1.  Question : (TCO 7) Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the snail extraction line of products takes up approximately 50 percent of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering snail extraction tools or focus only on serving pieces. If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided and serving piece sales would increase by 13 percent. Allocated fixed costs are assigned based on relative sales.

Snail Extraction         Serving

Tools                  Pieces                 Total

Sales                                                                 1,200,000               $800,000           $2,000,000

Less cost of goods sold                                          700,000                500,000             1,200,000

Contribution margin 500,000                                     300,000                800,000

Less direct fixed costs:

Salaries                                     175,000                175,000                350,000

Other                                          60,000                 60,000                120,000

Less allocated fixed costs:

Rent                                            14,118                   9,882                 24,000

Insurance                                      3,529                   2,471                   6,000

Cleaning                                       4,117                   2,883                   7,000

Executive salary                          76,470                 53,530                130,000

Other                                            7,058                   4,942                 12,000

Total costs                 340,292                                  308,708                649,000

Net income              $159,708                                  ($ 8,708)

$151,000

Prepare an incremental analysis in good form to determine the incremental effect on profit of discontinuing the snail extraction tool line.

2.   Question :           (TCO 4) Paschal’s Parasailing Enterprises has estimated that fixed costs per month are $115,600 and variable cost per dollar of sales is $0.38.

(a) What is the break-even point per month in sales?

(b) What level of sales is needed for a monthly profit of $67,000?

(c) For the month of August, Paschal’s anticipates sales of $585,000. What is the expected level of profit?

3.     Question :         (TCO 6) Princess Cruise Lines has the following service departments; concierge, valet, and maintenance.  Expense for these departments are allocated to Mediterranean and Trans-Atlantic cruises.  Expenses for the departments are totaled (both variable and fixed components are combined) and as follows:

Concierge         $2,500,000

Valet                 $1,750,000

Maintenance      $4,250,000

The sea miles logged are 6,000,000 for the Mediterranean and 18,000,000 for the Trans-

Atlantic voyages.

Based upon the sea miles logged, allocate the service department costs.

4.  Question :  (TCO 9) Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center his lot.  The building and equipment are estimated to cost $1,100,000 and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munster’s required rate of return for this project is 12 percent. Net income related to each year of the investment is as follows:

Revenue                                              $450,000

Net income                                        $102,000

(a) Determine the net present value of the investment in the service center. Should Munster invest in the service center?

(b) Calculate the internal rate of return of the investment to the nearest ½ percent.

(c) Calculate the payback period of the investment.

(d) Calculate the accounting rate of return.

5.           Question :           (TCO 5) The following information relates to Vice Versa Ventures for calendar year 20XX, the company’s first year of operations:

Units produced                                                                        20,000

Units sold                                                                               17,000

Selling price per unit                                                                    $35

Annual fixed selling and administrative expense                      $80,000

(a) Prepare an income statement using full costing.

(b) Prepare an income statement using variable costing.

6.           Question :           (TCO 8)  Leekee Shipyards has a new barnacle removing product for ocean going vessels. The company invests $1,200,000 in operating assets and plans to produce and sell 400,000 units per year.  Leekee wants to make a return on investment of 20% each year.  Leekee needs to  know what price to charge for this product.

Use the absorption costing approach to determine the markup necessary to make the desired return on investment based on the following information:

Per Unit               Total

Direct Materials                               $                 2.00

Direct Labor                                                     $                 1.50

Variable Manufacturing Overhead                            $                 1.00

Fixed Manufacturing Overhead                                  $          100,000

Variable Selling and Administrative Expense           $                 0.10

Fixed Selling and Administrative Expense                 $           100,000