Financial Statements; Cost Behaviour; Leverage and Risk/Reward Relationship; Fixed and Variable Cost

Problem 1

Eiffel Manufacturing Company makes small replicas of major landmarks
that it sells to souvenir shops. The company was started on January 1,
2003 when it acquired $60,000 cash from the issue of common stock.
During 2003 the company purchased and used raw materials that cost
$16,000 cash. It paid wages to workers who made the replicas $22,000
cash. Finally, manufacturing overhead costs, including rental fees paid
for facilities and equipment, amounted to $12,000 cash. The company
started and completed the production of 1,000 replicas during 2003.

Required

a. Determine the amount of expense Eiffel incurred in 2003 assuming none
of the replicas were sold in 2003.

b. Record the accounting events associated with making the 1,000
replicas in a financial statements model like the one shown below. The
event pertaining to the issue of common stock is recorded in the model
as an example.



Assets = Equity















Com.

Ret.









Events

Cash + Inv. = Stk. + Ear.

Rev. – Exp. = Net Inc.

Cash Flow

1

60,000 +

= 60,000 +



–

=

60,000 FA





















c. Determine the cost per unit of the 1,000 replicas. Determine the
sales price per unit assuming the products are sold for cost plus 40% of
cost.

d. Record the sale of 800 replicas.

e. Record the payment of a $4,000 sales commission to the salesperson
who sold the replicas.Problem 2

Handcappi Manufacturing Company experienced the following accounting
events during its first year of operation. Except for the depreciation
adjusting entries, all transactions are cash transactions.

1. Acquired $61,000 cash from the issue of common stock.

2. Paid $6,800 for the materials that were used to make its products.
All products started were completed during the period.

3. Paid salaries of $4,300 to selling and administrative employees.

4. Paid wages of $7,200 to production workers.

5. Paid $9,000 to buy furniture used in selling and administrative
offices. The furniture was acquired on January 1. It had a $1,000
estimated salvage value and a 5-year useful life. Code the furniture
purchase as Event No. 5a. Code recognition of the annual depreciation
as Event No. 5b.

6. Paid $23,000 to buy manufacturing equipment. The equipment was
acquired on January 1. It had a $3,000 estimated salvage value and a
4-year useful life. Code the equipment purchase as Event No. 6a. Code
recognition of the annual depreciation as Event No. 6b.

7. Completed 4,000 units of product. Determine the cost per unit and
the sales price per unit assuming the sales price is cost plus 60% of
cost. Record the sale of 3,000 units of product. Code the recognition
of revenue as Event No. 7a. Code the recognition of cost of goods sold
as Event No. 7b.

Required

Show how these events would affect the balance sheet, income statement,
and statement of cash flows by recording them in a horizontal financial
statements model like the one shown below. The first event is recorded
as an example.

Horizontal Statements Model



Assets = Equity









Event



Office

Manuf.



Com.

Ret.









No.

Cash + Furn.* + Equip.* + Inv. = Stk. + Ear.

Rev. – Exp. = Net Inc.

Cash Flow

1

61,000







61,000









61,000 FA





Problem 3

Art On Tour, Inc. (AOTI) contracts with artists to exhibit their works
to the public. AOTI has agreed to pay a well known artist a $20,000
commission for the right to exhibit his work for one month.

Required

Part a – Identifying Cost Behavior

1. Determine the total commission cost and the commission cost per
person if 1,000 / 2,000 / 4,000 people attend the exhibition. Is the
commission cost fixed or variable?

2. AOTI provides patrons with books illustrating the artist’s work.
The books cost $5 each. Determine the total cost of books and the cost
per person if 1,000 / 2,000 / 4,000 people attend the exhibition. Is
the book cost fixed or variable?

Part b – Operating Leverage and Risk/Reward Relationship

1. AOTI pays an artist a $20,000 commission. It sells 4,000 tickets at
$6 each. Prepare an income statement. Then prepare revised income
statements assuming 10 percent more than 4,000 and 10 percent fewer than
4,000 patrons attend the exhibition. Calculate the percentage change in
revenue and net income if attendance increases or decreases 10 percent.

2. Alternatively, AOTI pays the artist a commission of $5 per ticket
sold. It sells 4,000 tickets at $6 each. Prepare an income statement.
Then prepare revised income statements assuming 10 percent more than
4,000 and 10 percent fewer than 4,000 patrons attend the exhibition.
Calculate the percentage change in revenue and net income if attendance
increases or decreases 10 percent.

.

Part c --Fixed and Variable Cost Definitions are Context Sensitive

1. AOTI pays the artist a commission of $20,000 per exhibition. What is
the total commission cost and the commission cost per person if 1,000 /
2,000 / 4,000 people attend the exhibition? (Same as part a.1.)

2. AOTI pays the artist a commission of $20,000 per exhibition. What is
the total commission cost and the commission cost per exhibition if AOTI
sponsors 1, 2, or 3 exhibitions?

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