Problem 9: Solution
1. Identify each cost as fixed, variable or mixed. |
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Fixed Amount |
Variable Amt/Cover |
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Identification |
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Cost of food sold |
variable |
-- |
$3.00 |
Salaries |
fixed |
$10,000 |
-- |
Wages |
variable |
-- |
2.50 |
Employee benefits |
mixed |
4,000 |
0.50 |
Supplies |
variable |
-- |
0.75 |
Utilities |
mixed |
1,000 |
0.25 |
Rent |
variable |
-- |
0.50 |
Other operating expenses |
mixed |
3,000 |
0.25 |
Insurance |
fixed |
1,000 |
-- |
Depreciation |
fixed |
1,200 |
-- |
Property taxes |
fixed |
1,500 |
-- |
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2. What are the estimated monthly fixed costs? |
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$21,700 as shown above. |
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3. What are the estimated variable costs per cover? |
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$7.75 as shown above. |
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4. Develop a single equation to show cost activity. |
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total costs = 21,700 + (7.75 × number of covers) |
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5. What are the total costs when 3,200 covers are sold? |
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total costs = 21,700 + (7.75 × 3,200) = $46,500 |
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Problem 10: Solution
1. Indifference point: $120,000 ÷ .06 = $2,000,000
2. A fixed lease is recommended. $120,000 < (.06 × $3,000,000)
3. Excess lease expense: $200,000 × .06 = $12,000
Tax savings: $12,000 × .4 = ($4,800)
Net of Tax Cost = $7,200
Problem 11: Solution
Part 1 Type of Cost
1. Cost of food sold Variable
2. Payroll costs Mixed
3. Supplies Variable
4. Utilities Mixed
5. Other operating costs Variable
6. Building rent Fixed
7. Depreciation Fixed
Part 2 Variable
Amount/Unit Fixed
1. Cost of food sold $1.50 $ 0
2. Payroll costs .50 2,000
3. Supplies .20 0
4. Utilities .02 300
5. Other operating costs .50 0
6. Building rent 0.00 1000
7. Depreciation 0.00 200
Total $2.72 $3,500
Equation
Total Costs = $2.72(units sold) + $3,500
Check: Total Costs @ 3,000 units
TC = ($2.72 × 3,000) + $3,500
TC = $11,660
Total costs @ 6,000 units
TC = ($2.72 × 6,000) + $3,500
TC = $19,820
Part 3
Total costs @ 8,000 units
TC = ($2.72 × 8,000) + $3,500
TC = $25,260
Problem 12: Solution
1. Irrelevant Costs: Labor, supplies, and utilities
2. Cost Schedule Alternatives
Buy Lease
Cost of equipment $15,000 -
Equipment rental
6 pmts. @ $3,500 - $21,000
Salvage Value (2,000) -
Annual Costs:
Interest Expense
3 yrs. @ $1,000 3,000 -
Repairs
3 yrs. @ $1500 4,500 ___-
Total $20,500 $21,000
3. Recommendation: Buy since the total costs over three years are less than under the lease alternative.
Problem 13: Solution
1. Irrelevant costs: Labor, supplies, and utilities
2. Buy Lease
Cost of equipment $20,000 —
Equipment rental
10 payments @ $3,000 — $30,000
Salvage value (1,000) —
Annual costs:
Interest expense:
$1,500 × 5 (yrs.) 7,500 —
Repairs: $200 × 5 (yrs.) 1,000 —
Total $27,500 $30,000
3. One should recommend "buy" since the total costs over five years are less than under the "lease" alternative.
Problem 14: Solution
1. Labor and water are the same, so they are irrelevant.
2. Keep Old Buy New
Salvage value $ 300 $2,000
Repairs -$ 500
Maintenance -$2,000 -$1,000
Energy -$4,000 -$2,500
Purchase—new -$7,000
Salvage value—new _____ $2,000
Total -$6,200 -$6,500
Paul should keep the old dishwasher since future costs will be minimized by this decision.
