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Yedder Enterprises was a pioneer in designing and producing precision surgical lasers. Yedder’s product was brilliantly designed, but the manufacturing process was neglected by management with a consequence that quality problems have been chronic. When customers complained about defective units, Yedder would simply send out a repairperson or replace the defective unit with a new one. Recently, several competitors came out with similar products without Yedder’s quality problems, and as a consequence Yedder’s sales have declined.

To rescue the situation, Yedder embarked on an intensive campaign to strengthen its quality control at the beginning of the current year. These efforts met with some success—the downward slide in sales was reversed, and sales grew from $90 million last year to $100 million this year. To help monitor the company’s progress, costs relating to quality and quality control were compiled for last year and for the first full year of the quality campaign this year. The costs, which do not include the lost sales due to a reputation for poor quality, appear below:

	Costs (in thousands)
	Last Year		This Year
Product recalls	$	2,592	$	600
Systems development	$	522	$	950
Inspection	$	828	$	1,240
Net cost of scrap	$	693	$	1,470
Supplies used in testing	$	27	$	100
Warranty repairs	$	4,374	$	1,440
Rework labor	$	1,170	$	2,000
Statistical process control	$	0	$	170
Customer returns of defective goods	$	1,521	$	1,110
Cost of testing equipment	$	180	$	360
Quality engineering	$	504	$	820
Downtime due to quality problems	$	855	$	1,300

Required:

1.	Prepare a quality cost report for both this year and last year. (Round your percentage answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" and "%" signs in your response.)

Yedder Enterprises Quality Cost Report (in thousands of dollars)
	Last Year		This Year
	Amount (000s)	Percent of Sales	Amount (000s)	Percent of Sales
Prevention Costs:
Systems development	$	%	$	%
Statistical process control		%		%
Quality engineering		%		%

Total prevention costs		%		%

Appraisal Costs:
Inspection		%		%
Supplies used in testing		%		%
Cost of testing equipment		%		%

Total appraisal costs		%		%

Internal failure costs:
Net cost of scrap		%		%
Rework labor		%		%
Downtime due to quality problems		%		%

Total internal failure costs		%		%

External failure costs:
Product recalls		%		%
Warranty repairs		%		%
Customer returns of defective goods		%		%

Total external failure costs		%		%

Total quality cost	$	%	$	%

Spendlove Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool	Total Cost	Total Activity
Assembly	$1,660,260	59,000	machine-hours
Processing orders	$69,455.70	2,290	orders
Inspection	$126,338	1,810	inspection-hours

The company makes 780 units of product S78N a year, requiring a total of 1,140 machine-hours, 64 orders, and 36 inspection-hours per year. The product's direct materials cost is $58.21 per unit and its direct labor cost is $14.69 per unit. The product sells for $124.00 per unit.

According to the activity-based costing system, the product margin for product S78N is: (Round your intermediate calculations to 2 decimal places.)

	$39,858.00
	$3,324.48
	$5,265.60
	$5,837.28

The activity rates for each activity cost pool are computed as follows:

	Total Cost	Total Activity		Activity Rate
Assembly	$1,660,260	59,000	machine-hours	$28.14	per machine-hour
Processing orders	$69,456	2,290	orders	$30.33	per order
Inspection	$126,338	1,810	inspection-hours	$69.80	per inspection-hour

The overhead cost charged to Product S78N is:

	Activity Rate		Activity		ABC Cost
Assembly	$28.14	per machine-hour	1,140	machine-hours	$32,079.60
Processing orders	$30.33	per order	64	orders	1,941.12
Inspection	$69.80	per inspection-hour	36	inspection-hours	2,512.80
Total overhead cost					$36,533.52

Sales (780 units × $124.00 per unit)		$96,720.00
Direct materials (780 units × $58.21 per unit)	$45,403.80
Direct labor (780 units × $14.69 per unit)	11,458.20
Overhead	36,533.52	93,395.52
Product margin		$3,324.48

Matt Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 8,000 units and of Product B is 7,000 units. There are three activity cost pools, with total cost and total activity as follows:

		Total Activity
Activity Cost Pool	Total Cost	Product A	Product B	Total
Activity 1	$28,600	120	530	650
Activity 2	$42,550	920	230	1,150
Activity 3	$129,340	840	3,620	4,460

The activity-based costing cost per unit of Product A is closest to: (Round your intermediate calculations to 2 decimal places.)

