, in dollars, at this new product mix. Should the proposal

to spend the additional $9,700 a month be accepted? Explain

d. What major assumption do multi-product firms need to make in using CVP analysis that single-product

firms need not make?

Explanation / Answer

a. Project #1

a. Total overhead = 1,200,000

Total machine hours = 95,000+25,000 = 120,000

So overhead per machine hour = 1,200,000/120,000 = $10 per machine hour

Overhead for plain bookshelf = no of machine hours * $10 = 95,000*10 = $ 950,000

Overhead for hand-carved bookshelf = no of machine hours * $10 = 25,000*10 = $ 250,000

Gross profit per unit of plain bookshelf = (revenues-direct costs-overhead)/(no of shelves) = (4,800,000-3,800,000-950,000)/120,000 = $ 0.4167

Gross profit per unit of hand-carved bookshelf = (revenues-direct costs-overhead)/(no of shelves) = (4,400,000-3,100,000-250,000)/75,000 = $ 14.00

b. Of the total overhead, 500,000 is for utilities and 700,000 is for quality control

Utilities (i.e. electricity consumed) is related to the number of hours used by machines as they consume electricity

Quality control is related to the number of inspection hours as the inspection leads to better quality.

So utilities overhead should be allocated on the basis of machine hours, while quality control overhead should be allocated on the basis of inspection hours

Total machine hours = 95,000+25,000 = 120,000

So overhead per machine hour = utilities overhead/total machine hours = 500,000/120,000 = $4.1667 per machine hour

Total inspection hours = 7,000+35,000 = 42,000

So overhead per inspection hour = quality control overhead/total inspection hours = 700,000/42,000 = $16.6667 per inspection hour

Overhead for plain bookshelf = no of machine hours * $4.1667 + no of inspection hours * $16.6667 = 95,000*4.1667 + 7,000*16.6667 = $ 512,500

Overhead for plain bookshelf = no of machine hours * $4.1667 + no of inspection hours * $16.6667 = 25,000*4.1667 + 35,000*16.6667 = $ 687,500

Gross profit per unit of plain bookshelf = (revenues-direct costs-overhead)/(no of shelves) = (4,800,000-3,800,000-512,500)/120,000 = $ 4.0625

Gross profit per unit of hand-carved bookshelf = (revenues-direct costs-overhead)/(no of shelves) = (4,400,000-3,100,000-687,500)/75,000 = $ 8.1667

c. The unit cost for each model is different between the 2 methods of allocation as each model consumes disproportionate amount of a particular kind of overhead, for example, the plain model consumes many machine hours but very little inspection hours, while the hand carved model consumes many inspection hours but very little machine hours. Given this, the first allocation method does not do justice as it allocates all overhead costs based on just one parameter - the machine hours - while the second allocation method takes into consideration both machine hours and inspection hours, and hence is likely to be more fair.

Project #2

Contribution margin of A = 40%*5 = 2

Contribution margin of B = 30%*2.50 = 0.75

a. Let no of units sold of Product A be 3X and so the number of units sold of Product B = 4X

Contribution margin = no of units of A * contribution margin of A + no of units of B * contribution margin of B = 3X*2 + 4X*0.75 = 9X

At breakeven, this is equal to fixed cost of 72,000

So 9X=72,000, which means X=8,000

So breakeven sales dollars = 3X*5+4X*2.50 = 25X = 25*8,000 = $ 200,000

b. Breakeven dollar sales for A = fixed costs/contribution margin% = 36,000/40% = $ 90,000

Breakeven dollar sales for B = fixed costs/contribution margin% = 36,000/30% = $ 120,000

c. Let no of units sold of Product A be 5X and so the number of units sold of Product B = (32,000/40,000)*5X = 4X

Contribution margin = no of units of A * contribution margin of A + no of units of B * contribution margin of B = 5X*2 + 4X*0.75 = 13X

At breakeven, this is equal to fixed cost of 72,000+9,700 = 81,700

So 13X=81,700, which means X=6284.615

So breakeven sales dollars = 5X*5+4X*2.50 = 35X = 35*6284.615 = $ 219,961.5

Old profit = 30,000units of A * $2 + 40,000 units of B * $0.75 - 72,000 of fixed cost = 18,000

New profit = 40,000units of A * $2 + 32,000 units of B * $0.75 - 72,000 of fixed cost -9700 of advertising = 22,300

As the new profit is higher than the old profit, the proposal to spend the additional $9,700 a month should be accepted.

d. A major assumption of multi-product firms is that the sales mix remains constant, i.e. the number of units sold of each kind of product will be in same proportion to the number of units sold of all other kinds of products. Single product firms need not make this assumption as they have only product.

Hope this helped ! Let me know in case of any queries.

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