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Larry M. Walther & Christopher J. Skousen Managerial and Cost Accounting Exercises II Download free ebooks at bookboon.com 2 Managerial and Cost Accounting Exercises II © 2011 Larry M. Walther, Christopher J. Skousen & Ventus Publishing ApS. All material in this publication is copyrighted, and the exclusive property of Larry M. Walther or his licensors (all rights reserved). ISBN 978-87-7681-796-1 Download free ebooks at bookboon.com 3 Managerial and Cost Accounting Exercises II Contents Contents Problem 1 6 Worksheet 1 7 Solution 1 8 Problem 2 9 Worksheet 2 9 Solution 2 10 Problem 3 11 Worksheet 3 11 Solution 3 12 Problem 4 13 Worksheet 4 13 Solution 4 14 Problem 5 15 Worksheet 5 16 Solution 5 17 Please click the advert The next step for top-performing graduates Masters in Management Designed for high-achieving graduates across all disciplines, London Business School’s Masters in Management provides specific and tangible foundations for a successful career in business. 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Agilent offers a wide variety of affordable, industry-leading electronic test equipment as well as knowledge-rich, on-line resources —for professors and students. We have 100’s of comprehensive web-based teaching tools, lab experiments, application notes, brochures, DVDs/ CDs, posters, and more. See what Agilent can do for you. www.agilent.com/find/EDUstudents www.agilent.com/find/EDUeducators © Agilent Technologies, Inc. 2012 u.s. 1-800-829-4444 canada: 1-877-894-4414 Download free ebooks at bookboon.com 5 Managerial and Cost Accounting Exercises II Problem 1 Problem 1 Brian Snow is a river guide on the Columbia River. Typically brian takes tourists around 30 to 80 miles upriver. Round trip takes anywhere from 2 to 8 hours before returning to dock. Brian has noted that overall fuel costs vary based on “miles upriver” and he is considering changing his guide fee to separately charge customers for estimated fuel costs. Below Brian’s log for 15 typical days showing “miles upriver” and “total fuel cost”. Day Miles Upriver Fuel Cost 1 55 $129 2 61 139 3 33 109 4 42 120 5 73 148 6 37 111 7 49 127 8 55 130 9 66 139 10 36 115 11 43 120 12 67 144 13 52 124 14 54 130 15 46 120 Total $ 769 $ 1,905 a) Use the high-low method to determine the “fixed fuel cost” associated with the trolling time, and the “variable fuel cost” associated with running up and down the river. b) If the sole objective of the fuel charge is to approximately recover actual costs incurred each day, would “$2.50 per mile upriver” be a fair formula? What alternative formula might you suggest? Download free ebooks at bookboon.com 6 Managerial and Cost Accounting Exercises II Problem 1: Worksheet Worksheet 1 a) MILES RUN COST HIGH LOW b) Download free ebooks at bookboon.com 7 Managerial and Cost Accounting Exercises II Problem 1: Solution Solution 1 a) MILES RUN Highest Level 73 Lowest Level 33 Difference 40 Variable cost per mile upriver - ($39/40 miles): COST $ 109.00 $ $ Less: Variable Cost ($0.963 per mile X miles upriver) LOW 148.00 $ 71.18 $ Fixed Cost 39.00 $0.975 HIGH Total Cost 148.00 76.83 109.00 32.18 $ 76.83 b) Although the idea of charging $2.50 per mile would seem to average out about right ($1,905/769 miles = $2.48), it would not be a fair day-by-day charge. Some days would be overpriced (e.g., 75 miles @ $2.50 would recover $187.50 - more than the actual expected cost), and other days would be underpriced (e.g., 30 miles @ $2.50 would recover only $75 - far less than the actual expected cost). A simple and fair formula might be a $75 flat fee (for trolling time), plus $1.00 per mile upriver. Download free ebooks at bookboon.com 8 Managerial and Cost Accounting Exercises II Problem 2: Worksheet Problem 2 Jakob Loos recently graduated from medical school. He is considering opening his own family practice doctor office. A doctor’s office is a high-fixed cost business, as it requires considerable expenditures for facilities, labor, and equipment, no matter how many families are served. Assume the annual fixed cost of operations is $400,000. Further assume that the only significant variable cost relates to patients served. An average patient served costs $250. Jakob’s banker has asked a variety of questions in contemplation of providing a loan for this business. a) If the average family is charged $475 for services, how many families must be served to clear the break-even point? b) If the banker believes Jakob will only serve 500 families during the first year in business, how much will the business lose during its first year of operation? c) If Jakob believes his profits will be at least $100,000 during the first year, how much is he anticipating for total revenue? d) The banker has suggested that Jakob can reduce his fixed costs by $100,000 if he will not purchase certain equipment. Jakob can instead lease or rent this equipment as needed. The variable cost of leasing this equipment is $55 per family served. Will this suggestion help Jakob reach the break-even point sooner? Worksheet 2 a) Break-Even Point in Patients = b) c) Sales for a Target Income = d) New Break-Even Point in Patients = Download free ebooks at bookboon.com 9 Managerial and Cost Accounting Exercises II Problem 2: Solution Solution 2 a) Break-Even Point in Patients = Total Fixed Costs / Contribution Margin Per Unit 1,777.78 patients = $400,000 ÷ ($475 - $250) 1,778 patients must be served b) 1,000 patients X $475 = $475,000 total revenue $475,000 - $400,000 fixed costs - (1,000 X $250 variable costs) = $175,000 loss c) Sales for a Target Income = (Fixed Costs + Income) / Contribution Margin Ratio $1,055,556 = ($400,000 + $100,000) ÷ ($225/$475) d) New Break-Even Point in Patients = Total Fixed Costs / Contribution Margin Per Unit 1,538.46 patients = $300,000 ÷ ($475 - $225 - $55) 1,539 patients must be served (this approach does reduce the breakeven point) Download free ebooks at bookboon.com 10