Question 1. The law firm of Duwe, Cheatem& Howe provides legal services for clients. During the year, corporate clients required 5,000 hours of legal services, while individuals required 3,000 hours. The firm has traditionally used direct labor hours to assign overhead.
However, Ms. Duwe believes services to businesses cost more than services to individuals and wishes to adopt activity-based costing. The firm's revenues and costs for the year are shown below:
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Corporate
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Individual
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Total
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Revenue
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$150,000
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$150,000
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$300,000
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Expenses:
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Lawyers' salaries
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$100,000
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50,000
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$150,000
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Overhead:
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Filing
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10,000
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Quality control
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5,000
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Data entry
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25,000
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Total overhead
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$40,000
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Mr. Cheatem has kept records of the following data for use in the new activity-based costing system:
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Activity Level
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Overhead Cost
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Cost Driver
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Corporate
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Individual
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Filing
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Number of Clients
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5
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5
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Quality control
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Number of hours spent
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75
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25
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Data entry
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Number of pages entered
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1,000
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1,500
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REQUIRED:
a. Prepare an income statement showing profits by segments using the traditional direct-hour allocation base.
b. Prepare an income statement showing profits by segments using the three cost drivers in the ABC model.
Question 2. CVP-sensitivity analysis. Joan's Beauty College is considering introducing a new nail design seminar to run on an annual basis with the following price and cost characteristics:
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Tuition
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$320 per Student
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Variable Costs (polish, supplies, etc.)
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$20 per Student
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Fixed Costs (advertising, instructor's salary, insurance, etc.)
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$60,000 per Year
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Required:
a. What enrollment enables Joan's Beauty College to break even?
b. How many students will enable Joan's Beauty College to make an operating profit of $30,000 for the year?
c. Assume that the projected enrollment for the year is 600 students for each of the following situations:
(1) What will be the operating profit for 600 students?
(2) What would be the operating profit if the tuition per student (that is, sales price) decreased by 10 percent? Increased by 20 percent?
(3) What would be the operating profit if variable costs per student increased by 10 percent? Decreased by 20 percent?
(4) Suppose that fixed costs for the year are 10 percent lower than projected, whereas variable costs per student are 20 percent higher than projected. What would be the operating profit for the year?
Question 3. Please answer the following questions. (Provide one to two paragraphs of information for each question.)
a. What is meant by cost behavior? Explain how it relates to the following terms: fixed, variable, and mixed cost.
b. Describe how analysts estimate cost behavior using regression, account analysis, and engineering methods.
Question 4. Genia Enterprises, Inc. has the capacity to produce 12,000 units per year. Expected operations for the year are
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Sales (10,000 units @ $20)
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$200,000
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Manufacturing expenses:
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Variable
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$8 per unit
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Fixed
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$40,000
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Marketing expenses:
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Variable
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$3 per unit
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Fixed
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$20,000
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REQUIRED:
a. What is the expected level of operating profits?
b. Should the company accept a special order for 1,000 units at a selling price of $15 if variable marketing expenses associated with this special order would be $2 per unit? Calculate the incremental profits if the order is accepted.
c. Suppose the company received a special order for 3,000 units at a selling price of $15 with no variable marketing expenses. Calculate the impact on operating profits.Note that the expected level of operations for the company is 10,000 units, maximum capacity of production for the company is 12,000 units.