	$2.46
	$7.96
	$5.76
	$12.65

The activity rates for each activity cost pool are computed as follows:

	Total Cost	Total Activity	Activity Rate
Activity 1	$28,600	650	$44.00
Activity 2	$42,550	1,150	$37.00
Activity 3	$129,340	4,460	$29.00

The overhead cost charged to Product A is:

	Activity Rate	Activity	ABC Cost
Activity 1	$44.00	120	$5,280
Activity 2	$37.00	920	$34,040
Activity 3	$29.00	840	$24,360
			$63,680

Cost per unit = $63,680 ÷ 8,000 units = $7.96 per unit

Fogle Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries	$128,000
Other expenses	64,000
Total	$192,000

Distribution of resource consumption:
	Activity Cost Pools
	Making Bouquets	Delivery	Other	Total
Wages and salaries	60%	30%	10%	100%
Other expenses	45%	50%	5%	100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs.

The amount of activity for the year is as follows:

Activity Cost Pool	Activity
Making bouquets	57,390 bouquets
Delivery	12,500 deliveries

What would be the total overhead cost per delivery according to the activity based costing system? In other words, what would be the overall activity rate for the deliveries activity cost pool?

	$6.49
	$5.20
	$3.92
	$5.63

Allocations to the Delivery activity cost pool:

Wages and salaries (30% × $128,000)	$38,400
Other expenses (50% × $64,000)	32,000
Total cost	$70,400

Overhead cost per delivery = Total cost ÷ Number of deliveries

= $70,400 ÷ 12,500 deliveries

= $5.63 per delivery

Capizzi Corporation has an activity-based costing system with three activity cost pools-Machining, Order Filling, and Other. In the first stage allocations, costs in the two overhead accounts, equipment depreciation and supervisory expense, are allocated to three activity cost pools based on resource consumption. Data used in the first stage allocations follow:

Overhead costs:
Equipment depreciation	$81,200
Supervisory expense	$7,000

Distribution of Resource Consumption Across Activity Cost Pools:
	Activity Cost Pools
	Machining	Order Filling	Other
Equipment depreciation	0.50	0.20	0.30
Supervisory expense	0.50	0.10	0.40

Machining costs are assigned to products using machine-hours (MHs) and Order Filling costs are assigned to products using the number of orders. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow:

Activity:
	MHs (Machining)	Batches (Order Filling)
Product Y7	1,680	860
Product V2	9,710	2,240
Total	11,390	3,100

What is the overhead cost assigned to Product V2 under activity-based costing? (Round your intermediate calculations to 2 decimal places.)

	$37,578
	$49,808
	$12,230
	$60,340

Machining: $44,100 ÷ 11,390 MHs = $3.87 per MH

Order Filling: $16,940 ÷ 3,100 orders = $5.46 per order

Overhead cost for Product V2:

Machining $3.87 per MH × 9,710 MHs	$37,577.70
Order Filling $5.46 per order × 2,240 orders	12,230.40
Total	$49,808.10

Escher Company is a wholesale distributor that uses activity-based costing for all of its overhead costs. The company has provided the following data concerning its annual overhead costs and its activity based costing system:

Overhead costs:
Wages and salaries	$552,000
Other expenses	220,000
Total	$772,000

Distribution of resource consumption
	Activity Cost Pools
	Filling Orders	Customer Support	Other	Total
Wages and salaries	40%	55%	5%	100%
Other expenses	50%	45%	5%	100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. The amount of activity for the year is as follows:

Activity Cost Pool	Activity
Filling orders	5,400	orders
Customer support	22	customers

What would be the total overhead cost per order according to the activity based costing system? In otherwords, what would be the overall activity rate for the filling orders activity cost pool?

