Question 1:

1a.
Manufacturing overhead costs:
1. Depreciation of factory equipment 42,320
2. Factory electricity 35,650
3. Rent on factory building 41,400
4. Indirect labor 51,750
Total actual factory overhead costs = 42,320 + 35,650 + 41,400 + 51,750 = 171,120

1b.
Factory overhead applied (142,600*1.25) = 178,250
Overapplied overhead = 178,250-171,120 = 7,130

1c.
Raw material inventory = OI + TI – EI = 3,450 + 132,500 – 2,300 = 133,650
Cost of goods manufactured = 133,650 + Direct labour (142,600) + overhead (100,000) +
(17,250-20,700)= 372,800
Cost of sales = 372,800 + (35600-31050) = 377,350

1d.
Price variance = (2.5-2.3)*1900= 380 unfavorable
Quantity variance = (1900-2000)*2.3= 230 favorable

1e.
Overhead applied:
Order processing: $1,000*16=$16,000
Production setup: $450*15= $6,750
Material handling: $20*550= $11,000

Under-/Overapplied:
Order processing: 0
Production setup: 750 underapplied
Material handling: 0
Question 2:

2a.
EU for direct material = 4,000+2,000*0.8 = 5,600
EU for direct labour = 4,000 + 2,000*0.75 = 5,500
EU for manufacturing overhead = 4,000+2,000*0.45 = 4,900

2b.
Direct material per EU = (480,000+158,400)/5,600 = 114
Direct labour per EU = (240,000+40,500)/5,500 = 51
Manufacturing overhead per EU = (90,000+32,500)/4,900 = 25

2c.
First step, Maintenance cost allocated to the other
G&M = 156,000*120/(120+60+100+120) =46,800
Molding = 156,000*60/(120+60+100+120) = 23,400
Assembling = 156,000*100/(120+60+100+120) = 39,000
Finishing = 156,000*120/(120+60+100+120) = 46,800
Second step, G&M cost allocated to production departments
G&M cost = 46,800+120,000 = 166,800
Molding = 166,800* 80/(80+60+100) = 55600
Assembling = 166,800* 60/(80+60+100) = 41700
Finishing = 166,800* 100/(80+60+100) = 69500
Question 3:
3a.
Year 2
Revenue: 250,000*45 = 11,250,000
Variable manufacturing cost = 250,000*24 = 6,000,000
Annual committed manufacturing cost 860,000/344,000*250,000 = 625,000
Gross margin = 11,250,000 - 6,000,000 - 625,000 = 4,625,000
Variable S&A cost = 250,000*2.4 = 600,000
Annual committed S&A cost 840,000
Operating income 4,625,000 – 600,000 -840,000 = 3,185,000

3b.
Year 2
Revenue: 250,000*45 = 11,250,000
Variable manufacturing cost = 250,000*24 = 6,000,000
Variable S&A cost = 250,000*2.4 = 600,000
Contribution margin = 11,250,000 - 6,000,000 - 600,000 = 4,650,000
Annual committed manufacturing cost 860,000
Annual committed S&A cost 840,000
Operating income 4,650,000 – 860,000-840,000 = 2,950,000

3c.
In year 2, product unit higher than sales units, variable costing yields less profit due to fixed
overhead cost which is fully reconciled in the income statement.
The difference comes from the difference of product units and the sales units and the fixed
overhead
cost allocated to each unit. As a result, it has an operating income difference of (344000-
250000)* 860,000/344,000 =235000.
3d.
unit CM = 45-(24+2.4)=18.6, BE point in units = (860,000+840,000)/18.6 = 91,397.85 =
91398

3e.
unit CM=18.6, BE point in units = (860,000+840,000+ 800,000/0.7)/18.6 = 152,841.8 =
152842
Question 4:
4a.

Year 1 (net cash flow) = 90,000 + 174,000 = 264,000

Year 4 (net cash flow) = 90,000 + 174,000 + 168,000= 432,000

4b.
NPV = -960,000 + 264,000/(1+0.07) + 264,000/(1+0.07)^2+ 264,000/(1+0.07)^3
+ 432,000/(1+0.07)^4
= 62390.17

4c.
No,
NPV=-960,000 + 264,000/(1+0.07) + 264,000/(1+0.07)^2+ 264,000/(1+0.07)^3
+ 264,000/(1+0.07)^4 = - 65776.23

4d.
Year 1 (net cash flow) = (90,000 + 174,000 - 198,000) * (1-0.28) + 198,000 = 245,520

4e.

WACC = (2*0.14+1*(1-0.28)*0.10 )/ (2+1) = 0.1173

For grading, If someone misses tax, it would be 0.126667, gaining 1 point in that case.
Question 5:
5a.
when it has excess capacity, transfer price = 320
5b.
when it does not have excess capacity, transfer price = 400
5c.
when transfer price = 350, operating income = 10,000*(400-320) +5,000*(350-320)-110,000
= 840,000
ROI = 840,000/3,600,000 = 0.23
5d.
No, do not invest, because of lower ROI. (2 points yes or no) (2 points for reasons)
before acquisition: when transfer price = 400, operating income = 10,000*(400-320)-
100,000=700,000
ROI = 700,000/3,000,000= 0.23
after acquisition: when transfer price = 320, operating income = 10,000*(400-320)-
110,000=690,000
ROI = 690,000/(3,000,000+600,000)= 0.19
Question 6:
6a.
6b.

6c.

6d.