# Expert Solutions

Q1.  A firm has the capacity to produce 1,000,000 units of a product each year. At present, it is operating at 70 percent of capacity. The firm’s annual revenue is \$700,000. Annual fixed costs are \$300,000, and the variable costs are \$0.50 per unit.   The following equations will be useful.
-Profit = Revenue – Costs-
-Revenue = Price each * quantity –
-Costs = Fixed Cost + Variable Costs = Fixed Cost + (cost each * quantity)-
-At the break even point, Profit = 0-
a-What is the firm’s annual profit or loss?-
b-What is the price for each unit?-
c-At what volume of sales does the firm break even?-
d-What will be the profit or loss if the plant runs at 90 percent of capacity?-

Q2.  The maker of Winglow is purchasing a new stamping machine. Two options are being considered, Rooney and Blair. The sales forecast for Winglow is 8,000 units for next year. If purchased, the Rooney will increase plant fixed costs by \$20,000 and reduce variable costs by \$5.60 per unit. The Blair would increase fixed costs by \$5,000 and reduce variable costs by \$4.00 per unit. If variable costs are now \$20 per unit and fixed costs are \$50,000, which machine should be purchased?

Q3.  The Bore and Stroke Engine Company manufacturers has collected data on the manufacture of  engines last month as shown below.  The costs are the total cost for the month.  They now need to plan for future months.
a What is the  cost per unit if 5,000 engines are produced?
b  If Bore and Stroke can manufacture an additional 1,000 engines without adding new machinery and equipment or other fixed costs, what would be the total  cost per unit if 6,000 motors are produced?
Direct materials                                         \$150,000
Direct labor                                                \$300,000
Variable portion                                        \$100,000
Fixed portion                                               \$80,000
Variable portion                                       \$180,000
Fixed portion                                              \$70,000

Q4. (Q5 continued) The Bore and Stroke Engine Company manufacturers has collected data on the manufacture of  engines last month as shown below.  The costs are the total cost for the month.  They now need to plan for future months.
c What is the break even price on the motors if 5,000 are produced and sold?
d What is the break even quantity for a price of \$199?
Production Quantity                                           5,000
Direct materials                                            \$150,000
Direct labor                                                   \$300,000
Variable portion                                           \$100,000
Fixed portion                                                  \$80,000
Variable portion                                          \$180,000
Fixed portion                                                  \$70,000

Q5  You have been asked to prepare a price for a special order of an additional 20 units of a product you presently produce.   The number of hours necessary to product a unit is 6.  The average labor rate is \$10 per hour and the special order would be produced on Saturday where workers earn “time and a half.”  The materials cost \$20 per unit.  Labor overhead  is figured at 50% of the direct labor cost (normal rate).  The company prices its products by marking them up 30% over cost.  Ignore any fixed costs.
a What should the total price be for this potential order?
b Should fixed costs be ignored in quoting this (as they are)?

Q6.  Astro Aviatonics has collected the following data for a proposed new machine and process that will enable significant new product capabilities once fully implemented.  The salvage value is zero.  Convert this into an incremental income statement for a proposal.
Year                               0                   1                      2                   3                    4                      5
Present Sales                           \$600,000          \$600,000     \$600,000     \$600,000      \$600,000
Forecasted sales                     \$575,000          \$600,000      \$625,000    \$650,000      \$675,000
Investment          \$95,000
Depreciation    Straight-line 5-years
Salvage Value           \$0
COGS Present                         \$210,000           \$210,000     \$210,000      \$210,000     \$210,000
COGS Forecasted                   \$212,000           \$208,000     \$204,000      \$200,000     \$196,000
S.G.&A.                 no change
Taxes                        \$0

Q7.  An asset is purchased for \$165,000.  Compute the annual depreciation using 5-year Straight line depreciation and 5-year MACRS depreciation if the asset is sold at the end of year 5.  Salvage value is zero.

Q8.  The General Service Contractor Company paid \$400,000 for a house and lot.  The value of the land was appraised  at \$155,000 and the value of the house at \$245,000.  The house was torn down at an additional cost of \$15,000 so that a warehouse could be built on the lot at a cost of \$1,250,000.
a  What is the value of the property with the warehouse that should be recorded on the companies books?
b For depreciation purposes, what is the cost basis for the warehouse?

Q9.  To automate one of its production processes, the Milwaukee Corporation bought three flexible manufacturing cells at a price of \$400,000 each.  When they were delivered, Milwaukee paid freight charges of \$20,000 and handling fees of \$15,000.  Site preparation for these cells cost \$45,000.  Six foreman, each earning \$20 an hour, worked five 40 hour weeks to set up and test the manufacturing cells.  Special wiring and other materials applicable to the new manufacturing cells cost \$3,500.  Determine the cost basis (amount to be capitalized) for these cells.  (This amount will be used for depreciation purposes).