2. (TCO 6) Pacific Airlines has three service departments; ticketing, baggage handling, and aircraft maintenance. Costs of these departments are allocated to two revenue producing departments, domestic and international flights. Costs for the service departments are not separated into fixed and variable and the totals are as follows:
Ticketing
$4,000,000
Baggage handling
$2,000,000

Aircraft maintenance
$6,000,000
Air miles are as follows:
Domestic
5,000,000
International
20,000,000
(a) Allocate the service department costs based on air miles.
(b) Evaluate World Airlines use of air miles as a basis for allocation. Do you think the cause-and-effect relationship is strong?
(c) Suggest alternative methods to allocate the service department costs.

(TCO 10) Gina’s Boutique makes custom jewelry. One item, the guru necklace, is a best seller and sales in units for the first quarter are as follows:
January 100,000 units
February 150,000 units
March 180,000 units
Desired ending inventory is budgeted at 20% of next month sales.

(TCO 2) Singleton Company is trying to determine a predetermined manufacturing overhead. Estimated overhead for the upcoming year is $600,000. Budgeted machine hours are 120,000 hours, and budgeted labor hours are 15,000 hours at a rate of $20.00 per hour. Compute the predetermined overhead rate based on:
(a) Machine hours
(b) Direct labor hours
(c) Direct labor dollars

(TCO 9) A project will require an initial investment of $600,000 and is expected to generate the following cash flows:
Year 1 $100,000
Year 2 $250,000
Year 3 $250,000
Year 4 $200,000
Year 5 $100,000
(a) What is the project’s payback period?
(b) If the required rate of return is 20% and taxes are ignored, what is the project’s net present value?

2. (TCO 4) Legal Docs Inc is a legal services firm that files incorporation papers for small businesses. They charge $1,000 per application. This year’s income statement shows the following:

Sales $1,295,000
Variable Expenses $1,023,000
Contribution margin $272,000
Fixed costs $250,000
Profit $22,000

Required:
(a) Compute the break-even point in units.
(b) Compute the contribution margin ratio.
(c) Compute the current margin of safety.
(d) How many applications must the company sell to make a profit of $350,000?

(TCO 5) The following data has been taken from Air-Tite company in its first year of business.

Units produced 100,000
Units sold 60,000
Units in ending inventory 40,000
Fixed manufacturing overhead $500,000

(a) Compute the amount of fixed manufacturing overhead that would be expensed in the current year if full absorption costing is used.
(b) Compute the amount of fixed manufacturing overhead that would be expensed in the current year if variable costing is used.
(c) Compute the amount of fixed manufacturing overhead that would be included in ending inventory under full absorption costing.