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# Problem 1 Solution

By Ann Kelly,2014-05-05 08:51
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Problem 1 Solution

Chapter 6Solutions to Problems

Problem 1: Solution

1. Taxable Income Tax Rate

\$0 - \$20,000 10%

\$20,000 - \$50,000 \$2,000 + 20% of the amount over \$20,000

> \$50,000 \$8,000 + 30% of the amount over \$50,000

First \$20,000 × .10 = \$ 2,000

Next \$30,000 × .20 = \$ 6,000

Next \$10,000 × .30 = \$ 3,000

Total \$60,000 \$11,000 = Total Tax Liability

2. Federal Income Taxes / Taxable Income = Average Tax Rate

= \$11,000 / \$60,000 = 18.33%

Problem 2: Solution

The opportunity cost of building a new lodging facility on this

land is the best foregone opportunity of selling the land today

for \$500,000 net of tax.

Cash Flow

Selling price \$500,000 \$500,000

Cost 100,000

Gain on sale 400,000

Incr. tax rate 0.3 -120,000

Net cash flow \$380,000

Problem 3: Solution

1. The direct expenses of the rooms department total \$21,450. These

expenses include the payroll and related expenses of \$20,000

and other expenses of \$1,450.

2. Overhead expenses total \$77,356. These expenses include all

expense other than the direct expenses of the profit centers.

Therefore, the overhead expenses include the undistributed

operating expenses, fixed charges, and income taxes.

3. Costs controllable by the GM and by those under his/her

supervision include all expenses prior to "gross operating

profit." Thus, the undistributed operating expenses and direct

costs of the profit centers are the controllable expenses.

4. The fixed costs are the fixed charges of rent, property taxes,

insurance, interest, and depreciation. Other expenses also may

be fixed, but further investigation would be required.

5. The cost of sales is considered to be a variable expense.

Chapter 6Solutions to Problems

Problem 4: Solution

1.

Electric Expense Occupancy % High Month (August) \$7,200 78% Low Month (December) \$5,500 50%

\$1,700 28%

Mixed Cost Difference / Occupancy % Difference =

Variable Cost per 1% of Occupancy

= \$1,700 / 28% = \$60.71

2. December Occupancy % × Variable Cost = Total Variable Cost

of Electric Expenses for December

= 50% × \$60.71 = \$3,035.50

Total Electric Expense for December - Variable Electric

Expense for December = Total Fixed Cost of Electric Expense

for December

= \$5,500 - \$3,035.50 = \$2,464.50

August Occupancy % × Variable Cost = Total Variable Cost of

Electric Expenses for August

= 78% × \$60.71 = \$4,735.38

Total Electric Expense for August - Variable Electric

Expense for August = Total Fixed Cost of Electric Expense

for August

= \$7,200 - \$4,735.38 = \$2,464.62

3. Occupancy % × Variable Cost = Total Variable Cost of

Electric Expenses at 62%

= 62% × \$60.71 = \$3,764.02

Variable Cost of Electric Expenses at 62% + Fixed Cost of

Electric Expense = Estimated Electric Expense at 62%

= \$3,764.02 + \$2,464.50 = \$6,228.52

The answer for January of \$6,228.52 is based on applying the

estimated fixed cost and variable cost based on the high-low two

point method. Since January was neither the low or the high month

we can expect there will be some difference. The difference is

only \$28.52, which suggests in this case the high-low method worked

reasonably well.

Problem 5: Solution

Chapter 6Solutions to Problems 1. Number of

Customers Labor Costs

July 5,000 \$20,500

February 2,400 \$10,450

Difference 2,600 \$10,050

Variable cost per customer: \$10,050 / 2,600 = \$3.8654

2. Variable labor cost: \$3.8654 × 5,000 = \$19,327

Fixed labor cost: \$20,500 - \$19,327 = \$1,173

3. (3,900 × \$3.8654) + \$1,173 = \$16,248

Problem 6: Solution

1. Indifference Point:

Variable Cost Percentage × Sales = Fixed Lease Cost

.02(Sales) + \$1,000 = \$2,000

Sales = \$50,000

[.04(Sales - \$37,500)] + \$1,500 = \$2,000

Sales = \$50,000

2.

Chapter 6Solutions to Problems

Problem 6: Solution (continued)

3. Alternative 1:

\$2,000 = Total Lease Cost

Alternative 2:

.02(\$80,000) + \$1,000 = \$2,600 = Total Lease Cost

Alternative 3:

[.04(\$80,000 - \$37,500)] + \$1,500 = \$3,200 = Total Lease

Cost

Alternative 1 is recommended.

