Cost Data for Managerial Purposes
Refer to the information in Exercise 1-29. The dean of the Business School is considering expanding the BBA program by offering an evening program in a nearby city. The new evening program would be the same size (in terms of students). The school’s CFO estimates that the combined BBA revenue (on-campus plus the evening program) will be twice the current revenue, as shown in Exercise 1-29. Because the evening program will be new, advertising expenses for the evening session will be three times their current level. Faculty salaries will double. Degree operating costs will increase by 50 percent. Building maintenance and classroom costs will remain unchanged, but classroom space will be rented at a cost of $300,000 per academic year. School administration costs will increase by $30,000, and allocated school administration costs (for both programs) will be $780,000 per academic year.
Required
- a. What will the contribution of the combined BBA program be, given these estimates?
- b. Are there other factors the dean should consider before making a decision?
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FUND.OF COST ACCOUNTING (LL) W/CONNECT
- Product costing and decision analysis for a service company Blue Star Airline provides passenger airline service, using small jets. The airline connects four major cities: Charlotte, Pittsburgh, Detroit, and San Francisco. The company expects to fly 170,000 miles during a month. The following costs are budgeted for a month: Blue Star management wishes to assign these costs to individual flights in order to gauge the profitability of its service offerings. The following activity bases were identified with the budgeted costs: The size of the companys ground operation in each city is determined by the size of the workforce. The following monthly data are available from corporate records for each terminal operation: Three recent representative flights have been selected for the profitability study. Their characteristics are as follows: Instructions Determine the fuel, crew, and depreciation cost per mile flown. Determine the cost per arrival or departure by terminal city. Use the information in (1) and (2) to construct a profitability report for the three flights. Each flight has a single arrival and departure to its origin and destination city pairs.arrow_forwardKatayama Company produces a variety of products. One division makes neoprene wetsuits. The divisions projected income statement for the coming year is as follows: Required: 1. Compute the contribution margin per unit, and calculate the break-even point in units. Repeat, using the contribution margin ratio. 2. The divisional manager has decided to increase the advertising budget by 140,000 and cut the average selling price to 200. These actions will increase sales revenues by 1 million. Will this improve the divisions financial situation? Prepare a new income statement to support your answer. 3. Suppose sales revenues exceed the estimated amount on the income statement by 612,000. Without preparing a new income statement, determine by how much profits are underestimated. 4. How many units must be sold to earn an after-tax profit of 1.254 million? Assume a tax rate of 34 percent. (Round your answer up to the next whole unit.) 5. Compute the margin of safety in dollars based on the given income statement. 6. Compute the operating leverage based on the given income statement. (Round to three significant digits.) If sales revenues are 20 percent greater than expected, what is the percentage increase in profits?arrow_forwardHudson Corporation is considering three options for managing its data warehouse: continuing with its own staff, hiring an outside vendor to do the managing, or using a combination of its own staff and an outside vendor. The cost of the operation depends on future demand. The annual cost of each option (in thousands of dollars) depends on demand as follows: If the demand probabilities are 0.2, 0.5, and 0.3, which decision alternative will minimize the expected cost of the data warehouse? What is the expected annual cost associated with that recommendation? Construct a risk profile for the optimal decision in part (a). What is the probability of the cost exceeding $700,000?arrow_forward
- Young Company is beginning operations and is considering three alternatives to allocate manufacturing overhead to individual units produced. Young can use a plantwide rate, departmental rates, or activity-based costing. Young will produce many types of products in its single plant, and not all products will be processed through all departments. In which one of the following independent situations would reported net income for the first year be the same regardless of which overhead allocation method had been selected? a. All production costs approach those costs that were budgeted. b. The sales mix does not vary from the mix that was budgeted. c. All manufacturing overhead is a fixed cost. d. All ending inventory balances are zero.arrow_forwardThe management of Hartman Company is trying to determine the amount of each of two products to produce over the coming planning period. The following information concerns labor availability, labor utilization, and product profitability: a. Develop a linear programming model of the Hartman Company problem. Solve the model to determine the optimal production quantities of products 1 and 2. b. In computing the profit contribution per unit, management does not deduct labor costs because they are considered fixed for the upcoming planning period. However, suppose that overtime can be scheduled in some of the departments. Which departments would you recommend scheduling for overtime? How much would you