Balance sheet

  1. TWU, Inc. had the following inventory balances at the beginning and end of the year:


January 1        December 31

Raw material   $50,000           $35,000

Work in process          130,000           170,000

Finished goods            280,000           255,000


During the year, the company purchased $100,000 of raw material and incurred $340,000 of direct labor costs. Other data: manufacturing overhead incurred, $450,000; sales, $1,560,000; selling and administrative expenses, $90,000; income tax rate, 30%.



  1. Calculate cost of goods manufactured.
  2. Calculate cost of goods sold.
  3. Determine net income.


  1. The TWU Cafe produces one of the best meat products in north Texas. The company’s controller compiled the following information by analyzing the accounting records:
  2. Meat costs the company $3.25 per pound of sausage produced.
  3. Compensation of production employees is $2.25 per pound of sausage produced.
  4. Supervisory salaries total $23,000 per month.
  5. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced.
  6. Insurance and property taxes average $6,400 per month.


  1. Classify each cost as variable, fixed, or semivariable.
  2. Write a formula to express the behavior of the firm’s production costs. (Use the form Y = a + bX, where X denotes the quantity of sausage produced.)



  1. Baker Corporation uses the high-low method to analyze cost behavior. You as controller have determined that machine hours best explain the company’s utilities cost. The company’s relevant range of activity varies from a low of 600 machine hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year:
Month Utilities Machine Hours
January $8,700 800
February 8,360 720
March 8,950 810
April 9,360 920
May 9,625 950
June 9,150 900


  1. Determine the cost equation.
  2. What is the variable cost per unit?
  3. What are the total fixed costs?
  4. If there are 980 machine hours, what will utility costs be projected to be?



  1. TWU Clothing sells clothing, shoes, and accessories at a location in Denton, TX. Information for the just concluded calendar year follows.


Clothing                      Shoes               Accessories

Sales                            $850,000         $320,000         $150,000

Less: Variable costs    $510,000         $270,000           $82,500

Fixed costs          290,000             70,000             42,000

Total costs   $800,000         $340,000         $124,500

Operating income (loss)$50,000         $(20,000)           $25,500


Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. TWU Clothing will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about “one-stop shopping,” clothing sales are expected to fall by 15% if the shoe department is closed.



Your supervisor has asked you to determine whether the shoe department should be closed and the effect upon income if closed.



  1. The following costs relate to a variety of decision settings:
  Cost   Decision
1. Allocated corporate overhead   Closing a money-losing department
2. Cost of an old car   Vehicle replacement
3. Direct materials   Make or buy a product
4. Salary of marketing manager   Project discontinuance; manager to be transferred elsewhere in the firm
5. Home theater installation   Purchase of a new home
6. Unavoidable fixed overhead   Plant closure
7. Research expenditures incurred last year, related to new product   Product introduction to marketplace
8. $4 million advertising program   Whether to promote product A or B with the $4 million program
9. Manufactured cost of existing inventory   Whether to discard the goods or sell them to a third-world country

Consider each of the nine costs listed and determine whether it is relevant or irrelevant to the decision cited. If the cost is irrelevant, briefly explain why.





  1. Presbyterian Hospital has been hit with a number of complaints about its food service from patients, employees, and cafeteria customers. These complaints, coupled with a very tight local labor market, have prompted the organization to contact ABC Food Service about the possibility of an outsourcing arrangement.

The hospital’s business office has provided the following information for food service for the year just ended: food costs, $890,000; labor, $85,000; variable overhead, $35,000; allocated fixed overhead, $60,000; and cafeteria net income, $80,000.

Conversations with ABC personnel revealed the following information:
a. ABC fwill charge St. Luke’s Hospital $14 per day for each patient served..
b. Presbyterian’s 250-bed facility operates throughout the year and typically has an average occupancy rate of 70%.
c. Labor is the primary driver for variable overhead. If an outsourcing agreement is reached, hospital labor costs will drop by 90%.

  1. ABC plans to use the hospital’s facilities for meal preparation.
  2. Cafeteria net income is expected to increase by 15% because ABC will offer an improved menu selection.


A. What is meant by the term “outsourcing”?

  1. Should the hospital outsource its food-service operation to ABC?
  2. What factors, other than dollars, should hospital management consider before making the final decision?
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