Q.11). C6-69 Analyze cost behavior using a variety of methods (Learning Objectives 1, 2, 3, 4, & 5).

Braunhaus Microbrewery is in the process of analyzing its manufacturing overhead costs.

Braunhaus Microbrewery is not sure if the number of cases or the number of processing hours is the
best cost driver of manufacturing overhead (MOH) costs. The following information is available :

MOH Cost
Manufacturing
Processing per MOH Cost
Month Overhead cases
Hours Processing per Case
Costs
Hour
January $29,500 680 8,000 $43.38 $3.69
February 27,800 575 6,750 48.35 4.12
March 24,500 500 5,500 49.00 4.45
April 29,000 600 7,250 48.33 4.00
May 28,000 650 7,800 43.08 3.59
June 29,570 710 5,600 41.90 5.31

Requirements

1) Are manufacturing overhead costs fixed, variable, or mixed? Explain.

2) Graph Braunhaus Microbrewery’s manufacturing overhead costs against processing hours. Use
Excel or graph by hand.

3) Graph Braunhaus Microbrewery’s manufacturing overhead costs against cases produced. Use
Excel or graph by hand.

4) Does the data appear to be sound, or do you see any potential data problems? Explain.

5) Use the high-low method to determine Braunhaus Microbrewery’s manufacturing overhead cost
equation using processing hours as the cost driver. Assume that management believes all of the
data to be accurate and wants to include all of it in the analysis.

6) Estimate manufacturing overhead costs if Braunhaus Microbrewery incurs 550 processing hours
in July, using the results of the high-low analysis in Requirement 5.

7) Use Excel regression analysis to determine Braunhaus Microbrewery’s manufacturing over-head

cost equation using processing hours as the cost driver. Comment on the R-square. Estimate
manufacturing overhead costs if Braunhaus Microbrewery incurs 550 processing hours in July.

8) Use Excel regression analysis to determine Braunhaus Microbrewery’s manufacturing over head
cost equation using number of cases produced as the cost driver. Use all of the data provide.
Project total manufacturing overhead costs if Braunhaus Microbrewery produces 6,000 cases.
Which cost equation is better – this one or the one form Requirement 7? Why?
 9) Use Excel regression analysis to determine Braunhaus Microbrewery’s manufacturing overhead
cost equation using number of cases produced as the cost driver. This time, remove any
potential outliers before performing the regression. How does this affect the R-square? Project
total manufacturing overhead costs if Braunhaus Microbrewery produces 6,000 cases.

10) In which cost equation do you have the most confidence? Why?

Q-12). P6-65B Prepare traditional and contribution margin income statements (Learning Objective 6).

Mary’s Ice Cream Shoppe sold 9,100 servings of ice cream during June for $ per serving. Mary
purchases the ice cream in large tubs form the Organic Ice Cream Company. Each tub costs Mary $14
and has enough ice cream to fill 28 ice cream cones, Many purchase the ice cream cones for $0.20 each
from a local warehouse club. Mary’s Shoppe is located in a local strip mall, and she pays $2,050 a month
to lease the space. Mary’s Shoppe is located in a local strip mall, and she pays $2,050 a month to lease
the space. Mary expenses $210 a month for the depreciation of the Shoppe’s furniture and equipment.
During June, Mary incurred an additional $2,000 of ther operating expenses (75% of these were fixed
costs).

Requirements

1. Prepare Mary’s June income statement using a traditional format.

2. Prepare Mary’s June income statement using a contribution margin format.

Q-13). 17-72 Ethical dilemma with CVP analysis error (Learning Objective 2)

You have just begun your summer internship at Tmedic. The company supplies sterilized surgical
instruments for physicians. To expand sales, Tmedic is considering paying a commission to its sales
force. The controller, Jane Hewitt, asks you to compute (1) the new breakeven sales figure and (2) the
operating profit if sales increase 15% under the new sales commission plan. She thinks you can handle
this task because you learned CVP analysis in your accounting class.

You spend the next day collecting information from the accounting records, performing the
analysis, and writing a memo to explain the results. The company president is pleased with your memo.
You report that the new sales commission plan will lead to a significant increase in operating income
and only a small increase in breakeven sales.

The following week, you realize that you made an error in the CVP analysis. Your overlooked the
sales personnel’s $2,500 monthly salaries, and you did not include this fixed marketing expense in your
computations. You are not sure what to do. If you tell Hewitt of your mistake, she will have to tell the
president. In this case, you are afraid Tmedic might not offer you permanent employment after your
internship.
Requirements

1. How would your error affect breakeven sales and operating income under the proposed sales
commission plan? Could this cause the president to reject the sales commission proposal?

2. Consider your ethical responsibilities. Is there a difference between (a) initially making an error
and (b) subsequently failing to inform the controller?

3. Suppose you tell Hewitt of the error in your analysis. Why might the consequences not be as bad
as you fear? Should Hewitt take any responsibility for your error? What could Hewitt have done
differently?

