Practice Midterm Solutions

Page 1
1.
2.
3.
4.

B
B
D
C

Page 2
1.
2.
3.
4.

B
A
E
B

Page 3
Larop Corporation
Schedule of Cost of Goods Manufactured
Direct Materials:
Beginning raw materials inventory $ 15,000
Add: Purchases of raw materials 225,000
Raw materials available for use 240,000
Deduct: Ending raw materials inventory 45,000
Raw materials used in production $195,000
Direct labor 245,000
Total overhead costs 265,000
Total manufacturing costs 705,000
Add: Beginning work in process inventory 20,000
Deduct: Ending work in process inventory 55,000
Cost of goods manufactured $670,000

Page 4

Q u a n tity s c h e d u le a n d e q u iv a le n t u n its
Q u a n tity
S c h e d u le
U n its to b e a c c o u n te d fo r:
W o r k in p ro c e s s , b e g in n in g ............
S ta r te d in to p r o d u c tio n ....................
T o ta l u n its a c c o u n te d f o r ....................

200
1 8 ,0 0 0
1 8 ,2 0 0
E q u iv a le n t U n its
M a te r ia ls C o n v e r s io n

U n its a c c o u n te d fo r a s fo llo w s :
T r a n s f e r r e d to n e x t d e p a r tm e n t .......
W o r k in p r o c e s s , e n d in g .................
T o ta l u n its ..........................................

1 7 ,7 0 0
500
1 8 ,2 0 0

1 7 ,7 0 0
350
1 8 ,0 5 0

1 7 ,7 0 0
400
1 8 ,1 0 0

M a te r ia ls

C o n v e r s io n

C o s ts p e r e q u iv a le n t u n it
T o ta l C o s t
C o s t to b e a c c o u n te d fo r:
W o r k in p ro c e s s , b e g in n in g ............
C o s t a d d e d d u r in g th e m o n th ..........
T o ta l c o s t ( a ) ......................................
E q u iv a le n t u n its ( a b o v e ) ( b ) ...............
C o s t p e r E U , ( a ) ( b ) .........................
C o s t p e r w h o le u n it ............................

2 ,2 6 4
7 9 2 ,0 0 1
$ 7 9 4 ,2 6 5

756
1 1 6 ,5 6 9
$ 1 1 7 ,3 2 5
1 8 ,0 5 0
$ 6 .5 0 0

1 ,5 0 8
6 7 5 ,4 3 2
$ 6 7 6 ,9 4 0
1 8 ,1 0 0
$ 3 7 .4 0 0

$ 4 3 .9 0 0

C o s t re c o n c ilia tio n
T o ta l
C ost
C o s t a c c o u n te d fo r a s fo llo w s :
T r a n s f e r r e d o u t ................................
W o rk in p ro c e s s , e n d in g :
M a te r ia ls ......................................
C o n v e r s io n ...................................
T o ta l w o r k in p r o c e s s , e n d in g .........
T o ta l c o s t ............................................

E q u iv a le n t U n its
M a te r ia ls C o n v e r s io n

$ 7 7 7 ,0 3 0
$2
14
17
$794

,2 7 5
,9 6 0
,2 3 5
,2 6 5

1 7 ,7 0 0

1 7 ,7 0 0

350
400

Page 5
a.
c.
d.

Gross Margin: Sales cost of sales = $60 15 = $45 per unit x 500 units = $22,500
b. Contribution margin: Sales Variable Costs = $60 15 6 Commissions 12 Variable admin = $33
per unit x 500 units = $13,500
Total administrative expense: $3,000 + (20% of $60 x 500 units) = $9,000
Net operating income:
Sales $60 x 500 units
$30,000
Less: Cost of sales #15 x 500 units
- 7,500
Gross margin
22,500
Less Expenses:
Commissions 10% of $30,000 3,000
Advertising
5,000
Admin $3,000 + (20% of sales) 9,000
Net operating Income
$5,500
Page 6
1.B
2.B
3.C. First Calculate the CM% at break-even. Since at break-even FC = 30,000 then CM must also =
$30,000. Then, CM / Sales = $30,000 / $120,000 = .25 CM % of 25%, and then, ($12,000 target profit +
$30,000 FC) / .25 = $168,000 Sales.
4.D First calculate the amount of FC. Since with the data given CM is 70% of sales, CM in $$ = 196,000
and since NOI = 21,000, then FC must be $175,000 ( 196,000 21,000). Then, take FC / CM % =
$175,000 / 70% = $250,000
Page 7
1.C Total contribution margin currently is (50 15) x 3,600 = 126,000. If you increase total contribution
margin by 40% you get 176,400. Solving for A in (A 15) x 3,600 = 176,400 you get $64, then times
3600 you get $230,400; an increase of $50,400.
2.B. First, calculate sales in units at break-even = FC / CM per unit = $40,530 / (50 15) = 1,158 units x
$50 per unit = $57,900 at break-even. Since we want a margin of safety of $40,000, then sales in $ must
equal $97,900 and in units 1,958 ($97,900 / $50)
3.C. First, calculate the decrease in FC = $40,530 x (1 .20) = $32,424 new FC. Then, FC / CM per unit
= $32,424 / $35 = 926.4 new break-even in units, a decrease of 232 units approx. (1,158 current unit sales
at break-even 926.4 new).

