Question

1.) Products S5 and CP8 are each assigned $50.00 in indirect costs by a traditional costing system. An activity analysis revealed that although production requirements are identical, S5 requires 45 minutes less setup time than CP8. Based upon this analysis, it appears that CP8 is:

a.) overcosted
b.) undercosted
c.) accurately costed
d.) fairly costed

2.) Gaston Company's accountant has prepared the following budget data for the year: sales equal 150,000 units; selling price is $25 per unit; variable expenses equal $15 per unit; fixed manufacturing expenses equal $800,000; and fixed selling and administrative expenses total $700,000. Gaston's president is unhappy with the budget and has discussed his concern with a friend who owns an advertising agency. His friend convinces him that an aggressive advertising campaign would increase units sold by 20%, and increase the selling price per unit by 4%. If Gaston chooses to pay $280,000 to implement the advertising program and the anticipated increase in units sold and selling price per unit actually occur, operating income would:

a.) increase by $200,000
b.) increase by $480,000
c.) decrease by $280,000
d.) increase by $20,000

Answer 1

Q1. Answer is b. Undercosted.

Q2. Answer is a. Increase by $200,000

Explanation:

Selling price: 25

Variable cost: 15

Contribution = 25-15 = 10

Total contribution: 150,000 units @10 = $1500,000

Total Fixed cost: 800,000+700,000 = 1500,000

Net Income: Contribution-Fixed cost = 1500,000 -1500,000 = Nil

Revised Seling units: 150,000+20% = 180,000 units

Revised Selling price: 25+ 4% = 26

Contribution = 26- 15 = 11 per unit

Total contribution = 180,000 units*11 = $1980,000

Total fixed cost: 1500,000+280,000 = $1780,000

Net Income = Contribution-Fixed cost= 1980,000- 1780,000 = 200,000