(TCO 5) Vernon Inc. manufactures and sells one product.

(TCO 5) Vernon Inc. manufactures and sells one product. Sales and production

information is contained below.

·         Selling price per unit $50

·         Variable manufacturing costs per unit produced (DM, DL, and variable MOH) $24

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·         Variable operating expenses per unit sold $5

·         Fixed manufacturing overhead (MOH) in total for the year $135,000

·         Fixed operating expenses in total for the year $55,000

·         Units produced during the year 15,000

·         Units sold during the year 13,000

(a) Prepare the income statement using variable costing. (10 points)

(b) Prepare the income statement using absorption costing. (10 points)

(c) Please explain the difference in operating income between the two methods. (5 points) (Points : 25)

2. (TCO 8) Bestick Company manufactures and sells trophies for winners of athletic events. The company normally charges $65 per trophy. The average costs for a trophy is shown below.

Direct materials:                               $15
Direct labor:                                       10
Variable manufacturing overhead:           5
Variable marketing expenses:                3
Fixed manufacturing overhead:             12 ($1,200,000 fixed manufacturing overhead/100,000 trophies)
Total costs:                                       $45

Bestick Company has enough idle capacity to accept a one-time only special order for 1,000 trophies at $55 per trophy. Bestick Company will not incur any variable marketing expenses for this order and no additional fixed costs.


Should the company accept this special order? Please state your decision and provide numerical support for your decision. (Points : 25)

3. (TCO 7) Lee Company makes 30,000 units per year of Part X for use in one of its products. Lee Company incurred the following manufacturing costs when producing the 30,000 units of Part X.

Direct materials                                      $800,000
Direct labor                                                450,500
Variable manufacturing overhead           95,000
Fixed manufacturing overhead              110,000
Total                                                       $1,455,500

Assume Lee Company has no alternative use for the facilities presently devoted to production of Part X and that none of the fixed costs are avoidable. If the outside supplier offers to sell Part X for $45.00 each, should Lee Company accept the offer? Please clearly state your answer and support your answer with appropriate calculations. (Points : 25)

4. (TCO 9) Melinda Corp buys equipment for $75,000 that will last for 5 years. The equipment will generate cash flows of $24,000 per year and will have no salvage value at the end of its life. Ignore taxes. Use 12% required rate of return.


(a) What is the present value (PV) of this investment at 12%? (5 points)
(b) What is the net present value (NPV) of this investment? Should Melinda Corp buy the equipment based on NPV? Justify your decision. (10 points)
(c) What is the internal rate of return (IRR) of this investment? (5 points)
(d) What is the payback period? (5 points) (Points : 25)

5. (TCO 3) XYZ Company uses process costing to track its costs in two sequential production departments: Forming and Finishing. The following information is provided regarding the Forming department.

Forming Department
Month Ended June 30

Unit information
Beginning work in process, June 1 — 6,000
Started into production during June — 30,000
Completed and transferred to Finishing department during June — 22,000
Ending work in process, June 30 (25% complete as to direct materials and 40% complete as to conversion costs) — 14,000

Cost information
Beginning work in process as of June 1 consists of $10,000 of direct materials costs and $5,500 of conversion costs) — $15,500
Direct materials used in June — $27,000
Conversion costs incurred in June — $14,850

(a) Calculate the equivalent units for conversion costs. (Show your work)
(b) Calculate the cost per equivalent unit for conversion costs. (Show your work)

6.  (TCO 4) Johnson Company produces and sells a single product whose selling price is $80.00 per unit and whose variable expense is $50.00 per unit. The company’s fixed expense is $270,000 per month.
(a) What is the CM ratio (express your answer as a percentage to two decimal places)? (5 points)
(b) How many units must be sold to break-even for the month? (10 points)
(c) How many units do we need to sell to earn a profit of $240,000 for the month? (10 points)

7. (TCO 2) Lisa Inc. estimates that its employees will utilize 200,000 direct labor hours during the coming year. Total overhead costs are estimated to be $6,700,000 and machine hours are estimated to be 100,000. Actual labor hours are 225,000. Actual machine hours are 90,000.

If Lisa Inc. allocates overhead based on direct labor hours, what is the predetermined manufacturng overhead rate? (Points : 25)