COVERAGE OF LEARNING OBJECTIVES

Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.

27

CHAPTER 2

COVERAGE OF LEARNING OBJECTIVES

LEARNING OBJECTIVE

FUNDA-

MENTAL

ASSIGN-

MENT

MATERIAL

CRITICAL

THINKING

EXERCISES

AND

EXERCISES

PROBLEMS

CASES, NIKE

10K, EXCEL,

COLLAB., &

INTERNET

EXERCISES

LO1: Explain how cost

drivers affect cost behavior.

A1, B1 25, 26, 28, 30,

31

47,49, 51, 53,

56 68

LO2: Show how changes in

activity cost-driver levels affect variable and fixed costs.

A1, B1, A2,

A3, B2, B3

25, 26, 29, 30,

31, 32, 41, 48

47,49, 52, 53,

54, 56, 59, 60,

63

68, 69, 73

LO3: Explain step- and

mixed-cost behavior.

A4,B4 24,36,37,38,

39 75

LO4: Create a cost-volume-

profit graph and understand the assumptions behind it.

33, 34, 35,40, 49

LO5: Calculate break-even

sales volume in total dollars and total units.

A2, A3, B2,

B3

40, 41,42, 43 47,50, 52, 54,

55, 57, 59, 61

68, 69, 73, 74

LO6: Calculate sales volume

in total dollars and total units to reach a target profit.

A2 , B3 33, 34, 43, 62 47,50, 52, 54,

55, 57, 59,

69

LO7: Differentiate between

contribution margin and gross margin.61

LO8: Explain the effects of

sales mix on profits (Appendix 2A).

44 64, 65 70

LO9: Compute cost-volume-

profit relationships on an after- tax basis (Appendix 2B).

45, 46 66, 67 71

Introduction to Management Accounting 16th Edition Horngren Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.

28

CHAPTER 2

Introduction to Cost Behavior and Cost-Volume Relationships

2-A1 (20-25 Min.)

• The cost driver for both resources is number of times the plant is cleaned. Labor cost

is a fixed-cost resource, and cleaning supplies is a variable cost. Costs for cleaning

between 4 and 8 times a month are:

Number of times plant Square Feet Cleaning Supplies Cost per is cleaned Cleaned Labor Cost Cost** Total cost Cleaning

4 200,000

*

$21,000 $ 8,000

***

$29,000 $7,250

5 250,000 21,000 10,000 31,000 $6,200

6 300,000 21,000 12,000 33,000 $5,500

7 350,000 21,000 14,000 35,000 $5,000

8 400,000 21,000 16,000 37,000 $4,625

• 4 × 50,000 square feet

** Cleaning supplies cost per time the plant is cleaned = $8,000 ÷ 4 = $2,000 *** $2,000 per cleaning × number of times plant is cleaned

The predicted total cost to clean the plant during the next quarter is the sum of the total costs for monthly cleanings of 5, 6, and 8 times. This is

$31,000 + $33,000 + $37,000 = $101,000

• If Napco hires the outside cleaning company, all its cleaning costs will be variable at a

rate of $5,700 per cleaning. The cost driver will be “number of times cleaned.” The predicted cost to clean a total of 5 + 6 + 8 = 19 times is 19 × $5,700 = $108,300. Thus, Napco will save by not hiring the outside cleaning company.The table below shows the total costs for the two alternatives. If Napco expects average “times cleaned” to be 6 or more, it would save by cleaning with its own employees. If Napco expects to average 5 or fewer cleanings per month, it would save by outsourcing.

Napco Cleans Plant Outsource Cleaning Plant Times Cleaned Napco Times Cleaned Outside

4 $ 29,000 4 $22,800

5 31,000 5 28,500

6 33,000 6 34,200

7 35,000 7 39,900

8 37,000 8 45,600

Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.

29 2-A2 (20-25 min.)

• Let N = number of units

Sales = Fixed expenses + Variable expenses + Net income

$1.00 N = $4,000 + $.68 N + 0

$.32 N = $4,000

N = 12,500 units

Let S = sales in dollars

S = $4,000 + .68 S + 0

.32 S = $4,000

S = $12,500

Alternatively, the 12,500 units may be multiplied by the $1.00 to obtain $12,500.

In formula form:

In units

Fixed costs + Net income Contribution margin per unit = ($4,000 + 0) $.32 = 12,500 units

In dollars

Fixed costs + Net income Contribution margin percentage = ($4,000 + 0)

.32 = $12,500

2. The quick way: (45,000 – 12,500) × $.32 = $10,400

Compare income statements:

Break-even Point Increment Total Volume in units 12,500 32,500 45,000 Sales $12,500 $32,500 $45,000

Deduct expenses:

Variable 8,500 22,100 30,600 Fixed 4,000 --- 4,000 Total expenses 12,500 22,100 34,600 Effect on net income $ 0 $ 10,400 $ 10,400

• Total fixed expenses would be $4,000 + $1,600 = $5,600

Copyright ©2014 Pearson Education, Inc., Publishing as Prentice Hall.

30

$5,600

$.32/unit = 17,500 units; $5,600 .32 = $17,500 sales

or 17,500 units × $1.00 / unit = $17,500 sales

• New contribution margin is $1.00 – $.68 – $.07 = $.25 per unit

Breakeven = Fixed cost ÷ contribution margin = $4,000 ÷ $.25 = 16,000 units

16,000 units × $1.00 = $16,000 in sales

• The quick way: (45,000 – 12,500) × $.21 = $6,825. On a graph, the slope of the

total cost line would have a kink upward, beginning at the break-even point.

2-A3 (20-30 min.)

The following format is only one of many ways to present a solution. This situation is really a demonstration of "sensitivity analysis," whereby a basic solution is tested to see how much it is affected by changes in critical factors. Much discussion can ensue, particularly about the final three changes.

The basic contribution margin per revenue mile is $2.00 - $1.60 = $.40

(1) (2) (3) (4) (5)

(1)×(2) (3)-(4)

Revenue Contribution Total Miles Margin Per Contribution Fixed Net Sold Revenue Mile Margin Expenses Income

1. 500,000 $.40 $200,000 $50,000 $ 150,000

• (a) 500,000 1.00 500,000 50,000 450,000

(b) 650,000 .40 260,000 50,000 210,000 (c) 500,000 (.08) (40,000) 50,000 (90,000) (d) 500,000 .40 200,000 65,000 135,000 (e) 575,000 .35 201,250 50,000 151,250 (f) 350,000 .41 143,500 50,000 93,500 (g) 575,000 .40 230,000 65,000 165,000

2-A4 (20-25 min.) Some of these answers are controversial, and reasonable cases can be built for alternative classifications. Class discussion of these answers should lead to worthwhile disagreements about anticipated cost behavior with regard to alternative cost drivers.

• (b) Fixed cost.