Exercise 10-28 activity-based costing of suppliers (l.o. 3, 4)

Davis Fabricators buys metal for manufacturing from two suppliers, Alpha Metals and First Parts. If the metal is delivered late, the shipment to the customer is delayed. Delayed shipments lead to contractual penalties that call for Davis to reimburse a portion of the purchase price to the customer.

     During the past quarter, the purchasing and delivery data for the two suppliers showed the following:

Alpha

First

Total

  Total purchases (tons)

11,000

5,500

16,500

  Average purchase price

$

10.00

$

16.00

$

12.00

  Number of deliveries

80

20

100

  Percentage of late deliveries

25

%

5

%

21

%

The accounting department recorded $32,670 as the cost of late deliveries to customers.

Required:

Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the past. What is the effective price for metal from the two companies when late deliveries are considered? (Do not round your intermediate calculations. Round your answers to 2 decimal places. Omit the “$” sign in your response.)

Alpha

First

  Effective cost per ton

$

$

Nuke-It-Now manufactures microwave ovens. The following represents the financial information from one of its manufacturing plants for two years.

Year 1

Year 2

  Sales

$

3,490,000

$

3,890,000

  Costs

     Redesign process

$

31,000

$

36,500

     Discard defective units

36,100

42,900

     Training on equipment

241,000

203,000

     Warranty claims

134,000

179,000

     Contract cancellations

209,000

154,000

     Rework

66,000

102,000

     Preventive maintenance

142,000

114,000

     Product liability claims

300,000

173,000

     Final inspection

194,000

201,000

Construct a cost of quality report for year 1 and year 2. (Round your percentage values to 1 decimal place. Omit the “$” and “%” signs in your response.)

Nuke-It-Now Corporation
Cost of Quality Report

Year 1

%

Year 2

%

  Sales

$  

$  

  Prevention:

$  

$  

  Total prevention costs

$  

 %

$  

 %

  Appraisal:

$  

$  

  Internal failure:

$  

$  

  Total internal failure costs

$  

$  

  External failure:

$  

$  

  Total external failure costs

$  

$  

  Total Costs of Quality

$  

 %

$  

 %

Starlite Company manufactures office products. Last year, it sold 20,000 electric staplers for $25 per unit. The company estimates that this volume represents a 25 percent share of the current electric stapler market. The market is expected to increase by 10 percent next year. Marketing specialists have determined that as a result of new competition, the company’s market share will fall to 20 percent (of this larger market). Due to changes in prices, the new price for the electric staplers will be $26 per unit. This new price is expected to be in line with the competition and have no effect on the volume estimates.

Required:

Estimate Starlite’s sales revenues from electric staplers for the coming year. (Round your answer to the nearest dollar amount. Omit the “$” sign in your response.)

Rhodes, Inc., is a fast-growing start-up firm that manufactures bicycles. The following income statement is available for July:

  Revenues (210 units @ $520 per unit)

$

109,200  

  Less

    Manufacturing costs

      Variable costs

15,300  

      Depreciation (fixed)

16,200  

    Marketing and administrative costs

      Fixed costs (cash)

37,500  

      Depreciation (fixed)

13,700  

    Total costs

$

82,700  

  Operating profits

$

26,500  

Sales volume is expected to increase by 20 percent in August, but the sales price is expected to fall 10 percent. Variable manufacturing costs are expected to increase by 3 percent per unit in August. In addition to these cost changes, variable manufacturing costs also will change with sales volume. Marketing and administrative cash costs are expected to increase by 5 percent.

     Rhodes operates on a cash basis and maintains no inventories. Depreciation is fixed and should remain unchanged over the next three years.

Required:

Prepare a budgeted income statement for August. (Do not round intermediate calculations. Input all amounts as positive values. Round your answers to the nearest dollar amount. Omit the “$” sign in your response.)

Rhodes, Inc.
Budgeted Income Statement
August

$   

  Less:

    Manufacturing costs:

$   

  Total manufacturing costs

$   

$   

  Less:

    Marketing and Administrative:

$   

  Total marketing and administrative costs

$   

$   

Bay Area Limos operates transportation services to Bay City airport. The price of service is fixed at a flat rate for each trip and most costs of providing the service are fixed for each trip. Betty Smith, the owner, forecasts income by estimating two factors that fluctuate with the economy: the fuel cost associated with the trip and the number of customers who would take trips. Looking at next year, Betty develops the following estimates of contribution margin (price less variable costs, including fuel) for the estimated number of customers. For simplicity, she assumes that the fuel costs (therefore the contribution margin per ride) and the number of customers are independent.

Contribution Margin
per Ride

  Scenario

(Price – Variable cost)

Number of Customers

  Excellent

$ 45                

4,600                  

  Fair

35                

3,000                  

  Poor

20                

2,300                  

In addition to the costs of a ride, Betty estimates that other service costs are $54,000 plus $4 for each customer (ride) in excess of 3,000 rides. Annual administrative and marketing costs are estimated to be $23,000 plus 10 percent of the contribution margin.

Required:

Compute the total contribution, costs and operating profit for each of the scenario and each group of customer. (Input all amounts as positive values except losses which should be indicated with a minus sign. Omit the “$” sign in your response.)

Contribution Margin

Number of
Customers

Total
Contribution Margin

Service Costs

Marketing &
Admin.

