Need help with my case study for my managerial accouting class, any help will be
ID: 2422776 • Letter: N
Question
Need help with my case study for my managerial accouting class, any help will be greatly appreciated.
Part 1 15 points
Cingle Company LLC produces gadgets at one manufacturing factory. Corporate headquarters are located at the same site. Historical cost information shows the average costs at the following production levels .
Production in units
3,000
3,750
4,500
Cost of goods manufactured
Direct Materials
$ 198,000
$ 247,500
$297,000
Direct Labor
126,000
157,500
189,000
Overhead
Building depreciation-factory
5,000
5,000
5,000
Equipment lease
4,500
4,500
4,500
Factory supplies
1,600
1,930
2,260
Indirect Labor
5,500
5,500
5,500
Quality Inspection Costs
13,360
14,200
15,040
Selling and Administrative Expenses
Shipping
45,500
51,875
58,250
Advertising expense
50,000
50,000
50,000
Salaries and commissions
137,000
155,000
173,000
Insurance expense
10,000
10,000
10,000
Total
$ 596,460
$ 703,005
$ 809,550
A. Identify each of the company’s costs as being variable, fixed or mixed with respect to the number of units produced. Explain why you chose that cost behavior. [Hint: What happens to total cost if the cost behavior is fixed, is variable, is mixed? What happens to cost / unit if cost behavior is fixed, is variable, is mixed?] Show all computations needed to determine cost behavior.
NOTE: If the cost is mixed, please use the chart in part B to detail your explanation.
Use the chart below:
Cost
Fixed
Variable
Mixed
Explanation
Direct Materials
X
The total cost increases but cost/unit ($66) remains constant.
Direct Labor
Building depreciation-factory
Equipment lease
Factory supplies
Indirect Labor
Quality Inspection Costs
Shipping
Advertising expense
Salaries and commissions
Insurance expense
B. Using the high-low method, separate each mixed cost into variable and fixed elements. State the cost formula for each mixed cost. Show all your work and computations.
Use the chart below:
Mixed Cost (Name)
Cost Formula
(Y = a + bx form)
Supporting Computations
C. Determine the expected total costs (identify each cost separately) at a production level of 5,000 widgets. Show computations. You should arrive at a total cost figure.
Use the chart below:
Cost
Supporting Computations
Direct Materials
Direct Labor
Building dep-factory portion
Equipment lease
Factory supplies
Indirect Labor
Quality Inspection Costs
Shipping
Advertising expense
Salaries and commissions
Insurance expense
TOTAL COST
D. State the cost equation for the total costs of the entire company in the form Y = a + bx. Using alternative one or alternative two below, show how you determined the cost equation. (Note: you should have one equation such that someone could determine expected total cost for any activity level within the relevant range.)
Company – Wide Cost equation:
Use the chart below (Alternative one) which shows the fixed cost portion and the variable rate for each cost item or use the high- low method (Alternative two) for determining the cost equation. You need to choose only one alternative.
Alternative one: (use the information and chart from part A and the information from part B. Input the $ amounts in appropriate columns and total the columns of the chart. Using the chart information, state the cost equation in the Y = a + bx form.)
Fixed Cost
Variable Rate ($/unit)
Direct Materials
Direct Labor
Building dep-factory portion
Equipment lease
Factory supplies
Indirect Labor
Quality Inspection Costs
Shipping
Advertising expense
Salaries and commissions
Insurance expense
TOTAL COST
Alternative two: High-low method and supporting, labeled computations.
Part Two 20 points
Goggle Company manufactures a special virtual reality goggle that can be used underwater. The company’s contribution format income statement for last year is below:
Total
Per Unit
% of Sales
Sales (10,000 units)
$750,000
$75
100%
Variable Expenses
450,000
45
?
Contribution Margin
300,000
$30
?
Fixed Expenses
170,000
Net Operating Income
$130,000
Goggle Company is ready to take off and expand its market share. Management has asked for several items to be analyzed in order to make good decisions.
Calculate the company’s contribution margin ratio and the variable expense ratio.
Compute the company’s break-even point in both units and in sales dollars. You may use either the equation method or the formula method.
Management is predicting a 20% increase in sales next year, staying within the relevant range for the company. How much will the company’s net operating income increase?
Refer to the original data. Assume that management would like to earn a profit of at least $55,000. How many units will have to be sold to meet this target profit?
Refer to the original data. Compute the company's margin of safety in both dollar and percentage form.
Compute the company's degree of operating leverage at the present level of sales.
Assume that through a more intense effort by the sales staff, the company's sales increase by 8% next year. By what percentage would you expect net operating income to increase? Use the degree of operating leverage to obtain your answer.
Verify your answer to (b) by preparing a new contribution format income statement showing an 8% increase in sales.
In an effort to increase sales and profits, management is considering the use of a higher quality virtual reality system than the current system. The new system would increase variable costs by $15 per unit, but management could eliminate one quality inspector who is paid a salary of $30,000 per year. Management believes they can increase the selling price by $30 per unit.
Assuming that changes are made as described above, prepare a projected contribution format income statement for next year. Show data on a total, per unit, and percentage basis.
Compute the company's new break-even point in both units and dollars of sales. Use the formula method.
Would you recommend that the changes be made? Why or why not?
Production in units
3,000
3,750
4,500
Cost of goods manufactured
Direct Materials
$ 198,000
$ 247,500
$297,000
Direct Labor
126,000
157,500
189,000
Overhead
Building depreciation-factory
5,000
5,000
5,000
Equipment lease
4,500
4,500
4,500
Factory supplies
1,600
1,930
2,260
Indirect Labor
5,500
5,500
5,500
Quality Inspection Costs
13,360
14,200
15,040
Selling and Administrative Expenses
Shipping
45,500
51,875
58,250
Advertising expense
50,000
50,000
50,000
Salaries and commissions
137,000
155,000
173,000
Insurance expense
10,000
10,000
10,000
Total
$ 596,460
$ 703,005
$ 809,550
Explanation / Answer
Since Toatl Cost remains same at all levels of given production, it is teated as fixed cost
D.)
Total Cost = Total Fixed cost of all items + units* Total Variable cost per unit
Cost Fixed Variable Mixed Explanation Direct Material X Since Per Unit cost remains same at any level of production capacity this is varable cost Direct labour X Since Per Unit cost remains same at any level of production capacity this is varable cost Building Depreciation - Factory X Since Toatl Cost remains same at all levels of given production, it is teated as fixed cost Equipment Lease X Since Toatl Cost remains same at all levels of given production, it is teated as fixed cost Factory Supplies X When total cost remains fixed for certain level of production and after crossing certain level of production apart from the fixed cost there will be variable cost in additonal based on the production units. This type of cost is called semi-variable cost or mixed cost Indirect Labour X Since Toatl Cost remains same at all levels of given production, it is teated as fixed cost Quality Inspection Costs X When total cost remains fixed for certain level of production and after crossing certain level of production apart from the fixed cost there will be variable cost in additonal based on the production units. This type of cost is called semi-variable cost or mixed cost Shipping X When total cost remains fixed for certain level of production and after crossing certain level of production apart from the fixed cost there will be variable cost in additonal based on the production units. This type of cost is called semi-variable cost or mixed cost Advertising Expenses X Since Toatl Cost remains same at all levels of given production, it is teated as fixed cost Salaries & Commission X When total cost remains fixed for certain level of production and after crossing certain level of production apart from the fixed cost there will be variable cost in additonal based on the production units. This type of cost is called semi-variable cost or mixed cost Insurance Expenses XSince Toatl Cost remains same at all levels of given production, it is teated as fixed cost
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