2 World Airlines has three service departments; ticketing, baggage handling and aircraft maintenance.

Costs of these departments are allocated to two revenue producing departments, domestic and international flights. Costs for the service departments are not separated into fixed and variable and the totals are as follows: Ticketing $4,000,000 Baggage handling $2,000,000 Aircraft maintenance $6,000,000 Air miles are as follows: Domestic 5,000,000 International 20,000,000 A. Allocate the service department costs based on air miles. Total air miles = 25,000,000 Total service department cost = 12,000,000 Cost allocated to domestic = 12,000,000X5,000,000/25,000,000 = 2,400,000 Cost allocated to international = 12,000,000X20,000,000/25,000,000= 9,600,000 B. Evaluate World Airlines use of air miles as a basis for allocation. Do you think the cause-and-effect relationship is strong? The use of air miles is not correct for all costs. Only aircraft maintenance would be dependant on air miles. Baggage handling and ticketing would not have a strong cause and effect relationship. C. Suggest alternative methods to allocate the service department costs. ( As an alternative Ticketing costs should be allocated based on number of tickets sold Baggage handling costs should be allocated based on number of baggage. 3. Joanie Corp sells it products on both credit and cash basis. Monthly sales are sold 10% for cash, 90% for credit. Credit sales are collected 40% in the month of sale and 60% the following month. Sales for the first quarter are as follows. January $100,000 February $150,000 March $125,000 Compute cash collections for February. ( Collections in Feb = Cash sales for Feb = 150,000 X 10% = 15,000 Credit sales for Feb = 150,000 X 90% X 40% = 54,000 Credit sales for Jan = 100,000 X 90% X 60% = 54,000 Total cash collection = $123,000

4. ,8 English Company produces 5,000 units of part number 1011 as a component used in electronic equipment. Normal selling price is $50. Cost to make the product are as follows: Direct Labor $14 Direct Material $12 Variable Factory Overhead $6 Fixed Factory Overhead $4 English Company has been approached by a company to sell the company 2,000 units of part 1011 for $35. Should English accept this special order and what impact will it have on total profits? Back up your answer with appropriate calculations. Accepting the order would result in an increase in variable costs. The incremental cost for each unit is Direct Labor $14 Direct Material $12 Variable Factory Overhead $6 Total cost = $32 Selling Price = $35 English should accept the order there is a profit of $3 per unit. The total profits would be higher by 2,000 X 3 = $6,000

5. Singleton Company is trying to determine a predetermined manufacturing overhead. Estimated overhead for the upcoming year is $600,000. Budgeted numbers for machine hours are 120,000, budgeted labor hours are 15,000 hours at a rate of $20.00 per hour. Compute the predetermined overhead rate based on: Predetermined overhead rate = Total overhead/Total base A. machine hours Predetermined overhead rate = 600,000/120,000 MH = $5 per MH B direct labor hours Predetermined overhead rate = 600,000/15,000 direct labor hours = $40 per DLH C direct labor dollars Total direct labor dollars = 15,000 hours X $20 per hour Predetermined overhead rate = 600,000/(15,000X$20) = $2 per DL$

6. An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment's internal rate of return? ( The internal rate of return (IRR) is the return which will make the present value of cash inflow equal to the initial investment. So we can write 185,575 = 65,000 X PVIFA (4, rate) PVIFA (4,rate) = 185,575/65,000 = 2.855 Looking in the PVIFA table under 4 periods, this factor is under 15% The IRR is 15% 7. Copper Queen Hotel is interested in estimating fixed and variable costs so the hotel can make more accurate projections of costs, break-even and profits. The hotel is in a resort area and busy from November through March. In July and August the hotel has only a 50 percent occupancy. Classify each of the following costs as fixed, variable or mixed. We use number of guests as the base. If the cost would change with the number of guests it is variable, if it does not change it is fixed and if it has both fixed and variable elements, then it is mixed A. Depreciation of the building - Fixed B. Salaries of restaurant staff - Mixed (the staff numbers would change depending in the number of guests) C. Salaries of hotel manager, desk manager, accounting clerks. - Fixed D. Soap, shampoo and other toiletries in the bathrooms. - Variable E. Laundry costs.(cost of bed linens, table cloths, cleaning products, depreciation on cleaning equipment. Mixed (it has variable and fixed costs) F. Food and beverage costs - Variable G. Grounds Maintenance. - Fixed (

8. The following data has been taken from Air-tite company, its first year of business. Units produced 100,000 Units sold 60,000 Units in ending inventory 40,000 Fixed manufacturing overhead $500,000 A, Compute the amount of fixed manufacturing overhead that would be expensed in the current year if full absorption costing is used. The fixed overhead per unit = Total fixed overhead/number of units produced = 500,000/100,000 = $5 The amount expensed would be for units which are sold Amount of fixed overhead expensed = 60,000 X 5 = $300,000

B. Compute the amount of fixed manufacturing overhead that would be expensed in the current year if variable costing is used. Under variable costing, the full amount of fixed overhead is expensed. The amount of fixed manufacturing overhead expensed is $500,000 C. Compute the amount of fixed manufacturing overhead that would be included in ending inventory under full absorption costing. Amount in ending inventory = 40,000 units in ending inventory X $5 per unit = $200,000