Problem solvingAssign Problem 19, 22, & appendix
Kallapur Company manufactures two products: KAP1, which
sells for $120; and QUIN, which sells for $220. Estimated cost
and production data for the current year are as follows:
Managemen In addition, fixed manufacturing overhead is estimated to be
t and Target $2,000,000 and variable overhead is estimated to equal $3 per
direct labor hour. Kallapur desires a 15 percent return on sales
for all of its products.
1. Calculate the target cost for both KAP1 and QUIN.
2. Estimate the total manufacturing cost per unit of each
product if fixed overhead costs are assigned to products
on the basis of estimated production in units. Which of
the products is earning the desired return?
3. Recalculate the total manufacturing cost per unit if fixed
overhead costs are assigned to products on the basis of
direct labor hours. Which of the products is earning the
desired return?
4. On the basis of the confusing results of parts b and c,
Kallapur’s manager decides to perform an activity
analysis of fixed overhead. The results of the analysis are
as follows:
Estimate the total manufacturing cost per unit of each
product if activity-based costing is used for assigning
fixed overhead costs. Under this method, which product
is earning the desired return?
5. What proportion of fixed overhead is value-added? In
attempting to reach the target cost for QUIN, which
activity would you look to improving first and why?
6. Kallapur’s production manager believes that design
changes would reduce the number of setups required for
QUIN to 25. Fixed overhead costs for set-ups would
remain unchanged. What will be the impact of the design
changes on the manufacturing costs of both products?
Which of the products will earn the desired return?
7. An alternative to the design change is to purchase a new
machine that will reduce the number of set-ups for KAP1
to 20 and the number of set-ups for QUIN to 80. The
machine will also reduce fixed set-up costs to $200,000.
Calculate the manufacturing costs for each product if the
machine is purchased. Should QUIN be redesigned or
should the machine be purchased? Why?
LO19-7, LO19- Arusetta Inc. produces a popular brand of air conditioner
that is backed by a five-year warranty. In Year 1, Arusetta
began implementing a total quality management program
that has resulted in significant changes in its cost of quality.
Listed below is Arusetta’s financial information relating to
sales and quality for Years 1 and 2.
Cost of Quality
1. Prepare a cost of quality report for Arusetta covering
Year 1 and Year 2. Your report should divide the
above costs into the four categories of quality costs
and include total dollar amounts for each category.
2. How have the total amounts of prevention and
external failure costs changed over the two years?
What are some possible explanations for these
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3. At Arusetta, preventive maintenance has a direct
effect on the repair costs associated with equipment
breakdowns. Did the decrease in repair costs justify
the increase in maintenance costs?
4. Why might Arusetta’s estimate of lost sales remain
the same despite the adoption of the total quality
management program?
through LO225
Preparing and
Giant Chef Equipment Company is organized into two
divisions: Commercial Sales and Home Products. During
June, sales for the Commercial Sales Division totaled
$1,500,000, and its contribution margin ratio averaged 34
percent. Sales generated by the Home Products Division
totaled $900,000, and its contribution margin ratio
averaged 50 percent. Monthly fixed costs traceable to each
Using a
Responsibility division are $180,000. Common fixed costs for the month
amount to $120,000.
1. Prepare Giant Chef Equipment’s responsibility
income statement for the current month. Be certain to
report responsibility margin for each division and
income from operations for the company as a whole.
Also include columns showing all dollar amounts as
percentages of sales.
2. Compute the dollar sales volume required for the
Home Products Division to earn a monthly
responsibility margin of $500,000.
3. A marketing study indicates that sales in the Home
Products Division would increase by 5 percent if
advertising expenditures for the division were
increased by $15,000 per month. Would you
recommend this increase in advertising? Show
computations to support your decision.
Tots-To–Go, Inc., has two divisions: the
Seat Division and the Stroller Division. The
Seat Division supplies the seat frames used
PROBLEM by the Stroller Division to make its strollers.