Problem 15: Solution
1. Irrelevant costs: annual labor costs, annual supplies costs
2. Which system should be purchased?
ABC Co. XYZ Computers
Initial cost $25,000 $30,000
Utility costs (7 yrs.) 7,000 5,600
Maintenance (7 yrs.) 21,000 17,500
Salvage value (5,000) (8,000)
Net cost $48,000 $45,100
A new front office computer system should be purchased from XYZ Computers since its system has the lower cost over seven years.
Problem 16: Solution
1. There are not any sunk costs.
2. Irrelevant costs: Operator labor and supplies.
3. Comparison
A B
Cost $10,000 $12,000
Salvage Value (1,000) (2,000)
Utilities 3,000 2,400
Repairs 3,000 2,700
Total $15,000 $15,100
4. Recommendation: Emma should go with alternative "a" since the total cost over three years is less than alternative "b".
Problem 17: Solution
1. |
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Rooms |
Food |
Total |
Revenue |
$70,000 |
$30,000 |
$100,000 |
Cost of Sales |
0 |
12,000 |
12,000 |
Payroll and Related Expenses |
16,000 |
10,000 |
26,000 |
Other Direct Expenses |
6,000 |
4,000 |
10,000 |
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Total Expenses |
22,000 |
26,000 |
48,000 |
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Departmental Income |
48,000 |
4,000 |
52,000 |
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Undistributed Operating Expenses: |
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Administrative & General |
6,667 |
1,333 |
8,000 |
Sales & Marketing |
3,333 |
667 |
4,000 |
Property Operation & Maintenance |
1,667 |
333 |
2,000 |
Utility costs |
1,667 |
333 |
2,000 |
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Gross Operating Profit |
34,666 |
1,334 |
36,000 |
Fixed Charges: |
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Rent |
5,000 |
1,000 |
6,000 |
Insurance |
2,500 |
500 |
3,000 |
Property Taxes |
1,667 |
333 |
2,000 |
Depreciation |
8,333 |
1,667 |
10,000 |
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Total Fixed Charges |
17,500 |
3,500 |
21,000 |
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Income Before Income Taxes |
$17,166 |
-$2,166 |
15,000 |
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Income Taxes |
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6,000 |
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Net Income |
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$9,000 |
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2. After cost allocation of the undistributed operating expenses and the fixed charges, the food department operates at a loss. |
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Problem 18: Solution
Double K Hotel
Fully-Allocated Income Statement
Gift
Rooms Food Shop Total
Departmental Income $340,000 $145,000 $500 $485,500
Adm. & General 39,438 50,202 360 90,000
Sales & Marketing 30,674 39,046 280 70,000
POM & UC 30,674 39,046 280 70,000
Insurance 4,382 5,578 40 10,000
Depreciation 35,056 44,624 320 80,000
Department Income (Loss)
after Allocation $199,776 $(33,496 ) $(780 ) 165,500
Income Taxes 50,000
Net Income $115,500
Problem 19: Solution
Step 1
Sales & Gift
Total A & G Marketing POM&UC Rooms Food Shop
Depreciation $80,000 $2,992 $1,992 $4,984 $59,816 $9,968 $248
Insurance 10,000 305 152 1,143 6,098 2,287 15
Total $90,000 $3,297 $2,144 $6,127 $65,914 $12,255 263
Step 2
Sales & Gift
A & G POM&UC Marketing Rooms Food Shop
Costs recorded
in dept. $90,000 $70,000 $70,000 -- -- --
Costs allocated
for Step 1 3,297 6,127 2,144 $65,914 $12,255 $263
93,297
Allocation of A&G (93,297 ) $ 6,204 9,302 34,091 43,392 308
$ -0- 82,331
Allocation of POM&UC (82,331 ) 2,280 68,368 11,395 288
$ -0- 83,726
Allocation of Sales & Mktg. (83,726) 41,779 41,799 168
$ -0- $210,152 $108,821 $1,027
Double K Hotel
Fully-Allocated Income Statement
Rooms Food Shop Total
Departmental Income $340,000 $145,000 $ 500 $485,500
Allocated Overhead 210,152 108,821 1,027 320,000
Dept. Income (Loss)
after Cost Allocation $129,848 $ 36,179 $ (527) 165,500
Income Taxes 50,000
Net Income $115,500