A325 Spring 2013 Quiz 1 VERSION A

SHOW FORMULAS USED AND ALL WORK FOR MAXIMUM CREDIT 25 points total Name:________________________________________________________________________ Problem #1: Cost Classification. Assume that Cookie Rice, CEO of Ozarks Coca-Cola Bottling Co., would like to understand more about his companys costs. Assuming that your cost object is a single bottle of Coca-Cola, identify the following costs as (F) Fixed or (V) Variable; (A) Product or (B) Period Cost; and (D) Direct or (I) Indirect to the cost object; ( point each) 6 points total

Type of Cost Property tax on the Coca-Cola Bottling Plant Hourly wages for union contract employees who deliver the bottled Coca-Cola to the Grocery Stores. Depreciation on the Delivery Trucks taking finished goods to the Grocery Stores. Coca-Cola concentrate that is mixed with carbonated water in manufacturing the bottled drink.

Fixed (F) Variable (V)

Product (A) Period (B)

Direct (D) Indirect (I)

F F F V

A B B A

I I I D

Please state here any assumptions I would need to understand, related to your answers above: (It is not necessary to complete this section).

Problem #2: Answer the following questions using the information below:
Rogers Corporation Budgeted Income Statement For the Year Ended June 30, 2012 (in 000's) Revenue Cost of Goods Sold Variable Fixed Gross Margin Selling and administrative costs Sales Commissions (18% of sales) Fixed advertising cost Fixed administrative cost Operating Income Income taxes Net Income 26,000 11,700 2,870 14,570 11,430 4,680 1,400 1,850 7,930 3,500 1,400 2,100

40%

a) Using the current data in the problem, what would Rogers new Sales Revenue need to be in order to earn a net income of $3,000,000? NOTE: INCOME STATEMENT IS SHOWN IN (000S) 3 points. Formula: (Fixed Cost + TOI)/CM ratio Fixed Costs 6,120 New Net Income 3,000 NEW TOI 5,000 CM 9,620 CM ratio 0.37

Revenue Increases

30,054.05 Decreases No effect

b) What is the effect on the Sales Revenue needed in part a) above if the tax rate increases from 40-45%? 2 points

c) Rogers is considering changing the structure of its current sales force. Instead of paying a sales commission of 18% to an outside sales force, the company is considering hiring its own sales personnel. The company will hire eight sales people at a salary cost of $80,000 each, plus a 10% commission of their individual sales. Additionally, the company will incur $750,000 in travel and entertainment cost related to sales. Sales are expected to remain the same. What is the companys Operating Leverage and Operating Income before and after the change (Round to the nearest two digits)? 3 points

BEFORE THE CHANGE OPERATING INCOME OPERATING LEVERAGE 3,500 2.75

AFTER THE CHANGE 4,190 2.79

New Operating Income = 26,000-11,700-2,870-2,600-1,400-(1,850+640+750) = 4,190 Total CM/Operating Income = Before the change = (26,000-11,700-4,680)/3,500 = 2.75 Total CM/Operating Income = After the change = (26,000-11,700-2,600)/4,190 = 2.79 d) Under which scenario does the company have the potential to make a larger profit if sales increase (A or B). Explain why in two sentences or less? 2 points

B. Because Fixed Costs are higher proportionally than variable costs. More risk, but more return. Profit will go up 2.79% for every 1% increase in sales, versus 2.75% under scenario A.

Problem #3:
Assume the following costs for Richards Company:

Units Sold Units Produced Selling Price Direct Materials Direct Labor Variable Factory overhead Fixed Factory overhead Fixed Marketing and administrative expense

Year 1 70,000 100,000 $10 $90,000 $120,000 $60,000 $150,000 $180,000

Year 2 70,000 50,000 $10 $75,000 $100,000 $50,000 $150,000 $120,000

Answers below based on LIFO ASSUMPTION AND per unit produced cost of manufacturing from above data. a) Assuming the LIFO method of inventory valuation, what is Richards income under absorption costing for YEAR 2? 3 points

Revenue Variable manufacturing Fixed manufacturing Fixed S&A $

700,000 225,000 54,000 150,000 30,000 120,000 279,000 180,000 120,000

Absorption Costing Income

121,000

b) Assuming the LIFO method of inventory valuation, what is Richards income under variable costing for YEAR 2? 3 points

Revenue Variable manufacturing Fixed manufacturing Fixed S&A

700,000 225,000 54,000 $ 120,000 279,000 150,000 120,000

Variable Costing Income

151,000

Problem #4: Assume a company had operating income of $50,000 using variable costing for the period. If beginning inventory in units was 18,000 and ending inventory in units was 13,000 and fixed cost per unit was $2 for current period and $3 for the prior period, what was the income using absorption costing? 3 points FIFO

Variable Costing Income Fixed MOH in Beginning Inventory 18,000 $ 3 Fixed MOH in Ending Inventory 13,000 $ 2 Change in Fixed MOH in Inventory for the period Absorption costing income will be lower because inventory is decreasing

$ $ $ $ $

50,000 54,000 26,000 28,000 22,000

LIFO

Variable Costing Income Fixed MOH in Beginning Inventory 18,000 $ 3 Fixed MOH in Ending Inventory 13,000 $ 3 Change in Fixed MOH in Inventory for the period Absorption costing income will be lower because inventory is decreasing

$ $ $ $ $

50,000 54,000 39,000 15,000 35,000