[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for BEC. 🙂

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[wng1885]

In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 20X1. The following information is being considered by Gunning Industries:

The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000.
The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of $40,000 per year.
The investment in the new machine will require an immediate increase in working capital of $35,000.
Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of five years and zero salvage value.
Gunning is subject to a 40% corporate income tax rate.
Gunning uses the net present value method to analyze investments and will employ the following factors and rates.

Present Value of an
Present Value of Ordinary Annuity of
Period $1 at 10% $1 at 10%
—— —————- ——————-
1 0.9091 0.9091
2 0.8264 1.7355
3 0.7513 2.4869
4 0.6830 3.1699
5 0.6209 3.7908

The acquisition of the new production machine by Gunning Industries will contribute a discounted net-of-tax contribution margin of:

A.
$242,624.

B.
$303,280.

C.
$363,936.

Correct D.
$454,896.

Why would the tax affect on the depreciation not be considered in this question? is it because its only asking for the Contribution Margin? say the question were asking for the net profit then the tax effect of the depreciation would be included?

[cottonkandi]

@famh110 for some reason I can't edit that post but I had some typos, I meant 4<5. I don't known what happened I posted it last night and it didn't go through till this morning.

Sorry for the typos in advance guys- I try to squeeze in these blog posts in between study sessions.

[cottonkandi]

@ wei ng – Here's my take:

Budgeted FOH = $20,000
Actual Production= $19,800
Standard Price = $1
Standard Fixed Overhead (Flexible Overhead) = Actual Production * Standard Price = 19,800 * $1 = $19,800

Fixed costs are fixed in nature so the more you units produced the lower your fixed cost will be per unit.

When volume budgeted is less than volume actually produced then fixed cost per unit is actually higher than what I planned to spend per unit therefore it will be unfavorable.

Therefore,

FOH volume variance = Budgeted FOH – Standard FOH = $20,000 – 19,800 = $200 unfavorable

[Anonymous]

@mperez102204
I usually assume 360 unless otherwise told; however, i sometimes calculate the answer using both 360 and 365 to make sure. You will notice that answers for only of those days will be there!

@wei ng
Yes, I think because they are just asking for CM (sales-vc), they are not interested in anything else. They are simply asking what is the value of CM today? I think if they were to ask about operating cash flow then you would consider the depreciation shield.

[r]

Please help me! My test is in two days!!

Earl’s Hurricane Lamp Oil company produces both A and B Grade oil. There are approximately $9000 in joint cost that earl may allocate using relative sales value at split off or the net realizable value approach. Before split off A sells for $20000 and B sells for $40,000. After an additional investment of $10,000 after spilt off $3,000 for B grade and $7,000 for A grade both products sell for $50,000. What is the difference in allocated costs for A product assuming applications of net realizable value and net realizable value at split off approach?

The answer is . A fancy has $1,300 more joint cost allocated to it under the net realizable value approach than sales value at split off approach.

My question is why are they not using additional $10,000 cost. Why is the focus only on the $9,000
Relative sales value at split off A B Total
Sales value at split off $20,000 $40,000 $60,000
Percentage 33% 67% 100%
Joint cost $3,000 $6,000 $9,000

Net realizable Value
Final sales value $50,000 $50,000 $100,000
Additional costs incurred after spilt off $7,000 $3,000 $10,000
Net realizable value $43,000 $47,000 $90,000
Percentage 48% 52% 100%
Joint cost $4,300 $4,700 $9,000

[cottonkandi]

@r@twal The additional 10,000 is a separable cost not related to products sold before split-off therefore only the sales amount is used before the split-off point.

The 10,000 separable costs only relates to the products when they sell at $50,000.

[mtaylo24]

Ch 16 in Gleim – These finance/operating budget questions (40% of next month's sales) are annoying and time consuming.

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[mperez102204]

Thank you!!

[mtaylo24]

Geez 2 hrs 15 minutes to do 39 questions smh.

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Anonymous]

That feeling when you feel prepared a week before an exam but so unprepared the two days before..

[cottonkandi]

I feel like I'm going to forget everything.

[Teal]

@cim I studied all day Friday thinking I was going to kill it in one week….today I am struggling. So odd how that happens!

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[Anonymous]

@allergic2mornings @Teal
Let's not lose hope! I think walking in confident on exam day really helps with performance 🙂

[wng1885]

Kode Co. manufactures a major product that gives rise to a byproduct called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a byproduct to a joint product, what would be the effect on Kode's overall gross margin?

Incorrect A.
No effect

B.
Gross margin increases by $1 for each unit of May sold

C.
Gross margin increases by $3 for each unit of May sold

D.
Gross margin increases by $4 for each unit of May sold

You answered A. The correct answer is B.

When May is treated as a byproduct, its $3 net realizable value (i.e., $4 – $1) is subtracted from the main product cost so only that $3 is included in the computation of gross profit for the main product.

However, when May is treated as a joint product the entire $4 selling price enters into the computation of gross margin. The $1 is not subtracted in computing gross margin. This $1 shows up in selling costs which appear after the computation of gross margin.

The effect of a change from byproduct to joint product status is a $1 increase in gross margin. It should be noted that bottom line net income does not change, however.

PLEASE HELP ME UNDERSTAND THIS!

[mtaylo24]

OMG!!!! Stay away from chapter 16 in Gleim. Another hours and a half for 33 questions

AUD - 1st - 60 (12/12), 61 (2/13), 61 (8/13), 78! (11/15)
REG - 55 (2/16) 69 (5/16) Retake(8/16)
BEC - 71(5/16) Retake (9/16)
FAR - (8/16)

[Author]

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