	$63.26
	$61.26
	$58.76
	$67.76

Allocations to the Filling Orders activity cost pool:

Wages and salaries (40% × $552,000)	$220,800
Customer support (50% × $220,000)	110,000
Total cost of filling orders	$330,800

Cost per order = Total cost of filling orders ÷ Number of orders

= $330,800 ÷ 5,400 orders = $61.26 per order

An open-end fund has a net asset value of $11.40 per share. It is sold with a front-end load of 7%. What is the offering price? (Round your answer to 2 decimal places.)

Offering price

Explanation:

The offering price includes a 7% front-end load, or sales commission, meaning that every dollar paid results in only $0.93 going toward the purchase of shares. Therefore:

Offering price =	NAV	=	$11.40	= $12.26
	1 − load		1 − 0.07

The Closed Fund is a closed-end investment company with a portfolio currently worth $215 million. It has liabilities of $6 million and 4 million shares outstanding.

a.	What is the NAV of the fund? (Round your answer to 2 decimal places.)

NAV

b.	If the fund sells for $49 per share, what is its premium or discount as a percent of NAV? (Input the amount as a positive value. Round your answer to 2 decimal places.)

The fund sells at an % Discount from NAV.

Explanation:a.

NAV =	Market value of assets – Market value of liabilities
	Shares outstanding

=		$215,000,000 – $6,000,000	= $52.25
		4,000,000

Premium (or discount) =		Price – NAV	=	$49 – $52.25	= –0.0622 = –6.22%
		NAV		$52.25

The fund sells at an 6.22% discount from NAV.

Consider a mutual fund with $203 million in assets at the start of the year and with 10 million shares outstanding. The fund invests in a portfolio of stocks that provides dividend income at the end of the year of $5 million. The stocks included in the fund's portfolio increase in price by 7%, but no securities are sold, and there are no capital gains distributions. The fund charges 12b-1 fees of 0.75%, which are deducted from portfolio assets at year-end.

a.	What is net asset value at the start and end of the year? (Enter your answers in dollars rounded to 3 decimal places.)

	Net Asset Value
Start of the year	$
End of the year

b.	What is the rate of return for an investor in the fund? (Use rounded "Net Asset Value". Round your answer to 2 decimal places.)

Rate of return

Explanation:

Start of year NAV =	Market value of assets − Market value of liabilities
	Shares outstanding

=	$203,000,000	= $20.300
	10,000,000

End of year NAV is based on the 7% price gain, less the 0.75% 12b-1 fee:

End of year NAV = $20.300 × 1.07 × (1 − 0.0075) = $21.558

Given the dividends per share is $0.50, we can calculate the rate of return using the following equation:

Rate of return =	Δ(NAV) + Distributions
	Start of year NAV

=	($21.558 − $20.300) + $0.50	= 0.0866 = 8.66%
	$20.300

The Investments Fund sells Class A shares with a front-end load of 6% and Class B shares with 12b-1 fees of .5% annually as well as back-end load fees that start at 5% and fall by 1% for each full year the investor holds the portfolio (until the fifth year). Assume the portfolio rate of return net of operating expenses is 10% annually.

a.	If you plan to sell the fund after four years, are Class A or Class B shares the better choice for you?

	Class B

b.	What if you plan to sell after 15 years?