4. After considering all of the factors, should you inform Hewitt or simply keep quiet?

Q.14). Ethical Issue :

18-54 Outsourcing and ethics (Learning Objective 6)

Mary Tan is controller for Duck Associates, a property management company in Portland, Oregon. Each
year, Tan and payroll clerk Toby Stock meet with the external auditor’s about payroll accounting. This
year, the auditors suggest that Tan consider outsourcing Duck Associates’ payroll accounting to a
company specializing in payroll processing services. This would allow Tan and her staff to focus on their
primary responsibility: accounting for the properties under management. At present, payroll requires
1.5 employee positions - payroll clerk Toby Stock and a bookkeeper who spend half her time entering
payroll data in the system.

Tan considers this suggestion, and she lists the following items relating to outsourcing pay-roll
accounting :

a. The current payroll software that was purchased for $4,000 three years ago would not be
needed if payroll processing were outsourced.

b. Duck Associates’ bookkeeper would spend half her time preparing the weekly payroll input form
that is given to the payroll processing service. She is paid $450 a week.

c. Duck Associates would no longer need payroll clerk Toby Stock, whose annual salary is $42,000.

d. The payroll processing service would charge $2,000 a month.

Requirements

1. Would outsourcing the payroll function increase or decrease Duck Associates’ operating
income?
 2. Tan believes that outsourcing payroll would simplify her job, but she does not like the prospect
of having to lay off Stock, who has become a close personal friend. She does not believe there is
another position available for stock at his current salary. Can you think of other factors that
might support keeping Stock rather than outsourcing payroll processing? How should each of
the factors affect Tan’s decision if she wants to do what is best for Duck Associates and act
ethically?

Essay Questions :

Q.16). 1. “Breakeven analysis isn’t very useful to a company because companies need to do more than
break even to survive in the long run” Explain why you agree or disagree with this statement (p.413)

Q. 17). 2. Rondell Pharmacy is considering switching to the use of robots to fill prescriptions that consist
of oral solids or medications in pill form. The robots will workers needed. This change is expected to
reduce the number of prescription filling errors, reduce the customer’s wait time, and reduce the total
overall costs. How does the use of the robots affect Rondell Pharmacy’s cost structure? Explain the
impact of this switch to robotics on Rondell Pharmacy’s operating risk (p.414).

Decision Case

Q.19) C8-53 Outsourcing e-mail (Learning Objective 6)

BKFin.com provides banks access to sophisticated financial information and analysis systems via the
Web. The company combines these tools with benchmarking data access, including e-mail and wireless
communications, so that banks can instantly evaluate individual loan application and entire loan port
folios.

BKFIN.com’s CEO, Jon Wise, is happy with the company’s growth. To better focus on client
service, Wise is considering outsourcing some functions. CFO Jenny Lee suggests that the company’s e-
mail may be the place to start. She recently attended a conference and learned that companies such as
Continental Airlines, Dell Net, GTE, and NBC were outsourcing their e-mail function. Wise asks Lee to
identify cost related to BKFin.com’s in-house Microsoft exchange e-mail application, which has 2,300
mailboxes. This information follows:

Variable costs :
E-mail license $ 7 per mailbox per month
Virus protection license $ 1 per mailbox per month
Other variable costs $8 per mailbox per month
Fixed costs :
Computer hardware costs $94,300 per month
$8,050 monthly salary for two information
$16,100 per month
technology staff members who work only on e-mail
Requirements

1. Compute the total cost per mailbox per month of BKFin.com’s current e-mail function.

2. Suppose Mail.com, a leading provider of internet messaging outsourcing services, offers to host
BKFin.com’s e-mail function $9 per mail box per month. If BKFin.com outsources its e-mail to
Mail.com, BKFin.com will still need the virus protection software : its computer hardware ; and
one information technology staff member who would be responsible for maintaining virus
protect, quarantining suspicious e-mail, and managing content (e.g., screening e-mail for
objectionable content). Should CEO Wise accept Mail.com’s offer? Why or why not?

3. Suppose for an additional $5 per mailbox per month, Mail.com will also provide virus protection,
quarantine, and content-management services. Outsourcing these additional functions would
mean that BKFin.com would not need an e-mail information technology staff member or the
separate virus protection license. Should CEO Wise outsource these extra services to Mail.com?
Why or why not?

Q.20). S8-7 Replace a department (Learning Objective 4)

Consider Knight Fashion from S8-5. Assume once again that all fixed costs are unavoidable. If Knight
Fashion drops one of the current departments, it plans to replace the dropped department with a Shoe
Department. The company expects the Shoe Department to produce $80,000 in sales and have $50,000
of variable costs. Because the shoe business would be new to Knight Fashion, the company would have
to incur an additional $7,000 of fixed costs (advertising new show display racks, and so forth) per
quarter related to the department. What should Knight Fashion do now?