Question

# Accounting Services, Inc. has two customers. Customer X generates \$600,000 in income after direct fixed costs...

Accounting Services, Inc. has two customers. Customer X generates \$600,000 in income after direct fixed costs are deducted, and Customer Z generates \$580,000 in income after direct fixed costs are deducted. Allocated fixed costs total \$1,000,000 and are assigned 40 percent to Customer X and 60 percent to Customer Z. Total allocated fixed costs remain the same regardless of how these costs are assigned to customers.

What is the amount of allocated fixed costs to be assigned to Customer Z?

\$580,000

\$420,000

\$400,000

\$600,000

Exhibit 7-4

The following segmented annual income statement is for Paper Products, Inc.

 Product Lines Plain Lined Color Total Sales revenue \$25,000 \$100,000 \$125,000 \$250,000 Variable costs 15,000 50,000 85,000 150,000 Contribution margin \$10,000 \$50,000 \$ 40,000 \$100,000 Direct fixed costs 4,000 6,000 9,000 19,000 Allocated fixed costs ? ? ? 45,000 Profit (loss) \$ ? \$ ? \$ ? \$ ?

Refer to Exhibit 7-4. If allocated fixed costs are based on sales revenue for each product line as a proportion of total sales revenue, what is the profit or (loss) for Color?

\$8,500

\$16,000

\$31,000

\$13,000

In which of the following cases is a customer most likely to be dropped?

When the customer’s variable costs are more than its total fixed costs.

When the customer’s avoidable fixed costs are more than its contribution margin.

When the customer’s total fixed costs are more than its contribution margin.

None of the answer choices is correct.

Reinhart Company would like to purchase a new machine for \$5,000,000. The machine is expected to have a life of five years, and a salvage value of \$1,000,000. Annual maintenance costs will total \$300,000. Annual labor and material savings are predicted to be \$2,000,000. The company's required rate of return is 26 percent.

What is the payback period for this investment (round to the nearest month)?

1 year, 11 months.

1 year, 9 months.

2 years, 9 months.

2 years, 11 months.

1. Allocated fixed costs to customer Z = \$1000000 x 60% = \$600,000

2. Allocated Fixed costs to color = \$45000/250x125 = \$22500
Profit (Loss) of Color = \$40000-9000-22500 = \$8500

3.
Answer is b. When the customer’s avoidable fixed costs are more than its contribution margin.

4.
Net Annual Cash Flows = \$2000000 - 300000 = \$1,700,000
Payback Period = \$5000000 / 1700000 = 2.94 years
i.e. 2 years 11 months

Answer is d. 2 years, 11 months

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