be willing to pay per hour of overtime in each department? c. Suppose that 10, 6, and 8 hours of overtime may be scheduled in departments A, B, and C, respectively. The cost per hour of overtime is 18 in department A, 22.50 in department B, and 12 in department C. Formulate a linear programming model that can be used to determine the optimal production quantities if overtime is made available. What are the optimal production quantities, and what is the revised total contribution to profit? How much overtime do you recommend using in each department? What is the increase in the total contribution to profit if overtime is used?arrow_forwardDifferential Costing As pointed out earlier in Heres the Real Kicker, Kicker changed banks a couple of years ago because the loan officer at its bank moved out of state. Kicker saw that as an opportunity to take bids for its banking business and to fine-tune the banking services it was using. This problem uses that situation as the underlying scenario but uses three banks: FirstBank, Community Bank, and RegionalOne Bank. A set of representative data was presented to each bank for the purpose of preparing a bid. The data are as follows: Checking accounts needed: 6 Checks per month: 2,000 Foreign debits/credits on checking accounts per month: 200 Deposits per month: 300 Returned checks: 25 per month Credit card charges per month: 4,000 Wire transfers per month: 100, of which 60 are to foreign bank accounts Monthly credit needs (line of credit availability and cost): 100,000 average monthly usage These are overall totals for the six accounts during a month. Internet banking services? Knowledgeable loan officer? Responsiveness of bank? FirstBank Bid: Checking accounts: 5 monthly maintenance fee per account 0.10 foreign debit/credit 0.50 earned for each deposit 3 per returned check Credit card fees: 0.50 per item Wire transfers: 15 to domestic bank accounts, 50 to foreign bank accounts Line of credit: Yes, this amount is available, interest charged at prime plus 2%, subject to a 6% minimum interest rate Internet banking services? Yes, full online banking available: 15 one-time setup fee for each account 20 monthly fee for software module The loan officer assigned to the potential Kicker account had 10 years of experience with medium to large business banking and showed an understanding of the audio industry. Community Bank Bid: Checking accounts: No fees for the accounts, and no credits earned on deposits 2.00 per returned check Credit card fees: 0.50 per item, 7 per batch processed. Only manual processing was available, and Kicker estimated 20 batches per month Wire transfers: 30 per wire transfer Line of credit: Yes, this amount is available: interest charged at prime plus 2% subject to a 7% minimum interest rate Internet banking services? Not currently, but within the next 6 months The loan officer assigned to the potential Kicker account had 4 years of experience with medium to large business banking, none of which pertained to the audio industry. RegionalOne Bank Bid: Checking accounts: 5 monthly maintenance fee per account to be waived for Kicker 0.20 foreign debit/credit 0.30 earned for each deposit 3.80 per returned check Credit card fees: 0.50 per item Wire transfers: 10 to domestic bank accounts, 55 to foreign bank accounts Line of credit: Yes, this amount is available: interest charged at prime plus 2% subject to a 6.5% minimum interest rate Internet banking services? Yes, full online banking available: one-time setup fee for each account waived for Kicker 20 monthly fee for software module The loan officer assigned to the potential Kicker account had 2 years of experience with large business banking. Another branch of the bank had expertise in the audio industry and would be willing to help as needed. This bank was the first one to submit a bid. Required: 1. Calculate the predicted monthly cost of banking with each bank. Round answers to the nearest dollar. 2. CONCEPTUAL CONNECTION Suppose Kicker felt that full online Internet banking was critical. How would that affect your analysis from Requirement 1? How would you incorporate the subjective factors (e.g., experience, access to expertise)?arrow_forward
- Friendly Bank is attempting to determine the cost behavior of its small business lending operations. One of the major activities is the application activity. Two possible activity drivers have been mentioned: application hours (number of hours to complete the application) and number of applications. The bank controller has accumulated the following data for the setup activity: Required: 1. Estimate a regression equation with application hours as the activity driver and the only independent variable. If the bank forecasts 2,600 application hours for the next month, what will be the budgeted application cost? 2. Estimate a regression equation with number of applications as the activity driver and the only independent variable. If the bank forecasts 80 applications for the next month, what will be the budgeted application cost? 3. Which of the two regression equations do you think does a better job of predicting application costs? Explain. 