	Class A

Explanation:

Suppose you have $1000 to invest. The initial investment in Class A shares is $940 net of the front-end load. After 4 years, your portfolio will be worth:

$940 × (1.10)⁴ = $1,376.25

Class B shares allow you to invest the full $1,000, but your investment performance net of 12b-1 fees will be only 9.5%, and you will pay a 1% back-end load fee if you sell after 4 years. Your portfolio value after 4 years will be:

$1,000 × (1.095)⁴= $1,437.66

After paying the back-end load fee, your portfolio value will be:

$1,437.66 × 0.99 = $1,423.28

Class B shares are the better choice if your horizon is 4 years.

With a 15-year horizon, the Class A shares will be worth:

$940 × (1.10)¹⁵ = $3,926.61

For the Class B shares, there is no back-end load in this case since the horizon is greater than 5 years. Therefore, the value of the Class B shares will be:

$1,000 × (1.095)¹⁵ = $3,901.32

At this longer horizon, Class B shares are no longer the better choice. The effect of Class B's 0.5% 12b-1 fees cumulates over time and finally overwhelms the 6% load charged to Class A investors.

Suppose that every time a fund manager trades stock, transaction costs such as commissions and bid–ask spreads amount to 2.7% of the value of the trade. If the portfolio turnover rate is 50%, by how much is the total return of the portfolio reduced by trading costs? (Round your answer to 1 decimal place.)

Fall in returns

Explanation:

The turnover rate is 50%. This means that, on average, 50% of the portfolio is sold and replaced with other securities each year. Trading costs on the sell orders are 2.7%; the buy orders to replace those securities entail another 2.7% in trading costs. Total trading costs will reduce portfolio returns by: 2 × 0.027 × 0.5 = 0.027 or 2.7%

Guinta Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, O48C and G94Z, about which it has provided the following data:

	O48C		G94Z
Direct materials per unit	$	24.80	$	56.30
Direct labor per unit	$	24.10	$	63.20
Direct labor-hours per unit		0.70		2.40
Annual production (units)		38,800		18,300

The company's estimated total manufacturing overhead for the year is $3,224,840 and the company's estimated total direct labor-hours for the year is 71,080.

The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:

Activities and Activity Measures	Estimated Overhead Cost
Supporting direct labor (DLHs)	$	426,480
Setting up machines (setups)		723,840
Parts administration (part types)		2,074,520

Total	$	3,224,840

Activities	O48C	G94Z	Total
Supporting direct labor	27,160	43,920	71,080
Setting up machines	800	3,360	4,160
Parts administration	2,460	1,880	4,340

Required:
a.	Determine the unit product cost of each of the company's two products under the traditional costing system. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)

	O48C	G94Z
Unit product cost	$	$

b.	Determine the unit product cost of each of the company's two products under activity-based costing system. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)

	O48C	G94Z
Unit product cost	$	$

Explanation:

Traditional Unit Product Costs

Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base = $3,224,840 ÷ 71,080 DLHs = $45.37 per DLH

	O48C		G94Z
Direct materials	$	24.80	$	56.30
Direct labor		24.10		63.20
Manufacturing overhead (0.70 DLHs × $45.37 per DLH; 2.40 DLHs × $45.37 per DLH)		31.76		108.89

Unit product cost	$	80.66	$	228.39

b.
ABC Unit Product Costs.

	Estimated Overhead Cost		Total Expected Activity		Activity Rate
Supporting direct labor	$	426,480	71,080	DLHs	$	6	per DLH
Setting up machines	$	723,840	4,160	setups		174	per setup
Parts administration	$	2,074,520	4,340	part types		478	per part type

Overhead cost for O48C

	Activity Rate			Activity		ABC Cost
Supporting direct labor	$	6	per DLH	27,160	DLHs	$	162,960
Setting up machines	$	174	per setup	800	setups		139,200
Parts administration	$	478	per part type	2,460	part types		1,175,880

Total						$	1,478,040

Overhead cost for G94Z

	Activity Rate			Activity		ABC Cost
Supporting direct labor	$	6	per DLH	43,920	DLHs	$	263,520
Setting up machines	$	174	per setup	3,360	setups		584,640
Parts administration	$	478	per part type	1,880	part types		898,640

Total						$	1,746,800

	O48C		G94Z
Direct materials	$	24.80	$	56.30
Direct labor		24.10		63.20
Manufacturing overhead ($1,478,040 ÷ 38,800 units; $1,746,800 ÷ 18,300 units)		38.09		95.45

Unit product cost	$	86.99	$	214.95

Assume that Carmen's Cookies is preparing a budget for the month ending June 30. Management prepares the budget by starting with the actual results for April 30. Next, management considers what the differences in costs will be between April and June.

