# MBA560 Financial and Managerial Accounting: Module 6 Homework (P11-25 and P12-19)

MBA560 Financial and Managerial Accounting
Module 6 Homework (P11-25 and P12-19)

Problem 11-25 Effects of operating leverage on profitability
Cooper Training Services (CTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense CTS incurs is instructor salaries; it pays instructors \$3,600 per course taught. CTS recently agreed to offer a course of instruction to the employees of Akers Incorporated at a price of \$340 per student. Akers estimated that 20 students would attend the course.
Base your answer on the preceding information.

Part 1:
Required
a. Relative to the number of students in a single course, is the cost of instruction a fixed or a variable cost?
b. Determine the profit, assuming that 20 students attend the course.
c. Determine the profit, assuming a 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
e. Explain why a 20 percent shift in enrollment produces more than a 20 percent shift in profitability. Use the term that identifies this phenomenon.

Part 2:
The instructor has offered to teach the course for a percentage of tuition fees. Specifically, she wants \$210 per person attending the class. Assume that the tuition fee remains at \$340 per student.

Required
f. Is the cost of instruction a fixed or a variable cost?
g. Determine the profit, assuming that 20 students take the course.
h. Determine the profit, assuming a 20 percent increase in enrollment (i.e., enrollment increases to 24 students). What is the percentage change in profitability?
i. Determine the profit, assuming a 20 percent decrease in enrollment (i.e., enrollment decreases to 16 students). What is the percentage change in profitability?
j. Explain why a 20 percent shift in enrollment produces a proportional 20 percent shift in profitability.

Part 3:
CTS sells a workbook with printed material unique to each course to each student who attends the course. Any workbooks that are not sold must be destroyed. Prior to the first class, CTS printed 20 copies of the books based on the client’s estimate of the number of people who would attend the course. Each workbook costs \$20 and is sold to course participants for \$31. This cost includes a royalty fee paid to the author and the cost of duplication.

Required
k. Calculate the workbook cost in total and per student, assuming that 16, 20, or 24 students attempt to attend the course.
l. Classify the cost of workbooks as fixed or variable relative to the number of students attending the course.
m. Discuss the risk of holding inventory as it applies to the workbooks.
n. Explain how a just-in-time inventory system can reduce the cost and risk of holding inventory.

Problem 12-19 Allocation to accomplish smoothing
Teng Corporation estimated its overhead costs would be \$30,000 per month except for January when it pays the \$90,000 annual insurance premium on the manufacturing facility. Accordingly, the January overhead costs were expected to be \$120,000 (\$90,000 + \$30,000). The company expected to use 7,000 direct labor hours per month except during July, August, and September when the company expected 9,000 hours of direct labor each month to build inventories for high demand that normally occurs during the holiday season. The company’s actual direct labor hours were the same as the estimated hours. The company made 3,500 units of product in each month except July, August, and September in which it produced 4,500 units each month. Direct labor costs were \$25 per unit, and direct materials costs were \$20 per unit.

Required
a. Calculate a predetermined overhead rate based on direct labor hours.
b. Determine the total allocated overhead cost for January, March, and August.
c. Determine the cost per unit of product for January, March, and August.
d. Determine the selling price for the product, assuming that the company desires to earn a gross margin of \$20 per unit.