ACCT202 – Principles of Accounting II Problem #1 Hear Right Company has identifi

Question

ACCT202 – Principles of Accounting II

Problem #1
Hear Right Company has identified certain variable and fixed costs in the production of its hearing aid components. Management wants you to divide its mixed costs into its fixed and variable portions. Here are the high and low cost data for the firm:
Total
Month Units Costs ($’s)
February 20,000 54,000
October 40,000 77,400
Using the high-low method, determine the total amount of fixed costs and the amount of variable cost per unit. Show your work.

Assume the firm sells their hearing aid components at a sales price of $3.17 per unit. How many units must be sold for Hear Right to break even on its hearing components? Show your work.

Problem #2
You examine the financial statements of a firm and find that for every unit of Product Y sold, the firm sells 1.5 units of product X. The sales price and variable cost per unit for Product X are $100 and $70, respectively; the sales price and variable cost per unit for Product Y are $80 and $60, respectively. Assuming a constant product mix and fixed costs of $260,000, how many of each product line must be sold to break even? What is total sales revenue(in dollars) at the break-even point? Show your work.

Problem #3
West Star Company manufactures and sells computer monitors at $200 each. The following is the cost information for the manufacture and sale of one monitor, given the normal manufacture and sales level of 5000 is:

Direct materials $48 per unit
Direct labor 64 per unit
Variable overhead 36 per unit
Variable selling and admin. expenses 12 per unit
Fixed manufacturing overhead $125,000, in total

West Star actually has the capacity to produce 7000 monitors, but demand has not been high enough to do so. West Star received a special order for 1500 monitors at a sales price of $175 per unit. West Star will pay a reduced sales commission on the special order, reducing variable selling and administrative expenses from $12 per unit to $8 per unit. What is the net effect of the special order on the company’s profit? Show your work.


Problem #4
Swanton Company currently sells 3 products and details of revenues and costs are given below. The company is thinking of discontinuing the production of paper clip holders. However, because many customers buy the products as a set, Swanton estimates that the sales of the other two products will decrease by 20%.#
Desk
Calendars Pen sets Paper-clip
Holders
Sales $280,000 $240,000 $24,000
Variable costs 160,000 160,000 26,000
Direct fixed costs 40,000 20,000 5,000
Indirect fixed costs 30,000 40,000 6,000

What is the net benefit or net loss of dropping the production and sale of paper clip holders? Show your work.

Problem #5
Nowadays Manufacturing is considering an investment proposal with the following information:
Cost $900,000
Useful life 8 years (straight-line depreciation)
Annual Cash inflows $200,000 (estimated per year for 8 years)
Residual value $ 60,000
Required rate of return 12%
Answer the following questions concerning this proposal. Show your work.
a. What is the payback period of this project?
b. What is the NPV of this project?
c. Is the IRR greater or less than 12%?
d. Should the project be accepted based on NPV?

Explanation / Answer

                              High       Low        Difference
Total cost            $77,400    $54,000     $23,400
Units                    40,000      20,000       20,000
Variable unit cost    $23,400 / 20,000      $1.17

Fixed cost = $77,400 - (40,000 x $1.17) = $30,600

OR
Fixed cost = $54,000 - (20,000 x $1.17) = $30,600

Assume the firm sells their hearing aid components at a sales price of $3.17 per unit. How many units must be sold for Hear Right to break even on its hearing components? Show your work.

Unit contribution = $3.17 - $1.17 = $2.00
Break even (no. of Hearing components) = $30,600 / $2.00 = 15,300 units must be sold

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