Management expects the number of cookies sold to be 20 percent greater in June than in April, and it expects all food costs (e.g., flour, eggs) to be 20 percent higher in June than in April. Management expects "other" labor costs to be 25 percent higher in June than in April, partly because more labor will be required in June and partly because employees will get a pay raise. The manager will get a pay raise that will increase the salary from $4,500 in April to $5,400 in June. Rent and utilities are not expected to change.

Required:
Prepare a budget for Carmen's Cookies for June.

Explanation:

Food:

Flour = $3,600 × 1.2 = $4,320

Eggs = $6,700 × 1.2 = $8,040

Chocolate = $3,500 × 1.2 = $4,200

Nuts = $3,500 × 1.2 = $4,200

Other = $3,700 × 1.2 = $4,440

Labor:

Other = $3,000× 1.25 = $3,750

Number of cookies sold = 47,000 × 1.2 = 56,400

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA).

STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE Degree Income Statement For the Academic Year Ending June 30
Revenue	$	2,110,000
Costs
Advertising—BBA program		86,000
Faculty salaries		1,075,000
Degree operating costs (part-time staff)		185,000
Building maintenance		196,000
Classroom costs (building depreciation)		436,000
Allocated school administration costs		226,000

Total costs	$	2,204,000

Net loss	$	-94,000

The dean of the Business School is considering expanding the BBA program by offering an evening program in a nearby city. The program would be the same size (in terms of students). The school’s CFO estimates that the combined BBA revenue (on-campus plus the evening program) will be twice the current revenue, as shown in the above table. Because the evening program will be new, advertising expenses for the evening session will be three times their current level. Faculty salaries will double. Degree operating costs will increase by 50 percent. Building maintenance and classroom costs will remain unchanged, but classroom space will be rented at a cost of $155,000 per academic year. School administration costs will increase by $21,000 , and allocated school administration costs (for both programs) will be $315,000 per academic year.

Explanation:

The following differential analysis shows that the combined contribution of the BBA program will be positive.

Revenue: $2,110,000 × 2 = $4,220,000

Costs:

Advertising – BBA program: 86,000 + (86,000 × 3 ) = 344,000

Faculty salaries: 1,075,000 × 2 = 2,150,000

Degree operating costs: 185,000 × 1.5 = 277,500

State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis, which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs of other programs.

STATE UNIVERSITY BUSINESS SCHOOL, BBA DEGREE Degree Income Statement For the Academic Year Ending June 30
Revenue	$	350,000
Costs
Advertising—BBA program		12,000
Faculty salaries		195,000
Degree operating costs (part-time staff)		35,000
Building maintenance		31,000
Classroom costs (building depreciation)		60,000
Allocated school administration costs		31,600

Total costs	$	364,600

Net loss	$	(14,600)

Required:

What revenues and costs are probably differential for the decision to drop the BBA program?

Betty’s Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.

BETTY'S FASHIONS, CITY DIVISION Divisional Income Statement For the Year Ending January 31
Sales revenue	$	4,500,000
Costs
Advertising—City Division		177,000
Cost of goods sold		2,350,000
Divisional administrative salaries		292,000
Selling costs (sales commissions)		582,000
Rent		737,000
Share of corporate administration		477,000

Total costs	$	4,615,000

Net loss before income tax benefit	$	-115,000
Tax benefit at 40% rate		46,000

Net loss	$	-69,000

Required:

What revenues and costs are probably differential for the decision to discontinue City division's operations?

Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at "cost plus 20 percent." AI operates a manufacturing plant that can produce 22,000 monitors per year, but it normally produces 20,000. The costs to produce 20,000 monitors follow:

	Total Cost		Cost per Monitor
Production costs:
Materials	$	1,340,000	$	67
Labor		1,860,000		93
Supplies and other costs that will vary with production		860,000		43
Indirect cost that will not vary with production		640,000		32
Variable marketing costs		1,720,000		86
Administrative costs (all fixed)		1,060,000		53

Totals	$	7,480,000	$	374

Based on these data, company management expects to receive $448.8 (= $374 × 120 percent) per monitor for those sold on this contract. After completing 2,000 monitors, the company sent a bill (invoice) to the government for $897,600 (= 2,000 monitors × $448.8 per monitor).

The president of the company received a call from an Air Force auditor, who stated that the per monitor cost should be


Materials	$	67
Labor		93
Supplies and other costs that will vary with production		43

	$	203

Therefore, the price per monitor should be $243.6 (= $203 × 120 percent). The Air Force ignored marketing costs because the contract bypassed the usual selling channels.

Required:

What is the price per computer monitor that should be charged by Alameda Instruments under the following options for considering the cost basis of the monitors? (Round your intermediate calculations to 2 decimal places and your final answers to 2 decimal places.)

Options:
A.	Only the differential production costs are used as the cost basis.
B.	The total cost per monitor for normal production of 20,000 monitors are used as the cost basis.
C.	The total cost per monitor for production of 22,000 monitors, excluding marketing costs, are used as the cost basis.
D.	The total cost per monitor for production of 22,000 monitors, including marketing costs, are used as the cost basis.

Explanation:

Costs			Unit Cost Options (One Unit = One Monitor)
				A		B			C			D
Materials (variable)	$	67.00	$	67.00	$	67.00		$	67.00		$	67.00
Labor (variable)		93.00		93.00		93.00			93.00			93.00
Supplies (variable)		43.00		43.00		43.00			43.00			43.00
Indirect costs (fixed)		640,000		N/A		32.00	^a		29.09	^b		29.09
Marketing (variable)		86.00		N/A		86.00			N/A			86.00
Administrative (fixed)		1,060,000		N/A		53.00	^c		48.18	^d		48.18

Per monitor cost basis			$	203.00	$	374.00		$	280.27		$	366.27

Per monitor price (Cost + 20%)			$	243.60	$	448.80		$	336.32		$	439.52

^a	$32.00 = $640,000 ÷ 20,000 units.
^b	$29.09 (rounded) = $640,000 ÷ 22,000 units.
^c	$53.00 = $1,060,000 ÷ 20,000 units.
^d	$48.18 (rounded) = $1,060,000 ÷ 22,000 units.

T-Comm makes a variety of products. It is organized in two divisions, North and South. South Division normally sells to outside customers but, on occasion, also sells to the North Division. When it does, corporate policy states that the price must be cost plus 20 percent to ensure a “fair” return to the selling division. South received an order from North Division for 300 units. South’s planned output for the year had been 1,200 units before North’s order. South’s capacity is 1,500 units per year. The costs for producing those 1,200 units follow:

	Total		Per Unit
Materials	$	116,400	$	97
Direct labor		60,000		50
Other costs varying with output		44,400		37
Fixed costs		516,000		430

Total costs	$	736,800	$	614

Based on these data, South's controller calculated that the unit price for North's order should be $736.8 (= $614 × 120 percent). After producing and shipping the 300 units, South's sent an invoice for $221,040. Shortly thereafter, West received a note from the buyer at North's stating that this invoice was not in accordance with company policy. The unit cost should have been


Materials	$	97
Direct labor		50
Other costs varying with output		37

Total	$	184

The price per unit would be $220.8 (= $184 × 120 percent).

