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1. The company sells a large variety of tee shirts and sweatshirts. The owner, is thinking of expanding his sales by hiring local high school students, on a commission basis, to sell sweatshirts bearing the name and mascot of the local high school.
These sweatshirts would have to be ordered from the manufacturer six weeks in advance, and they could not be returned because of the unique printing required. The sweatshirts would cost He owner $10 each with a minimum order of 80 sweatshirts. Any additional sweatshirts would have to be ordered in increments of 80.
Since the owner’s plan would not require any additional facilities, the only costs associated with the project would be the costs of the sweatshirts and the costs of the sales commissions. The selling price of the sweatshirts would be $15.00 each. The owner would pay the students a commission of $2.00 for each shirt sold.
Assume left over shirts have no value.
A. Assume that the venture is undertaken and an order is placed for 80 sweat shirts (at a cost of $10 per shirt). What would be he owner’s break-even point in units and in sales dollars? Show computations and explain the reasoning behind your answer.
B. What level of sales in units and in dollars would be required to reach the target net income of $1,200? Show all computations.
C. Assume that the purchase cost of each sweatshirt increases to $11.00 while other conditions remain the same. What level of sales in units and in dollars would now be required to reach a target net income of $1,200? Show all computations.
2. A Theater is interested in estimating fixed and variable costs. The following data are available:
Total Cost No. of Tickets Sold
January $172,000 20,000
February $176,000 19,500
March $180,500 25,500
April $170,500 21,500
May $190,000 25,000
June $188,000 26,500
Use regression analysis to estimate fixed cost per month and variable costs per ticket sold, show your output and answer the following questions:
a. How much is the variable cost per ticket?
b. How much is total fixed cost?
c. What percentage of variance in Total Cost is explained by the number of tickets sold ?
d. Write the total cost equation in good form.
e. MovieTown Theater is considering an advertising campaign that is expected to increase annual sales by 7,000 tickets. Assume that the ticket selling price is $9. What is the expected increase in profit associated with the advertising campaign?
3. A firm allocates factory overhead using one cost pool with direct labor hours as the allocation base. The firm has two production departments (A1 and A2). The new accountant at the firm estimates that next year the total factory overhead costs will be $4,000,000 and approximately 500,000 direct labor hours will be worked. The accountant also estimates that A1 will use 150,000 direct labor hours and there will be about $2,000,000 in overhead costs in A1. A2 will use 350,000 direct labor hours and there will be $2,000,000 in overhead costs in A2. The firm has two products: R4 and R5. It takes two direct labor hours in A1 and three direct labor hours in A2 to complete one unit of R4. It takes one direct labor hour in A1 and four direct labor hours in A2 to complete one unit of R5.
What overhead cost per unit will you get using (a) plant-wide and (b) departmental pools? Which method is better and why? Support your answer with appropriate calculations.