Question

3.

Lagle Corporation has provided the following information:

	Cost per Unit			Cost per Period
Direct materials	$	5.20
Direct labor	$	3.80
Variable manufacturing overhead	$	1.35
Fixed manufacturing overhead				$	7,600
Sales commissions	$	1.70
Variable administrative expense	$	0.30
Fixed selling and administrative expense				$	5,000

For financial reporting purposes, the total amount of period costs incurred to sell 4,000 units is closest to:

Multiple Choice

• $13,000

• $8,000

• $5,000

• $7,600

4.

Lagle Corporation has provided the following information:

	Cost per Unit			Cost per Period
Direct materials	$	5.40
Direct labor	$	4.20
Variable manufacturing overhead	$	1.55
Fixed manufacturing overhead				$	11,400
Sales commissions	$	2.10
Variable administrative expense	$	0.45
Fixed selling and administrative expense				$	4,900

If 6,000 units are sold, the total variable cost is closest to:

Multiple Choice

• $66,900

• $98,500

• $82,200

• $82,500

5. Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $498,000 or a new model 220 machine costing $469,000 to replace a machine that was purchased 6 years ago for $453,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired.

Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L.

Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $469,000 in the new machine, the money could be invested in a project that would return a total of $478,000.

In making the decision to buy the model 220 machine rather than the model 370 machine, the sunk cost was:

Multiple Choice

• $453,000

• $469,000

• $498,000

• $478,000

Answer 1

3. Period costs are those costs which are not relevant to the production. Hence, all the selling and Administraticve expenses are period costs.

Period costs = Fixed Selling ($ 5000) + Variable Selling and Admin ($2 * 4000)

= 5000 + 8000 = $ 13,000 (Option A)

4. Variable cost = (5.40 + 4.20 + 1.55 + 2.10 + 0.45) * 6000 = $ 82,200 (Option C)

5. Sunk cost means the cost incurred in the past and is not relevant for the decision making. hence the sunck cost is the cost of the Machine 220 purchased 6 years ago = $ 453,000 (Option A)