Problem 1: CVP analysis (30 points total)


The owners of Cobb’s Gym currently are working on their operating plan for the coming year, and they have provided you with the following average membership and cost data for the previous year:

Annual membership fee                         $400 per member

Number of members                                               6,000

Variable cost (supplies, instructors, etc.)            $130 per member

Fixed costs (equipment, salaries, etc.)   $945,000

The owners anticipate that, for the coming year, both total fixed costs and the variable cost per member will remain unchanged from the previous year.

  1. Assuming the same number of members as last year, what is Cobb’s expected profit for the coming year? (10 points)
  1. How many members must Cobb’s Gym have to break even? (10 points)
  1. The owners of Cobb’s Gym are considering reducing the annual membership fee by 10%. They believe this will increase membership to 7,500 members for the coming year.  What will profit be if the owner’s adopt this strategy (note:  the membership fee for all members will be reduced by 10%)?  Does this seem like a good option?  Support your answer with calculations. (10 points)

Problem 2: CVP analysis (10 points total)

DeKalb Corporation produces three products, A, B and C.  The normal volume is 350 units of A, 140 units of B and 210 units of C.  The price per unit is $5, $7, $10, for products A, B, and C, respectively.  The variable cost per unit is $2, $3, $4, for products A, B, and C. respectively.  The total fixed costs are $2,400.

What is the weighted average contribution margin per unit?




Problem 3: Job costing and overhead allocation methods (30 points total)


Fulton Company’s actual manufacturing overhead cost for the month of July was $90,000. The company’s predetermined overhead rate was 40% of direct labor cost. Other information pertaining to Fulton’s inventories and production for the month of July is as follows:

 Beginning inventories, July 1: 
 Direct materials$13,000
 Work in process$40,000
 Finished goods$80,000
 Purchases of direct materials during July$110,000
 Direct labor cost$180,000
 Ending inventories, July 31 
 Direct materials$16,000
 Work in process$26,000
 Finished goods$75,000
  1. Determine the amount of direct materials used during July. (10 points)
  1. Determine the underallocated or overallocated overhead for the month. (10 points)
  1. Determine the Cost of Goods Manufactured for the month. (10 points)


Problem 4: Activity-based costing (30 points total)

Rome, Inc., produces two products, Product A and Product B. If currently allocates overhead costs using direct-labor hours, but the controller has recommended an activity-based costing (ABC) system using the following data:

   Activity Level
ActivityCost-Driver BaseCostProduct AProduct B
Production setupNumber of setups$ 90,0001119
Materials handling & requisitionNumber of parts per unit$ 15,000618
Packaging & shippingNumber of units shipped$ 45,00030,00060,000
Total overhead $150,000  


  1. Compute the amount of overhead to be allocated to each product using direct-labor hours as the allocation base. Assume that the number of direct-labor hours required to assemble each unit is 0.5 per unit for Product A and 1.0 per unit for Product B. The company produces 30,000 units of Product A and 60,000 units of Product B. (10 points)
  1. Compute the amount of overhead to be allocated to each product under ABC. (10 points)
  1. Should the company follow the controller’s recommendation? Explain your answer. (10 points)

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