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ACC310 WEEK1 1-18 2-19 3-16 3-33 3-36


Fundamentals of cost accounting 3e Lanen

1-18 Cost Data for Managerial Purposes

Beige Computers operates retail stores in both downtown (City) and suburban (Mall) locations.
The company has two responsibility centers: the City Division, which contains stores in downtown
locations, and the Mall Division, which contains stores in suburban locations. Beige’s CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last
several years. The most recent income statement follows. The CEO has asked for your advice on
shutting down the City Division’s operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs
of the Mall Division

Beige Computers, City Division
Divisional Income Statement
For the Year Ending January 31
Sales revenue   12,900,000
   Advertising - city division   525,000
   Cost of goods sold   6,450,000
   Divisional administrative salaries   870,000
   Selling costs (sales commissions)   1,730,000
   Rent   2,215,000
   Share of corporate administration   1,425,000
     Total costs   13,215,000
Net differential gain before income tax   (315,000)
Tax expense at 40% rate 126,200
Net differential gain from store  (189,000)

What revenues and costs are probably differential for the decision to discontinue City Division’s
operations? What will be the effect on Beige’s profits if the division is eliminated?

2-19 Basic Concepts
For each of the following costs incurred in a manufacturing firm, indicate whether the costs are
most likely fixed (F) or variable (V) and whether they are most likely period costs (P) or product
costs (M) under full absorption costing.

a. Energy to run machines producing units of output in the factory.
b. Depreciation on the building for administrative staff offices.
c. Bonuses of top executives in the company.
d. Overtime pay for assembly workers.
e. Transportation-in costs on materials purchased.
f. Assembly line workers’ wages.
g. Sales commissions for sales personnel.
h. Administrative support for sales supervisors.
i. Controller’s office rental.
j. Cafeteria costs for the factory.

Exercise 3-16 “I am going to work for a hospital, which is a not-for-profit organization. Because there are no profits, I will not be able to apply any CVP analysis in my work.” Do you agree with this statement? Why or Why not?

Exercise 3-33 CVP with Income Taxes
Crest Industries sells a single model of satellite radio receivers for use in the home. The radios have
the following price and cost characteristics:

Sales price 80 per radio
Variable costs 32 per radio
Fixed costs 360,000 per month 

Crest is subject to an income tax rate of 40 percent.

a. How many receivers must Crest sell every month to break even?
b. How many receivers must Crest sell to earn a monthly operating profit of $90,000 after taxes?

3-36 CVP Analysis and Price Changes: Argentina Partners.

Argentina Partners is concerned about the possible effects of inflation on its operations. Presently,
the company sells 60,000 units for $30 per unit. The variable production costs are $15, and fixed
costs amount to $700,000. Production engineers have advised management that they expect unit
labor costs to rise by 15 percent and unit materials costs to rise by 10 percent in the coming year.
Of the $15 variable costs, 50 percent are from labor and 25 percent are from materials. Variable
overhead costs are expected to increase by 20 percent. Sales prices cannot increase more than
10 percent. It is also expected that fixed costs will rise by 5 percent as a result of increased taxes
and other miscellaneous fixed charges.
The company wishes to maintain the same level of profit in real dollar terms. It is expected
that to accomplish this objective, profits must increase by 6 percent during the year.

a. Compute the volume in units and the dollar sales level necessary to maintain the present profit
level, assuming that the maximum price increase is implemented.
b. Compute the volume of sales and the dollar sales level necessary to provide the 6 percent
increase in profits, assuming that the maximum price increase is implemented.
c. If the volume of sales were to remain at 60,000 units, what price increase would be required to
attain the 6 percent increase in profits?

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