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Solved Managerial Accounting Exam: 1. Based on the above information, what is Hawking’s breakeven point (in terms of customer-visits per month)? (Download Now)

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Solution Pages: 10

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Questions Covered in the Solution

Hawking’s Bagels
Patricia Hawking is considering opening a small bagel shop in University City. Her initial research has discovered the following information. Fixed costs (mostly the costs of the facility and salaries), excluding advertising will cost \$50,000 per month, and provide her with a capacity to serve 60,000 customer-visits per month. Due to the size of the facility, increasing capacity beyond that will be extremely difficult. Each customer-visit will generate average revenues of \$4.50, and incur average direct material costs of \$2.50.

1. Based on the above information, what is Hawking’s breakeven point (in terms of customer-visits per month)?Is this feasible?
2. Based on the above information, what is the monthly profit of Hawking’s Bagels in February assuming it serviced 20,000 customer-visits?
3. Assuming that Hawking’s cannot increase customer-visits in the short-run, what increase in average customer revenue is necessary in order to break-even?
4. How many advertisements per month should Hawkings run in order to break-even?
5. What is the cost of producing the iPod-Nano and the iPod-Standard? What is the profitability of each product?
6. Compute the amount of overhead cost allocated to each product and the profitability of each product using the activity based costing approach.
7. What do you learn from the ABC analysis? How can Apple change in order to improve the profitability of its iPods?
8. Should Apple analyze the Selling and Admin costs using an ABC system? Why or why not?
9. For this question, assume that Apple is considering eliminating either the iPod-Nano or the iPod-Standard. Explain two important factors that Apple should consider in a decision to eliminate either one of these products. Your answer should include at least one quantitative factor but does not need to contain any calculations.
1. How many minutes does the company expect regular jeans to spend in the machines?
2. How many minutes does the company expect distressed jeans to spend in the machines (in total)?
3. How much is allocated per minute in the machine for Standard Machine Variable Cost?
4. How much is allocated per minute in the machine for Ageing Machine Variable Cost?
5. What is the total expected cost allocated to one pair of regular jeans?
6. What is the total expected cost allocated to one pair of distressed jeans?
10. Create a flexible budget for True Religion based on the actual results during 2007 (including the sales number).
11. Analyze the difference between the original budgeted sales number and the actual sales number for regular jeans. Quantitatively disentangle the reasons for the difference (i.e., sales volume variance and sales price variance).What could have caused the sales volume variance (qualitatively)? (Provide at least two possible reasons)
12. Please analyze the variance in the cost of direct material? Disentangle the various reasons for the variance and explain each piece.
13. Prepare a budget for 2008 sales revenue. Suppose that prices of regular jeans will remain the same as the 2007 actual price and the price of the distressed jeans will increase by 10%. The demand for distressed jeans will decrease by 10% while the demand for regular jeans will increase by 5%.
1. Should the 200 remaining units in Machining be transferred to Assembly? At what transfer price? Why?
2. If Assembly wants 300 units. Would the suggested price from #1 be different? If so, how would it change?

Sample of Solution

1. Based on the above information, what is Hawking’s breakeven point (in terms of customer-visits per month)?

For determining the breakeven point in number of Units (customer visits per month), we need total fixed costs which are \$50,000 and contribution margin per Customer visit (Revenue – Variable costs).

Total Fixed Costs = \$50,000

Contribution Margin (Per Unit) = Per Customer Revenue – Per Unit Variable Costs

Contribution Margin (Per Unit) = \$4.5          –           \$2.5

Contribution Margin (Per Unit) = \$2

Breakeven Point (Units) = Total Fixed Costs / Contribution Margin per Unit

Breakeven Point (in Term of Customer Visits per month) = \$50,000/\$2

Breakeven Point (in Term of Customer Visits per month) = 25,000

Is this feasible?

Since the breakeven point of customer-visits per month which is 25,000 is under 60,000 (the maximum capacity). Hence, it is feasible to conduct breakeven number of customer-visits, as for as the capacity is concerned.

…….

1. What do you learn from the ABC analysis? How can Apple change in order to improve the profitability of its iPods?

It can be inferred from the above analysis, that there are certain costs which may not be directly related to the production of the products but are inaccurately allocated and can make the product seem unprofitable. But if the costs are consciously allocated based on the number of resource units (activity) each product consumes in its production, the true profitability of the product can be realized which may be different from the one calculated under traditional costing system.

…….

f. What is the total expected cost allocated to one pair of distressed jeans?

Total Direct Material Costs = \$ 864,000

Total Direct Cost Allocated to Distressed Jeans = 0.1667 * 864,000 = \$144,029

Total Variable Cost for Standard Machine = \$ 518,000

Variable cost for standard machine allocated to Distressed Jeans = 0.1667 * 518,000 = \$ 86,350.6

Total Variable overhead for ageing Machine = \$21,600