1. Hoen Manufacturing Company experienced the following accounting events during its first year of operation. With the exception of the adjusting entries for depreciation, all transactions are cash transactions.
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Acquired $50,000 cash by issuing common stock.
2. Paid $8,000 for the materials used to make products, all of which were started and completed during the year.
3. Paid salaries of $4,400 to selling and administrative employees.
4. Paid wages of $7,000 to production workers. 5. Paid $9,600 for furniture used in selling and administrative offices. The furniture was acquired
on January 1. It had a $1,600 estimated salvage value and a four-year useful life.
6. Paid $13,000 for manufacturing equipment. The equipment was acquired on January 1. It
had a $1,000 estimated salvage value and a three-year useful life.
7. Sold inventory to customers for $25,000 that had cost $14,000 to make.
Explain how these events would affect the balance sheet, income statement, and statement of cash flows by recording them in a horizontal financial statements model as indicated here. The first event is recorded as an example. In the Cash Flow column, indicate whether the amounts represent financing activities (FA), investing activities (IA), or operating activities (OA).
Identify the following costs as fixed or variable. Costs related to plane trips between Seattle, Washington, and Orlando, Florida, follow. Pilots are paid on a per trip basis.
a. Pilots’ salaries relative to the number of trips flown.
b. Depreciation relative to the number of planes in service.
c. Cost of refreshments relative to the number of passengers.
d. Pilots’ salaries relative to the number of passengers on a particular trip.
e. Cost of a maintenance check relative to the number of passengers on a particular trip.
f. Fuel costs relative to the number of trips. First Federal Bank operates several branch offices in grocery stores. Each branch employs a su-
pervisor and two tellers.
g. Tellers’ salaries relative to the number of tellers in a particular district.
h. Supplies cost relative to the number of transactions processed in a particular branch.
i. Tellers’ salaries relative to the number of customers served at a particular branch.
j. Supervisors’ salaries relative to the number of branches operated.
k. Supervisors’ salaries relative to the number of customers served in a particular branch.
l. Facility rental costs relative to the size of customer deposits.
Costs related to operating a fast-food restaurant follow.
m. Depreciation of equipment relative to the number of restaurants.
n. Building rental cost relative to the number of customers served in a particular restaurant.
o. Manager’s salary of a particular restaurant relative to the number of employees.
p. Food cost relative to the number of customers.
q. Utility cost relative to the number of restaurants in operation.
r. Company president’s salary relative to the number of restaurants in operation.
s. Land costs relative to the number of hamburgers sold at a particular restaurant.
t. Depreciation of equipment relative to the number of customers served at a particular restaurant
Webster Training Services (WTS) provides instruction on the use of computer software for the em- ployees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense WTS incurs is instructor salaries; it pays instructors $5,000 per course taught. WTS recently agreed to offer a course of instruction to the employees of Chambers Incorporated at a price of $400 per student. Chambers 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 10 percent increase in enrollment (i.e., enrollment increases
to 22 students). What is the percentage change in profitability?
d. Determine the profit, assuming a 10 percent decrease in enrollment (i.e., enrollment de-
creases to 18 students). What is the percentage change in profitability?
e. Explain why a 10 percent shift in enrollment produces more than a 10 percent shift in profit-
ability. Use the term that identifies this phenomenon.
Inman Manufacturing Company makes a product that it sells for $60 per unit. The company incurs variable manufacturing costs of $24 per unit. Variable selling expenses are $12 per unit, annual fixed manufacturing costs are $189,000, and fixed selling and administrative costs are $141,000 per year.
Determine the break-even point in units and dollars using the following approaches.
a. Equation method. b. Contribution margin per unit. c. Contribution margin ratio. d. Confirm your results by preparing a contribution margin income statement for the break-
even sales volume.
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