Page 8
1.
a. At the break-even, the total contribution margin equals total fixed expenses. Therefore, the total
contribution margin would be $30,000.

b.

C o n trib u tio n m a rg in ra tio

c.

I n c r e a s e in s a le s ......................................
C M r a tio ..................................................
I n c r e a s e in n e t o p e r a tin g in c o m e ............

d.

I n c r e a s e in a d v e r tis in g e x p e n s e s ..................
D e s ir e d in c r e a s e in n e t o p e r a tin g in c o m e .....
T o ta l r e q u ir e d c o n tr ib u tio n m a rg in ..............
C o n tr ib u tio n m a r g in p e r u n it .....................
R e q u ir e d u n it s a le s .......................................

Page 8 continues on the next page.

= U n it c o n trib u tio n m a rg in S e llin g p ric e

= ($ 2 0 - $ 1 2 ) $ 2 0 = 4 0 %
$ 2 0 ,0 0 0
40%
$ 8 ,0 0 0
$ 6 ,0 0 0
2 ,0 0 0
$ 8 ,0 0 0
$8
1 ,0 0 0

2.

a . V a ria b le c o s tin g u n it p ro d u c t c o s t
D ir e c t m a te r ia ls ...........................................
D ir e c t la b o r ..................................................
V a r ia b le m a n u f a c tu r in g o v e r h e a d ...............
U n it p r o d u c t c o s t .........................................
b . V a ria b le c o s tin g in c o m e s ta te m e n t
S a le s .............................................................
L e s s v a ria b le e x p e n s e s :
V a ria b le c o s t o f g o o d s s o ld :
B e g in n in g in v e n to r y ...............................
A d d v a r ia b le m a n u fa c tu r in g c o s ts .........
G o o d s a v a ila b le f o r s a le .........................
L e s s e n d in g in v e n to r y ............................
V a r ia b le c o s t o f g o o d s s o ld .......................
V a r ia b le s e llin g a n d a d m in is tr a tiv e ..........
C o n tr ib u tio n m a r g in .....................................
L e s s fix e d e x p e n s e s :
F ix e d m a n u f a c tu r in g o v e r h e a d ..................
F ix e d s e llin g a n d a d m in is tr a tiv e ...............
N e t o p e r a tin g in c o m e ...................................

$28
49
7
$84
$ 6 6 6 ,5 0 0
$

8 ,4 0 0
3 7 8 ,0 0 0
3 8 6 ,4 0 0
2 5 ,2 0 0
3 6 1 ,2 0 0
3 0 ,1 0 0
1 7 5 ,5 0 0
8 1 ,7 0 0

3 9 1 ,3 0 0
2 7 5 ,2 0 0
2 5 7 ,2 0 0
$ 1 8 ,0 0 0

c . C o m p u ta tio n o f a b s o rp tio n c o s tin g n e t o p e ra tin g in c o m e

F ix e d m a n u f a c tu r in g o v e r h e a d p e r u n it ..........................
C h a n g e in in v e n to r ie s ( u n its ) ..........................................

$ 3 9 .0 0
200

V a r ia b le c o s tin g n e t o p e r a tin g in c o m e ............................

A d d fix e d m a n u fa c tu rin g o v e rh e a d c o s ts d e fe rre d in
in v e n to r y u n d e r a b s o r p tio n c o s tin g .............................
A b s o r p tio n c o s tin g n e t o p e r a tin g in c o m e .......................

$ 1 8 ,0 0 0
7 ,8 0 0
$ 2 5 ,8 0 0