Operating
Profit(Loss)

  Poor

$

20      

2,300     

$

$

$

$

  Fair

$

35      

2,300     

$

$

$

$

  Excellent

$

45      

2,300     

$

$

$

$

  Poor

$

20      

3,000     

$

$

$

$

  Fair

$

35      

3,000     

$

$

$

$

  Excellent

$

45      

3,000     

$

$

$

$

  Poor

$

20      

4,600     

$

$

$

$

  Fair

$

35      

4,600     

$

$

$

$

  Excellent

$

45      

4,600     

$

$

$

$

Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:

Actual
(based on actual of
425,000 units)

Master Budget
(based on budgeted
400,000 units)

  Sales revenue

$

2,970,000

$

3,600,000

  Less    

     Variable costs

       Blank flash drives

900,000

880,000

       Direct labor

237,500

210,000

       Variable overhead

353,500

390,000

       Variable marketing and administrative

307,500

300,000

       Total variable costs

$

1,798,500

$

1,780,000

  Contribution margin

$

1,171,500

$

1,820,000

  Less

     Fixed costs 

       Manufacturing overhead

573,000

625,000

       Marketing

175,000

175,000

       Administrative

99,000

112,500

       Total fixed costs

$

847,000

$

912,500

  Operating profits

$

324,500

$

907,500

Prepare a flexible budget for Data-2-Go. (Input all amounts as positive values. Do not round your intermediate calculations. Round your answers to the nearest dollar amount. Omit the “$” sign in your response.)

Flexible budget
(based on actual of
425,000 units)

  Sales revenue

$        

   Variable costs:

      Blank drives

      Direct labor

      Variable overhead

      Variable marketing and administrative

  Total variable costs

$        

  Contribution margin

$        

  Fixed costs: 

     Manufacturing overhead

       Marketing

       Administrative

  Total fixed costs

$        

  Operating profits

$        

Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:

Actual
(based on actual of
425,000 units)

Master Budget
(based on budgeted
400,000 units)

  Sales revenue

$

2,905,000

$

3,280,000

  Less

     Variable costs

       Blank flash drives

900,000

880,000

       Direct labor

247,500

210,000

       Variable overhead

358,500

390,000

       Variable marketing and administrative

305,000

300,000

       Total variable costs

$

1,811,000

$

1,780,000

  Contribution margin

$

1,094,000

$

1,500,000

  Less

     Fixed costs

       Manufacturing overhead

586,000

575,000

       Marketing

175,000

175,000

       Administrative

98,000

110,000

       Total fixed costs

$

859,000

$

860,000

  Operating profits

$

235,000

$

640,000

Required:

Prepare a sales activity variance analysis for Data-2-Go. (Input all amounts as positive values. Leave no cells blank, be certain to insert “0” wherever required. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance). Do not round your intermediate calculations. Round your answers to the nearest dollar amount. Omit the “$” sign in your response.)

Flexible Budget
(based on actual
of 425,000 units)

Sales Activity Variance

Master Budget
(based on
budgeted
400,000 units)

  Sales revenue

$    

$   

$

3,280,000

  Variable costs:

     Blank drives

880,000

     Direct labor

210,000

     Variable overhead

390,000

     Variable marketing and administrative

300,000

  Total variable costs

$    

$   

$

1,780,000

  Contribution margin

$    

$   

$

1,500,000

  Fixed costs:

     Manufacturing overhead

$    

$

575,000

     Marketing

175,000

     Administrative

110,000

  Total fixed costs

$    

$   

$

860,000

  Operating profits

$    

$   

$

640,000

The following data reflect the current month’s activity for Sills, Inc.:

  Actual total direct labor

$

158,640

  Actual hours worked

12,000

  Standard labor-hours allowed for actual output (flexible budget)

13,500

  Direct labor price variance

$

3,840

 U

  Actual variable overhead

$

38,200

  Standard variable overhead rate per standard direct labor-hour

$

3.30

Variable overhead is applied based on standard direct labor-hours allowed.

Required:

Compute the labor and variable overhead price and efficiency variances. (Do not round your intermediate calculations. Input all amounts as positive values. Indicate the effect of each variance by selecting “F” for favorable, “U” for unfavorable, and “None” for no effect (i.e., zero variance). Omit the “$” sign in your response.)

Price Variance

Efficiency Variance

  Direct labor

$   

$   

  Variable overhead

$   

$   

Lancaster Metals has the following average times (in hours):

  Transporting product

0.25

  Manufacturing product

1.00

  Inspecting product

0.25

  Storing inventory

2.50

Required:

Calculate the manufacturing cycle efficiency. (Omit the “%” sign in your response.)

  Manufacturing cycle efficiency

 %  

The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of 7 years so it will not have to use outsiders’ laboratories for certain types of work. The following are all of the cash flows affected by the decision:

  Investment (outflow at time 0)

$

6,450,000

  Periodic operating cash flows:

      Annual cash savings because outside laboratories

          are not used

1,430,000

      Additional cash outflow for people and supplies to operate

         the equipment

230,000

  Salvage value after seven years, which is the estimated

      life of this project

430,000

  Discount rate

8

%

Calculate the net present value of this decision. Should the organization buy the equipment? (Round present value factors to three decimal places. Negative amount should be indicated by a minus sign.)