1. DragNet Manufacturing sold 72 , 000 units of its product for $95 per unit in
ID: 2445416 • Letter: 1
Question
1. DragNet Manufacturing sold 72,000 units of its product for $95 per unit in 2014. Variable cost per unit is $51.30 and total fixed costs are $5,350,000.
Required:
a. Compute the company's CM ratio and its break-even point in both units and dollars.
b. Assume that the company increased its monthly advertising budget by $66,000, which would result in a $5,500,000 increase in monthly sales. What would be the effect on the company's monthly net operating income or loss? (Use the incremental approach in preparing your answer.)
c. Refer to the original data. The CEO proposes a reduction in the selling price to $75, which would increase the monthly advertising budget by $102,200, and double unit sales. Preparethe new contribution format income statement.
2. Trendy Manufacturing uses normal costing based on a job-order costing system. Indirect costs are allocated to jobs using a plantwide overhead rate based on machine hours. At the beginning of 2014, the company made the following estimates:
Machine-hours required to support estimated production
200,000
Fixed manufacturing overhead cost
$950,000
Variable manufacturing overhead cost per machine-hour
$7.00
Required:
a. Compute the predetermined overhead rate.
b. During 2014, Job 450 was started and completed. The following information was available with respect to this job:
Direct materials requisitioned
$400
Direct labor cost
$270
Machine-hours used
45
Compute the total manufacturing cost assigned to Job 450.
c. During the year, the company worked a total of 189,000 machine-hours on all jobs and incurred actual manufacturing overhead costs of $2,200,750. What is the amount of underapplied or overapplied overhead for the year? If this amount were closed out entirely to Cost of Goods Sold, would the journal entry increase or decrease net operating income?
Machine-hours required to support estimated production
200,000
Fixed manufacturing overhead cost
$950,000
Variable manufacturing overhead cost per machine-hour
$7.00
Explanation / Answer
Dragnet Manufacturing Ans a All amounts in $ Units sold 72,000 Marginal Costing Details Amt/Unit Total Amt Sales Revenue 95.00 6,840,000 Less Variable cost 51.30 3,693,600 Contribution Margin 43.70 3,146,400 CM ratio=CM/Sales price= 46% Fixed cost 5,350,000 Net Operating Income (2,203,600) Break even point units =Fixed cost/contribution per unit = 122,426 Break even sales in $= BEP*sales price 11,630,435 Ans b Income statement when advertisement increased by $66,000 Sales unit increase by 57895 units Sales Revenue 95.00 12,340,000 Less Variable cost 51.30 6,663,614 Contribution Margin 43.70 5,676,387 CM ratio=CM/Sales price= 46% Fixed cost 5,416,000 Net Operating Income 260,387 So there will be an increase in net opearting income by $ 2,463,986.50 Ans c reduction in sales price to $75 Units sold 144000 Marginal Cost Income statement Sales Revenue 75.00 10,800,000 Less Variable cost 51.30 7,387,200 Contribution Margin 23.70 3,412,800 CM ratio=CM/Sales price= 32% Fixed cost 5,452,200 Net Operating Income (2,039,400) Ans 2 Total machine hrs budgeted 200,000 Fixed manufacturing OH $ 950,000 Fixed manufacturing OH / Machine Hr 4.75 Variable Manufacturing OH/Machine Hr 7 Total Manuafcturing OH/Machine Hr 11.75 Ans a Predetermined OH rate/Machine Hr 11.75 Ans b Job Costing -Job 450 Details Amt $ Direct Material 400 Direct Labor 270 Overhead applied to 45 machine hrs @11.75 /machine hr 529 Total Manufacturing Cost 1,199 Ans c Actual Machine hrs in year 189,000 Absorbed Overhead @11.75/machine hr 2,220,750 Actual OH cost incurred 2,200,750 Over applied OH for the year 20,000 Journal entry Account Dr $ Cr $ Overhead Control 20,000 Cost of Goods sold 20,000 ( over applied OH adjusted by crediting COGS or increasing net op income)
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