BA421 MidTerm Exam Page 8 2015

| September 28, 2018

BA 421 – 2014-15 Term V Mid Term Exam Page 8Short Answer/Short EssayIn cost accounting, costs can be classified as being direct or indirect. In practice, some costs can fall into either category.Required:Identify three costs that can be either a direct or an indirect cost. For each cost identified, explain what factors are relevant in the decision to treat the cost as direct or indirect. BA 421 – 2014-15 Term V Mid Term Exam Page 3Oskar Meyer PlasticsOskar Meyer Plastics is a manufacturer of custom plastic toys. Production is capital-intensive, and as of late some potential new customers have avoided using Oskar Meyer Plastics because there aren’t enough machines to keep up with the demand. For the fiscal year July 2015-June 2016, they are budgeting sales of $30,000,000 and purchases as follows:Oskar Meyer Plastics is starting a new project to reduce its inventory costs. The budgeted inventory figures for Oskar Meyer Plastics are as follows:Oskar Meyer Plastics accounts for overhead using a job cost system. The raw materials (plastic pellets) are measured by the pound and are traceable to the job used. Overhead is currently allocated based on the number of direct labor hours used on a job. Currently, the average rate of pay for production floor workers is $29/hour, including payroll taxes and benefits.Some members of management believe that it would be better to allocate overhead costs based on the amount of machine-hours used in each job instead of direct labor hours. In an average year, machines will be available for 20,000 machine-hours.Other members of management would like to use activity-based costing to allocate the overhead. An initial cost study shows that each customer order incurs $1,100 in costs and each production run costs $750 in setup costs. There are 1,200 orders and 2,640 production runs in BA 421 – 2014-15 Term V Mid Term Exam Page 4the average year. In the proposed activity-based costing system, all remaining overhead costs would be allocated by the amount of machine-hours used.Oskar Meyer Plastics excludes income taxes in its overhead calculation. It also excludes all selling, general, and administrative expenses from overhead calculations.Actual information from four jobs produced in August 2015 are as follows:Required:1. Prepare an income statement and statement of goods manufactured using the budgeted revenues and costs. Assume an corporate income tax rate of 40%.2. Determine the following:a. The total amount of overhead to apply to jobs, assuming the use of a normal costing systemb. The overhead rate, under the current method of direct-labor hoursc. The overhead rate, assuming that Oskar Meyer Plastics switches to using machine-hours as its allocation based. The overhead rate per machine hour under activity-based costing3. Using the rate calculated in requirement #2(d), determine the following:a. Overhead costs for Jobs 80, 81, 82, and 83b. Profit for Jobs 80, 81, 82, and 834. What advantages and disadvantages exist for each of the three allocation methods that Oskar Meyer Plastics is using? Which method would you recommend, and why?Irate PigeonsYour company is developing a new phone game calledIrate Pigeons, which is set for release on July 1, 2015. Based on market research, there is a 77% chance that the game will sell poorly, a 20% chance that the game will sell okay, and a 3% chance that the game becomes an Internet Sensation. If you make the game available for free, forecasted downloads (in units) per fiscal quarter are as follows:You spent $120,000 to develop the game and are hoping to recoup your investment and make a profit. There are several revenue models that you have researched, described below.Freemium– Under this model, the game is free to download, and users have an option to buy a premium version with more characters and power-ups. 2% of all users will spend $5 for the premium version.Pay-To-Download– Under this model, you will charge $5 for the user to download the game. If you use this model, your downloads will be only 1% of the forecasted numbers if the game does poorly, 3% of the forecasted numbers if the game does okay, and 10% of the forecasted numbers if the game becomes an Internet Sensation.Bait-And-Switch– Under this model, you allow the game to be downloaded for free through the second quarter of 2016. At that point, players must pay $5 to continue playing the game or it will no longer be usable. You expect 40% of the people who have downloaded your game will pay this amount. Beginning the third quarter of 2016, the model becomes pay-to-download, as described above.BA 421 – 2014-15 Term V Mid Term Exam Page 9In-Game Purchases– Under this model, you allow the game to be downloaded for free. You offer the ability for customers to spend money on new characters and in-game bonuses. During each quarter, 20% of new players buy an upgrade, 10% of players who downloaded the game the previous quarter will buy an upgrade, and 5% of players who downloaded the game two quarters ago will buy an upgrade. You price the upgrades at $1 each.Advertising Revenue– Under this model, the game is downloaded for free, and you will receive $0.20 directly from advertisers for every download.When a user pays money to you, 30% of the sales price must be paid for commissions. There are no other variable costs or fixed costs in the marketing and selling of the game.Hint: Calculate the revenues that each model will earn separately, based on if the game will sell poorly, sell okay, or become an Internet Sensation, and use the expected value methods.Required:1. Determine which revenue model is the best under the following expectations:a. The game will sell poorlyb. The game will sell okayc. The game will become an Internet Sensation2. Determine the expected revenues to be earned using each of the five pricing models.3. Including the effects of the variable costs and fixed costs, determine the expected profit for each of the revenue models4. What non-financial considerations should you consider in making your revenue model decision? You do not need to limit your answer to information provided in this problem.5. Based on your answers above, which model should you use to earn money from your game?QuestionsThe famous progressive rock band Fink Ploid is planning to re-release their famous albumTissue Your Earin the United Kingdom. The fixed costs of production will be £150,000 and variable costs of production are £4.30 per CD. One-sixth of the sales price of the album is paid by Fink Ploid for Value-Added Tax (a form of sales tax that is included in the sales price). The income tax rate for corporations like Fink Ploid is 20% of pre-tax profits.Required:1. Determine the following:a. Assuming a sales price of £5.40 per unit, what is the breakeven point, in CDs?b. Assuming a sales price of £8.40 per unit, what is the breakeven point, in CDs?2. Assume that Fink Ploid wants to earn an after-tax profit of £70,000. Determine the following:a. Assuming a sales price of £5.40 per unit, how many CDs will Fink Ploid have to sell to earn the desired profit?b. Assuming a sales price of £8.40 per unit, how many CDs will Fink Ploid have to sell to earn the desired profit?3. Fink Ploid expects to sell 1,500,000 CDs if it sets the sale price at £5.00. For every £0.01 increase in sales price, 3,000 fewer CDs will be sold. Determine the following:a. The profit-maximizing price (all prices are to the nearest £0.01)b. The amount of profit earned at that price.4. Assume that Fink Ploid can purchase £30,000 in specialized production equipment that will reduce its production cost £0.05 per CD. Determine the following:a. The profit-maximizing priceb. The amount of profit earned at that pricec. Should the specialized equipment be purchased? Why or why not?5. The British government is planning on increasing the rate of value-added tax. Will this increase the breakeven point, decrease the breakeven point, or have no effect on the breakeven point of sales? Why?6. The British government is planning on reducing the corporation tax rate. Will this increase the breakeven point, decrease the breakeven point, or have no effect on the breakeven point of sales? Why?7. Fink Ploid is considering offering its customers a limited-edition box set that includes one CD and a special vinyl record that is colored pink. The vinyl record would cost £6.60 and have additional fixed production costs of £40,000. The entire box set would be sold for £30.00 and it is estimated that 10% of customers would purchase the box set instead of the CD alone. Assume that Fink Ploid has chosen not to purchase the specialized production equipment from #4. Determine the following:a. Assuming a sales price for CDs of £5.40 per unit, what is the breakeven point, in CDs?b. Assuming a sales price for CDs of £8.40 per unit, what is the breakeven point, in box sets?

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