| Answer all of the following questions. Explain your answer briefly and clearly, showing any necessary calculations. Your answer should be submitted in an Excel file, with separate tabs for each question. |
| |
| 1. (9) Westminster Company has had the following experience over the past six quarters: |
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| Units produced |
Electricity Cost ($) |
| 27,000 |
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1
| 10,000 |
| 34,000 |
126,000 |
| 31,000 |
1
| 16,000 |
| 23,000 |
8
| 8,000 |
| 22,000 |
90,000 |
| 32,000 |
120,000 |
| a) Using the high-low method, determine an equation for electricity cost (Y) as a function of units produced (X). Assume a linear function. |
| b) Using your equation, forecast electricity cost at a volume of 30,000 units produced. |
| 2. (12) Barrister Company has decided to replace an existing production machine with a new machine, which it will lease from the manufacturer. Barrister must decide between two models, A and B, which operate at equal speed and produce product of equal quality. Both have capacity in excess of Barrister’s present needs.
| Model A |
leases for $16,000/month, and has a monthly maintenance cost of $2,000.
Model B |
leases for $25,000/month and has monthly maintenance cost of $1,000. Variable unit costs of production for Model A are: materials, $24, direct labor, $16. Because of design efficiencies, Model B will produce the same product for $23 of material and $13 of labor.
| a) At what monthly production volume would Barrister be indifferent between the two models? |
| b) If the volume in (a) is expected to be regularly exceeded, which model should Barrister lease, and why? |
| 3. (14) Gotham Art Museum is considering hosting a travelling exhibit of paintings by a famous artist sponsored by the Smithsonian Institution. The Smithsonian charges $250,000 for a one-month exhibit, which covers all costs of transportation. They will also receive 10% of gross ticket sales revenue from the exhibit. Gotham will incur costs of $85,000 to modify exhibit space for the paintings; these modifications would have no value after the exhibit. Additional staff for ticket sales and security will cost $50,000. |
| It is expected that 12,000 visitors will purchase the exhibit ticket for $40, which would include access to the entire museum. Of these, it is estimated that 10,000 would not have attended the museum, while 2,000 would have purchased the regular admission ticket for $25. It is estimated that the increase in visitors will result in additional sales of $100,000 for the gift shop, and $40,000 for the café. Additional staffing for these units will cost $15,000. The gift shop normally runs a gross margin of 40%, and the café 70%. |
| Determine the incremental profit or loss to Gotham Art Museum of hosting the travelling exhibit. |
| 4. (18) Veeblefester Company manufactures two types of gizmo (Model A and Model B) in its Longmont plant. |
| Product information: |
Model AModel B
| Direct material/unit |
$40 |
$55 |
| Direct labor/unit |
$32 |
$47 |
| Budgeted volume (units) |
8,00010,000
| Setups |
5030
| Machine hours |
16,000
24,000 |
| Shipments |
230 |
170 |
| Budgeted overhead for the year is $3,200,000 |
| a) Compute the unit cost of each model if overhead is allocated on the basis of machine hours. |
| b) Overhead costs are driven 55% by machining, 25% by setups, and 20% by shipments. |
| Compute the unit cost of each model if overhead is allocated with an ABC system, using |
| these three cost drivers. |
| c) Model A currently sells for $300/unit. In order to meet budgeted sales volume, the |
| marketing department is advocating a 15% price cut. Is this advisable? Explain. |
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