Problem 1 – Café Xaragua’s Second Year

Rob Lehnert and his partners decided to proceed with their plans and opened Café Xaragua. During the first year, the business performed almost exactly as they expected. During the second year of operations, their newly hired manager made some changes, which resulted in a revenue increase of a little over 21%, but a decrease in gross margin. The partners hired a consultant who prepared the schedule that appears on the following page. After preparing the schedule, the consultant disappeared, so the partners have hired you to help them interpret the schedule. Here are their questions:

1. Wow! Total revenues increased a lot! Are we selling more of each product than we thought we would? How has each product affected total revenues?

1. When the new manager came on board, he messed around with selling prices. What was the effect of the price changes on the increase in revenues for each product?

1. It looks like our customers purchased a different mix of product than we expected. Which product was the most different from what we expected?

1. We’re really happy about the big increase in revenues, but why is the gross margin percentage less than last year? Tell me howeach productcontributed to the overall decline in our expectedgross margin.

1. What do you think we should do differently next year to increase our total gross margin? I’m counting on you to give me very specific guidance.

1. Do your findings suggest that customers like our strategy of providing a unique blend of sustainable coffee produced in Haiti or do they regard us as just another coffee shop?

Module D – May 2015

FINAL EXAM

Problem 2 – Activity-Based Costing

Using the information below, answer the questions that follow.

Plumbing Supply Company manufactures three products: Valves, Pumps and “Flowtrollers” (which is patented and only manufactured by Plumbing Supply). The most recent monthly statement of pre-tax operating income appears below:

Plumbing Supply Company

Pre-tax Operating Income – April 2013

Until recently, Plumbing Supply allocated manufacturing overhead to each product using 185% of direct labor costs:

Overhead Allocated as 185% * Direct Labor Cost

The Company recently hired a Hult graduate who determined that an activity-based method for allocating overhead would provide a better estimate of each product’s costs and computed the following estimates:

Activity-Based Costing

1. Under the previous method for allocating overhead (i.e., 185% of Direct Labor Costs), which product was most profitable? What is the basis for your answer?

2.       Under activity-based costing, is the same product you identified above still the most profitable? If not, what has changed? Explain.

3.       Based on the revised amounts of overhead charged to each product using activity-based costing, what conclusion(s) can you draw about the relative resources required to manufacture each product? (That is, compare the amount of resources necessary for each product.)

4.       Does the method of allocating overhead affect the company’s operating profit? Explain.

5.       What suggestions would you make to management to improve their overall profitability?

Problem 3 – Cost Behavior and Break-even Analysis

Following the success of the Norgan Theatre in Minto, Ontario, owners of another troubled theatre located in Texas decided to renovate and re-open, hoping the enjoy the same success as Norgan. The owners of the Texas theatre put together the following information related to their expected costs of running the theatre:

The owners are unsure about the single admission price they should charge (there is only one ticket price). One of the owners recalled having learned something about break-even analysis in graduate school, but didn’t remember the details. Please help out by answering the questions below.

1. All the expenses with numbers above, which total $26,585, are fixed costs. What does that mean?

1. Why is it necessary to know fixed costs in order to determine a break-even point?

1. Contribution margin is defined as sales revenue less variable costs. Using the information above, write an equation for the theatre’s contribution margin where X=the revenue required for theatre admission.

1. Solve for the break-even level of theatre admission revenue.

1. The theatre owners are expecting 2,975 people to buy tickets. If the theatre owners want to charge a price that results in a profit of $5,000, how much should they charge for each ticket?