Problem 7: Solution

1. Cost Fixed Variable

Payroll:

Salaries Fixed \$15,000.00

Wages Variable \$20.00

Employee benefits Mixed \$6,200.00 \$1.50

Supplies Variable \$1.00

Utilities Mixed \$4,000.00 \$2.00

Other operating costs Mixed \$2,000.00 \$1.00

Building rent Fixed \$8,000.00

Interest expense Fixed \$2,000.00

Insurance Fixed \$3,000.00

2. Salaries + Building rent + Interest expense + Insurance =

Fixed Costs

\$15,000 + \$8,000 + \$2,000 + \$3,000 = \$28,000

Fixed portion of employee benefits + Fixed portion of

utilities + Fixed portion of other operating costs = Fixed

portion of mixed costs

\$6,200 + \$4,000 + \$2,000 = \$ 12,200

Fixed costs + Fixed portion of mixed costs = Total fixed

costs

\$28,000 + \$12,200 = \$40,200

3. Wages + Supplies = Variable costs

\$20.00 + \$1.00 = \$21.00

Variable portion of employee benefits + Variable portion of

utilities + Variable portion of other operating costs =

Variable portion of mixed costs per room sold

\$1.50 + \$2.00 + \$1.00 = \$4.50

Chapter 6Solutions to Problems Problem 7: Solution (continued)

Variable costs + Variable portion of mixed costs = Total

variable costs per room sold

\$21.00 + \$4.50 = \$25.50

4. Total costs = Fixed costs + (Variable cost per room sold ×

room sales)

Total costs = \$40,200 + (\$25.50 × room sales)

5. \$40,200 + (\$25.50 × 3,500) = \$129,450

Problem 8: Solution

1. Indifference point: \$120,000 / .06 = \$2,000,000 2. A fixed lease is recommended. \$120,000 < (.06 × \$3,000,000) 3. Excess lease expense: \$200,000 × .06 = \$12,000

Tax savings:\$12,000 × .4 = (\$4,800)

Net of Tax Cost = \$7,200

Problem 9: Solution

Part 1 Type of Cost 1. Cost of food sold Variable

2. Payroll costs Mixed

3. Supplies Variable

4. Utilities Mixed

5. Other operating costs Variable

6. Building rent Fixed

7. Depreciation Fixed

Part 2 Variable

Amount/Unit Fixed 1. Cost of food sold \$1.50 \$ 0

2. Payroll costs .50 2,000

3. Supplies .20 0

4. Utilities .02 300

5. Other operating costs .50 0

6. Building rent 0.00 1000

7. Depreciation 0.00 200

Total \$2.72 \$3,500 Equation

Total Costs = \$2.72(units sold) + \$3,500

Check: Total Costs @ 3,000 units

TC = (\$2.72 × 3,000) + \$3,500

TC = \$11,660

Chapter 6Solutions to Problems

Problem 9: Solution (continued)

Total costs @ 6,000 units

TC = (\$2.72 × 6,000) + \$3,500

TC = \$19,820

Part 3

Total costs @ 8,000 units

TC = (\$2.72 × 8,000) + \$3,500

TC = \$25,260

Problem 10: Solution

1. Irrelevant Costs: Labor, supplies, and utilities

2. Cost Schedule Alternatives

Cost of equipment \$15,000 -

Equipment rental

6 pmts. @ \$3,500 - \$21,000

Salvage Value (2,000) -

Annual Costs:

Interest Expense

3 yrs. @ \$1,000 3,000 -

Repairs

3 yrs. @ \$1500 4,500 ___-

Total \$20,500 \$21,000

3. Recommendation: Buy since the total costs over three years are

less than under the lease alternative.

Problem 11: Solution

1. Irrelevant costs: Labor, supplies, and utilities

Cost of equipment \$20,000

Equipment rental

10 payments @ \$3,000 \$30,000

Salvage value (1,000)

Annual costs:

Interest expense:

\$1,500 × 5 (yrs.) 7,500

Repairs: \$200 × 5 (yrs.) 1,000

Total \$27,500 \$30,000

3. One should recommend "buy" since the total costs over five years

are less than under the "lease" alternative.

Chapter 6Solutions to Problems

Problem 12: Solution

1. Labor and water are the same, so they are irrelevant.

Salvage value \$ 300 \$2,000

Repairs -\$ 500

Maintenance -\$2,000 -\$1,000

Energy -\$4,000 -\$2,500

Purchasenew -\$7,000

Salvage valuenew _____ \$2,000

Total -\$6,200 -\$6,500

Paul should keep the old dishwasher since future costs will

be minimized by this decision.