Required:

What is the total price for 300 units of products that should be charged by South Division under the following options for considering the cost basis of units? (Do not round intermediate calculations.)

Options:

A.	Use the full per unit cost for normal production of 1,200 units
B.	Use only differential costs as the cost basis.
C.	Use differential costs plus a share of fixed costs, based on actual production volume (with North's order) of 1,500 units.

Explanation:

Costs			Unit Cost Options:
			A			B		C
Direct materials (variable)	$	97	$	97		$	97	$	97
Direct Labor (variable)		50		50			50		50
Other variable costs		37		37			37		37
Fixed costs		516,000		430	^a		N/A		344	^b

Per unit cost			$	614		$	184	$	528
Cost plus 20%				736.80			220.80		633.60

Total price (300 units)			$	221,040		$	66,240	$	190,080

^a	$430 = $516,000÷ 1,200 units.
^b	$344 = $516,000 ÷ 1,500 units.

KC Services provides landscaping services in Edisont. Kate Chen,, the owner, is concerned about the recent losses the company has incurred and is considering dropping its lawn services, which she feels are marginal to the company’s business. She estimates that doing so will result in lost revenues of $51,500 per year (including the lost tree business from customers who use the company for both services). The present manager will continue to supervise the tree services with no reduction in salary. Without the lawn business, Kate estimates that the company will save 15 percent of the equipment leases, labor, and other costs. She also expects to save 21 percent on rent and utilities.

KC SERVICES Annual Income Statement (Before Dropping Lawn Services)
Sales revenue	$	316,000

Costs
Equipment leases	$	192,000
Labor		32,500
Utilities		20,000
Rent		31,200
Other costs		15,500
Manager’s salary		56,800

Total costs	$	348,000

Operating profit (loss)	$	(32,000)

Required :

a.	Prepare a report of the differential costs and revenues if the lawn service is discontinued. (Loss amounts shoud be indicated by minus sign.)

rev: 02_21_2014_QC_45747, 02_24_2014_QC_45747

Explanation:

KC SERVICES Annual Income Statement
	Status Quo: With Lawn Service		Alternative: Without Lawn Service			Difference
Sales revenue		$ 316,000		$ 264,500	$ (51,500)	(given)
Costs
Equipment leases		192,000		163,200	(28,800)	(= 15% x $192,000)
Labor		32,500		27,625	(4,875)	(= 15% x $32,500)
Utilities		20,000		15,800	(4,200)	(= 21% x $20,000)
Rent		31,200		24,648	(6,552)	(= 21% x $31,200)
Other costs		15,500		13,175	(2,325)	(= 15% x $15,500)
Manager's salary		56,800		56,800	0

Total costs		$ 348,000		$ 301,248	$ (46,752)

Operating profit (loss)		$ (32,000)		$ (36,748)	$ (4,748)

Equipment leases: 15% x $192,000 = 163,200

Labor: 15% x $32,500 = 27,625

Utilities: 21% x $20,000 = 15,800

Rent: 21% x $31,200 = 24,648

Other costs: 15% x $15,500 = 13,175

The decision to drop the lawn service results in a differential loss of $4,748 [=$(32,000) – $ (36,748)], so it is not profitable to drop that service. Note that only differential costs and revenues figured in the decision. The manager's salary did not change, so it did not affect the decision.

Tom’s Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store owner has approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues at Tom’s Tax Services are presented below:

TOM’S TAX SERVICES Annual Income Statement
Sales revenue	$	738,000

Costs
Labor		466,000
Equipment lease		50,300
Rent		42,900
Supplies		32,300
Tom’s salary		74,500
Other costs		20,900

Total costs	$	686,900

Operating profit (loss)	$	51,100

If Tom gets the store’s business, he will incur an additional $59,800 in labor costs. Tomalso estimates that he will have to increase equipment leases by about 5 percent, supplies by 10 percent, and other costs by 10 percent.