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Problem 1 Solution

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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

     Buy Lease

     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

    2. Buy Lease

     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.

    2. Keep Old Buy New

     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

     Gift

     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

     Sales & Gift

    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

     Sales & Gift

     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

    1. Reduced overhead if

     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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