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Question One.

Westwood Company has met all production requirements for the current month and has an opportunity to manufacture additional units with its excess capacity. Unit selling prices and unit costs for three product lines follow.

Standard Deluxe Premium
Selling price $40 $55 $65
Direct material 12 16 22
Direct labour (at $20 per hour) 10 15 20
Variable overhead 8 12 16
Fixed overhead 6 7 8

Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional manufacture of all products.

Required:

  1. If Westwood has excess machine capacity and can add more labor as needed (i.e., neither machine capacity nor labor is a constraint), which product is the most attractive to produce? Explain.

(10 marks)

  1. If Westwood has excess machine capacity but a limited amount of labor time available, which product or products should be manufactured? Explain.

(12 marks)

(Total: 22 marks)

Questions continued overleaf Page 2 of 6

Question Two.

Ocean Pro Ltd manufactures two products, Shadow and Ice, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively.

Information about the company’s products follows.

Shadow —

Estimated production volume: 3,000 units Direct materials cost: $28 per unit

Direct labor per unit: 3 hours at $15 per hour

Ice —

Estimated production volume: 4,000 units Direct materials cost: $42 per unit

Direct labor per unit: 4 hours at $15 per hour

Ocean Pro’s overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

Orders

processed

Machine hours

worked

Inspection

hours

Shadow 320 16,000 4,000
Ice 180 24,000 6,000
Total 500 40,000 10,000

REQUIRED:

  1. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system.

(3 marks)

  1. Assuming use of activity-based costing, compute the unit manufacturing costs of Shadow and Ice if the expected manufacturing volume is attained.

(10 marks)

  1. How much overhead would be applied to a unit of Shadow and Ice if the company used traditional costing and applied overhead solely on the basis of direct labor hours? Which of the two products would be undercosted by this procedure and by how much? Overcosted and by how much?

(8 marks)

(Total: 21 marks)

Question Three.

Atomic Corporation is preparing a cash budget for the first two months of the coming year. The following data have been forecasted:

Sales January

$ 750,000

February

$ 800,000

Purchases 450,000 480,000
Operating expenses:
Payroll 146,800 167,400
Advertising 52,700 62,800
Rent 8,750 8,750
Depreciation 23,750 23,750
End-of-January balances:
Cash 120,000
Bank loan 480,000
Additional data:
  • Sales are 40% cash and 60% credit. The term of credit sales is 2/10, n/30. The collection pattern for credit sales is 80% in the month following the month of sale (of which 75% are collected within 10 days), and 20% in the month thereafter. Total sales in December of the prior year were $1,000,000.
  • Purchases are all on credit, with 40% paid in the month of purchase and the balance the following month.
  • Operating expenses are paid in the month incurred.
  • The firm desires to maintain a minimum cash balance of $150,000 at the end of each month.
  • Loans are used to maintain the minimum cash balance. At the end of each month, interest of 1% per month is paid on the outstanding loan balance as of the beginning of the month. Repayments are made (at the end of the month) whenever the cash balance exceeds $150,000.

Required:

Prepare the cash budget for February. What is the amount of the loan balance at the end of the month (after loan repayments, if any)?

(16 marks)

(Total: 16 marks)

Questions continued overleaf

Page 4 of 6

Question Four.

Apollo Corp. is a retail store that sells hats and caps. In the past, it has bought all its hats from a supplier for $15 per unit. However, Apollo has the opportunity to acquire a small manufacturing facility where it could produce its own hats. The projected data for producing its own hats are as follows, for a hat: selling price $25; variable costs, $5; total fixed costs (per year), $125,000.

Required:

  1. If Apollo acquired the manufacturing facility, how many hats (per year) would it have to produce to break even (round your answer up, to the nearest whole unit)?

(4 marks)

  1. To earn an annual after-tax profit of $100,000,
  2. How many hats would Apollo have to sell if it buys the hats from the supplier?
  3. How many hats would it have to sell if it produces its own hats?

Apollo’s combined income tax rate is estimated at 35%. Round up your

answers, to the nearest whole number of units.

(12 marks)

  1. At what annual volume of sales (in units) would Apollo be indifferent between the two decision alternatives (ignore income tax effects)? Show a computation of operating incomes to prove your answer.

(6 marks)

(Total: 22 marks)

Questions continued overleaf

Question Five.

Cressi Company needs 1,000 motors in its manufacture of outboards. It can buy the motors from Mares Motors for $1,250 each. Cressi’s plant can manufacture the motors for the following costs per unit:

Direct materials $ 500
Direct manufacturing labor 250
Variable manufacturing overhead 200
Fixed manufacturing overhead 350
Total $1,300

If Cressi buys the motors from Mares, 70% of the fixed manufacturing overhead applied will not be avoided.

REQUIRED:

  1. Should Cressi make or buy the motors? Show calculations to justify your answer.

(11 marks)

  1. What additional factors should Cressi consider in deciding whether or not to make or buy the motors? Identify at least 4 (four) factors.

(8 marks)

(Total: 19 marks)

(Total for this paper: 100 marks)

End of examination paper

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