Short cases

Case #1

Wild Wadi Co. manufactures the boards they use in their water park. Their accountant provided you with the following details showing the cost of making 1,800 units a year:

Direct Materials                                    $17,500

Direct labor                                          $  2,700

Variable overhead                                $  2,100

Fixed manufacturing overhead   $  7,400

Total manufacturing costs                      $29,700

Suppose that China Sports Suppliers Co. offered to sell Wild Wadi similar boards for $14 each delivered. If purchased Wild Wadi would add its own logo at a cost of $0.60 per board. Wild Wadi accountant predicts that purchasing the board will enable the company to avoid $2,600 of fixed costs.

Required:

  1. Assume that the facilities have no other use, prepare an analysis to show whether Wild Wadi should make or buy the boards.
  2. Assume the facilities currently used to manufacture those boards can be rented to another company at a rent of $3,000 a year. Perform the analysis again on whether Wild should make or buy.

Case #2

You are a consultant and a client of yours approached you for advice. The client (Oasis Trading Co.) is a wholesaler that distributes a single product.  Oasis’s revenues and expenses for the last two months are given below:

  May June
Sales in units………………………. 3,000 4,500
     
Sales revenue………………………… $420,000 $630,000
Less Expenses:

Cost of goods sold………………

  

168,000

  

252,000
   Advertising expense…………….. 121,000 121,000
Salaries and commissions……… 151,000 199,000
Net operating income (loss)…… ($ 20,000) $  58,000
     
     

Oasis’s management came to you and they are trying to understand their cost structure. The company is still young and is not using its full capacity yet. Oasis hopes to make an operating income of $90,000 in the coming month of July. To give them the advice, you need to determine the followings:

  1. Determine Oasis’s cost structure.
  2. Use the information you learned in item (a) & prepare the income statement for the month of June using the variable cost-contribution margin approach
  3. How many units Oasis needs to sell to achieve the target operating income of $90,000 in the following month?

Case #3  Three Independent Cases

  1. In discussing the operation of his automobile, a doctor once observed that gasoline is a fixed cost because the cost per gallon is relatively stable. Insurance, on the other hand, is a variable cost because the cost per mile varies inversely with the number of miles driven. Comment on the doctor’s observation.
  2. Define the term “relevant range” and explain its importance in understanding cost behavior.
  3. Dubai Trading Co. (DTC) has a branch in each Emirate. Your fried works as the general manager of Sharjah branch. He just finished a meeting with his superiors in Dubai where he submitted his last year report which shows:

Total Sales                   $1,280,000

Operating Income         $198,000

At the end of the meeting his superiors at Dubai Trading Co. told him that his budgeted operating for the coming year will be $207,900, an increase of 5% over last year. Your friend is wondering about the sales volume he must make to achieve his target profit. Do you think that his next year sales must be around $1,344,000, an increase of 5% over last year? Explain.

Case #4

KC Manufacturing, which began operations on January 1, 2021, produces an industrial scraper that sells for $325 per unit. By the end of 2021 KC Manufacturing provided the following Information.
KC carries its finished-goods inventory at the average unit cost of production. There was no work in process at year-end.

Required:
A. Compute the company’s average unit cost of production.

  1. Determine the cost of the December 31 Finished-Goods Inventory & Cost of Goods Sold.
  2. If next year’s production increases to 23,000 units and general cost behavior patterns do not change, what is the likely effect on:
  3. The direct-labor cost of $35 per unit? Why?
  4. The fixed manufacturing overhead cost of $400,000? Why?

Case #5

The following are relevant account balances from Brown’s comparative balance sheet and 2015 income statement.

 

  Dec. 31, 2014 Dec. 31, 2015
Cash $     9,000 $    6,000
Accounts receivable 12,000 8,000
Merchandise inventory 18,000 29,000
Prepaid rent 4,000 6,000
Equipment 80,000 100,000
Accumulated depreciation    (13,000)    (28,000)
Total assets $110,000 $121,000
     
Accounts payable $   29,000 $    15,000
Dividends Payable 2,000 0
Common stock 30,000 35,000
Additional Paid in Capital, common stock

Retained earnings

 2,000

    49,000

 3,000

68,000
Total liabilities and stockholders’ equity $110,000 $121,000
     

 

Other information:

No equipment was sold or retired during 2015. Brown’s net income for 2015 was $33,000.

Calculate depreciation expense for 2015.

Calculate the amount of dividends declared & paid during 2015.

Determine the cost of the equipment purchased during 2015.

  1. Determine the change in current assets and current liabilities over the 2 years.

Case #6

The following data are available for the month of April for Dubai Company. The physical count at the end of the month showed that 130 units are still available in the store. Assume the company uses LIFO to account for its inventories and cost of goods sold.

 

Date No. of Units / cost per unit
April 1 inventory 120 units at $8.00 each
April 10 purchase 200 units at $8.20 each
April 20 purchase 410 units at $8.50 each
April 28 purchase 110 units at $9.00 each
   

Note: Assume no spoilage of theft.

Required:

  1. Calculate the sales revenues for the month April assuming a selling price of $15 a unit.
  2. Calculate cost of goods sold & cost of ending inventories to be reported at the end of April.
  3. Calculate the gross profit for the month of April.
  4. It is the mid-day of April 30 and in few hours, you will be submitting a report of April Activities. You are concerned that you have not achieved you target gross profit for the month of April. Your accountant wanted to help and suggested that you may do that by returning the last purchase you made yesterday on April 28. Do you agree with her? Explain.

Case # 7

On January 6, 2017, Milner Company purchased a machine for $138,000. The machine cost $1,200 to deliver and $4,800 to install. The costs of operating the machine over 2017 was $4,000. At the end of 10 years estimated useful life, Milner expects to sell the machine for $12,000. Compute depreciation expense & the book value to be reported at the end of 2017 and 2018 using the following methods:

  1. Double declining method
  2. Straight line method

Assume the use of straight-line method. Assume the machine is sold at the end of 2019 for $105,000. Show the impact of sale on the financial statements.

Case #8 Independent Transactions

For each of the following transactions use the accounting equation to show the impact on the date of transaction & on Dec. 31, 2015, fiscal year-end, if any. Indicate what would be reported in each statement on Dec. 31, 2015 & how much. (Assume no adjustments were made during the year)

 Transaction #1: March 1, 2015.  We purchased a 1-year insurance policy for $8,400 cash

 

Date Assets Liabilities Owners’ Equity
Account Amount Account Amount Account Amount
March 1, 2015

 

  

 

 

          
Dec. 31, 2015 (Adjustment)

 

            

 

Indicate what would be reported in each statement on Dec. 31, 2015:

Income Statement Name of account Amount
 

 

  
Balance Sheet Name of account Amount
 

 

  

Transaction #2: We started 2015 with a balance of inventory of office supplies of $650. On Feb. 5, 2015 we bought additional office supplies for $960 on account. On Dec. 31, 2015 only $135 worth of supplies was still on hand.

 

Date Assets Liabilities Owners’ Equity
Account Amount Account Amount Account Amount
Feb. 5,  2015

 

            
Dec. 31, 2015 (Adjustment)

 

            

 

Indicate what would be reported in each statement:

Income Statement Name of account Amount
 

 

  

 

Balance Sheet Name of account Amount