4. Run a multiple regression to determine the cost equation using both activity drivers. What are the budgeted application costs for 2,600 application hours and 80 applications?arrow_forwardTwo departments within Cougar Gear Inc. are Production and Sales. Each department has a unique scorecard, as follows: The Production Department scorecard focuses on the learning and growth and internal processes perspectives. The Sales Department scorecard focuses on the learning and growth and customer perspectives. Both scorecards have the learning and growth performance metrics of median training hours per employee and average employee tenure. The Production scorecard has the unique metrics of production time per unit and number of production shutdowns. The Sales scorecard has the unique metrics of percentage of customers who shop again and online customer satisfaction rating. The performance targets for each metric are shown in the tan boxes just under the performance metrics. The actual achieved metrics are shown in the red boxes just below the tan boxes. When evaluating both departments, Cougar Gears management looks at the median training hours per employee and average employee tenure metrics and subsequently decides to give the Sales Department a large bonus while giving the Production Department a minimal bonus. a. Determine and define the type of cognitive bias Cougar Gears management has exhibited in this instance. b. Determine which department would have received the larger bonus had the companys management not been biased in the evaluation. c. Discuss one advantage and one disadvantage of using unique balanced scorecards for different departments or divisions of a company.arrow_forwardIdentifying Fixed, Variable, Mixed, and Step Costs Consider each of the following independent situations: a. A computer service agreement in which a company pays 150 per month and 15 per hour of technical time b. Fuel cost of the companys fleet of motor vehicles c. The cost of beer for a bar d. The cost of computer printers and copiers at your college e. Rent for a dental office f. The salary of a receptionist in a law firm g. The wages of counter help in a fast-food restaurant h. The salaries of dental hygienists in a three-dentist office. One hygienist can take care of 120 cleanings per month. i. Electricity cost which includes a 15 per month billing charge and an additional amount depending on the number of kilowatt-hours used Required: 1. For each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost. (Hint: First, consider what the driver or output measure is. If additional assumptions are necessary to support your cost type decision, be sure to write them down.) Example: Raw materials used in productionVariable cost 2. CONCEPTUAL CONNECTION Change your assumption(s) for each situation so that the cost type changes to a different cost type. List the new cost type and the changed assumption(s) that gave rise to it. Example: Raw materials used in production. Changed assumptionthe materials are difficult to obtain, and a years worth must be contracted for in advance. Now, this is a fixed cost. (This is the case with diamond sales by DeBeers Inc. to its sightholders. See the following website for information: www.keyguide.net/sightholders/.)arrow_forward
- Dantrell Palmer has just been appointed manager of Kirchner Glass Products Division. He has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Dantrell will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is as follows: Upon arriving at the division, Dantrell requested the following data on the divisions three products: He also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products; the quantity that could be produced and sold would equal the quantity sold of the product it displaces, although demand limits the maximum quantity that could be sold to 20,000 units. Because of specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows: Required: 1. Prepare segmented income statements for Products A, B, and C. 2. Determine the products that Dantrell should produce for the coming year. Prepare segmented income statements that prove your combination is the best for the division. By how much will profits improve given the combination that you selected? (Hint: Your combination may include one, two, or three products.)arrow_forwardKagle design engineers are in the process of developing a new green product, one that will significantly reduce impact on the environment and yet still provide the desired customer functionality. Currently, two designs are being considered. The manager of Kagle has told the engineers that the cost for the new product cannot exceed 550 per unit (target cost). In the past, the Cost Accounting Department has given estimated costs using a unit-based system. At the request of the Engineering Department, Cost Accounting is providing both unit-and activity-based accounting information (made possible by a recent pilot study producing the activity-based data). Unit-based system: Variable conversion activity rate: 100 per direct labor hour Material usage rate: 20 per part ABC system: Labor usage: 15 per direct labor hour Material usage (direct materials): 20 per part Machining: 75 per machine hour Purchasing activity: 150 per purchase order Setup activity: 3,000 per setup hour Warranty activity: 500 per returned unit (usually requires extensive rework) Customer repair cost: 25 per repair hour (average) Required: 1. Select the lower-cost design using unit-based costing. Are logistical and post-purchase activities considered in this analysis? 2. Select the lower-cost design using ABC analysis. Explain why the analysis differs from the unit-based analysis. 3. What if the post-purchase cost was an environmental contaminant and amounted to 10 per unit for Design A and 40 per unit for Design B? Assume that the environmental cost is borne by society. Now which is the better design?arrow_forwardA local picnic table manufacturer has budgeted these overhead costs: They are considering adapting ABC costing and have estimated the cost drivers for each pool as shown: Recent success has yielded an order for 1,000 tables. Assume direct labor costs per hour of $20. Determine how much the job would cost given the following activities:arrow_forward
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