The Stroller Division produces
approximately 10,000 strollers for young
children annually. Thus, the Stroller
Division receives 10,000 seat frames
annually from the Seat Division. The market
price of these seats frames is $120. The total
variable cost of the seat frames is $95 per
unit. The market price of the strollers is
$300. The unit variable cost of each stroller
excluding the cost of the seat frame is $75.
The Seat Division is currently operating at
full capacity, producing 20,000 seat frames
per year (10,000 of which are transferred to
the Stroller Division). The demand for seat
frames is so great that all 20,000 units could
be sold to outside customers if the Stroller
Division acquired seat frames from
elsewhere. The Seat Division uses the full
market price of $120 as the transfer price
charged to the Stroller Division.
The manager of the Stroller Division asserts
that the Seat Division benefits from the
intercompany transfer because of reduced
shipping costs. As a result, he wants to
negotiate a lower transfer price of $110 per
1. Compute the contribution margin
earned annually by each division and
by the company as a whole using the
current transfer price.
2. Compute the contribution margin that
would be earned annually by each
division and by the company as a
whole if the discounted transfer price
were used.
3. What issues and concerns should be
considered in setting a transfer price
for intercompany transfers of seats?
LOB-3, LOB-5, On December 1, Showcase Interiors purchased a shipment
of furniture from Colonial House by paying $10,500 cash
and issuing an installment note payable in the face amount
of $28,800. The note is to be paid in 24 monthly
Valuation of a installments of $1,200 each. Although the note makes no
Note Payable mention of an interest charge, the rate of interest usually
charged to Showcase Interiors in such transactions is 1½
percent per month.
1. Compute the present value of the note payable, using
a discount rate of 1½ percent per month.
2. Prepare the journal entries in the accounts of
Showcase Interiors on:
1. December 1, to record the purchase of the
furniture (debit Inventory).
2. December 31, to record the first $1,200
monthly payment on the note and to recognize
interest expense for one month by the effective
interest method. (Round interest expense to
the nearest dollar.)
3. Show how the liability for this note would appear in
the balance sheet at December 31. (Assume that the
note is classified as a current liability.)
LOB-3, LOB-5, Custom Truck Builders frequently uses long-term lease
contracts to finance the sale of its trucks. On November 1,
2015, Custom Truck Builders leased to Interstate Van
Lines a truck carried in the perpetual inventory records at
Capital Leases: $33,520. The terms of the lease call for Interstate Van
Lines to make 36 monthly payments of $1,400 each,
Comprehensiv beginning on November 30, 2015. The present value of
these payments, after considering a built-in interest charge
e Problem
of 1 percent per month, is equal to the regular $42,150 sales
price of the truck. At the end of the 36-month lease, title to
the truck will transfer to Interstate Van Lines.
1. Prepare journal entries for 2015 in the accounts of
Custom Truck Builders on:
1. November 1, to record the sale financed by the
lease and the related cost of goods sold. (Debit
Lease Payments Receivable for the $42,150
present value of the future lease payments.)
2. November 30, to record receipt of the first
$1,400 monthly payment. (Prepare a
compound journal entry that allocates the cash
receipt between interest revenue and reduction
of Lease Payments Receivable. The portion of
each monthly payment recognized as interest
revenue is equal to 1 percent of the balance of
the account Lease Payments Receivable, at the
beginning of that month. Round all interest
computations to the nearest dollar.)
3. December 31, to record receipt of the second
monthly payment.
2. Prepare journal entries for 2015 in the accounts of
Interstate Van Lines on:
1. November 1, to record acquisition of the
leased truck.
2. November 30, to record the first monthly lease
payment. (Determine the portion of the
payment representing interest expense in a
manner parallel to that described in part a.)
3. December 31, to record the second monthly
lease payment.
4. December 31, to recognize depreciation on the
leased truck through year-end. Compute
depreciation expense by the straight-line
method, using a 10-year service life and an
estimated salvage value of $6,150.
3. Compute the net carrying value of the leased truck in
the balance sheet of Interstate Van Lines at
December 31, 2015.
4. Compute the amount of Interstate Van Lines’s lease
payment obligation at December 31, 2015.

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