Problem 13: Solution

1. Irrelevant costs: annual labor costs, annual supplies costs

2. Which system should be purchased?

ABC Co. XYZ Computers

Initial cost \$25,000 \$30,000

Utility costs (7 yrs.) 7,000 5,600

Maintenance (7 yrs.) 21,000 17,500

Salvage value (5,000) (8,000)

Net cost \$48,000 \$45,100

A new front office computer system should be purchased from

XYZ Computers since its system has the lower cost over seven

years.

Problem 14: Solution

1. There are not any sunk costs.

2. Irrelevant costs: Operator labor and supplies.

3. Comparison

A B

Cost \$10,000 \$12,000

Salvage Value (1,000) (2,000)

Utilities 3,000 2,400

Repairs 3,000 2,700

Total \$15,000 \$15,100

4. Recommendation: Emma should go with alternative "a" since the

total cost over three years is less than alternative "b".

Chapter 6Solutions to Problems

Problem 15: Solution

Double K Hotel

Fully-Allocated Income Statement

Rooms Food Shop Total Departmental Income \$340,000 \$145,000 \$500 \$485,500

Adm. & General 39,438 50,202 360 90,000

Sales & Marketing 30,674 39,046 280 70,000

POM & UC 30,674 39,046 280 70,000

Insurance 4,382 5,578 40 10,000

Depreciation 35,056 44,624 320 80,000

Department Income (Loss)

after Allocation \$199,776 \$(33,496 )\$(780 ) 165,500

Income Taxes 50,000 Net Income \$115,500

Chapter 6Solutions to Problems

Problem 16: Solution

Step 1

Total A & G Marketing POM&UC Rooms Food Shop Depreciation \$80,000 \$2,992 \$1,992 \$4,984 \$59,816 \$9,968 \$248

Insurance 10,000 305 152 1,143 6,098 2,287 15

Total \$90,000 \$3,297 \$2,144 \$6,127 \$65,914 \$12,255 263

Step 2

A & G POM&UC Marketing Rooms Food Shop Costs recorded

in dept. \$90,000 \$70,000 \$70,000 -- -- --

Costs allocated

for Step 1 3,297 6,127 2,144 \$65,914 \$12,255 \$263

93,297

Allocation of A&G (93,297 ) \$ 6,204 9,302 34,091 43,392 308

\$ -0- 82,331

Allocation of POM&UC (82,331 ) 2,280 68,368 11,395 288

\$ -0- 83,726

Allocation of Sales & Mktg. (83,726) 41,779 41,799 168

\$ -0- \$210,152 \$108,821 \$1,027

Double K Hotel

Fully-Allocated Income Statement

Rooms Food Shop Total Departmental Income \$340,000 \$145,000 \$ 500 \$485,500

Allocated Overhead 210,152 108,821 1,027 320,000 Dept. Income (Loss)

after Cost Allocation \$129,848 \$ 36,179 \$ (527) 165,500

Income Taxes 50,000 Net Income \$115,500

Chapter 6Solutions to Problems

Problem 17: Solution

Options

Factors Continue as is Expand the restaurant Lease the space Current dept. profit \$ 20,000 \$ - \$ - Reduction of overhead costs \$ - \$ 10,000 \$ 5,000 Lease revenue \$ - \$ - \$ 5,000 Decrease in room profits \$ - \$ (7,500) \$ - Increase in food profits \$ - \$ 5,000 \$ - Cost to expand restaurant \$ - \$ (1,000) \$ - Salvage value of unneeded equip. \$ - \$ 500 \$ -

Total \$ 20,000 \$ 7,000 \$ 10,000

Upset Ulysses should opt to continue operating the lounge as is based on the info. provided.

Note: cost factors are figured on a monthly basis.

Problem 18: Solution

Alternatives

Continue Convert to Lease

Differential Lounge Small to

Factors Operation Meeting Room BEVCO

lounge is closed \$ -- \$7,000 \$2,000

2. Lease to BEVCO -- -- 625

3. Impact on other

departments of

closing lounge:

Rooms dept. -- (3,000) --

Food dept. -- (6,000) --

4. Cost to convert

lounge -- -- --

5. Rental for small

meetings -- 3,000 --

6. Departmental profit

if lounge operation

continues 10,000 -- --

Total \$10,000 \$13,000 \$ 2,625

Based on the above analysis, the lounge should be converted to a

small meeting room. The operation of the small meeting room should

result in an increase in pretax income of \$3,000 for Rose Inn.

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