264-Final (Fall 2015)

Multiple Choices. Select the best answer.(1 mark each)

1- What would be a good example of a common cost that normally could not be assigned to products on a segmented income statement except on an arbitrary basis?

A) Product advertising outlays.

B) Salary of a corporation president.

C) Direct materials.

D) The product manager’s salary.

2- Which of the following best describes a segment of a business responsible for both revenues and expenses?

A) A cost center.

B) An investment center.

C) A profit center.

D) A residual income center.

3- The management of the Daily Grind wants to install an espresso bar in its restaurant.

The cost of the espresso bar is $150,000 and it has a 10-year life. The espresso bar generate net income of $35,000 after deducting depreciation expense of $15,000. Would be the payback period?

A) 3.0 years 

B) 4.3 years

C) 7.5 years

D) 10.0 years

4- The marging of safety percentage is computed as:

A) Breakeven sales/ Total sales

B) Total sales – Breakeven sales (Wrong)

C) (Total sales – Breakeven sales)/ Breakeven sales

D) (Total sales – Breakeven sales)/Total sales 

5- Which one of the following statements about the payback method of capita is correct?

A) The payback method does not consider the time value of money.

B) The payback method consider cash flows after the payback has been re..

C) The payback method uses discounted cash flow techniques.

D) The payback method will lead to the same decision as other method of budgeting.

6- Which of the following costs are always relevant in decision making?

A) Variable costs.

B) Avoidable costs.

C) Sunk costs.

D) Fixed costs.

7- An increase in the discount rate:

A) Will increase the present value of future cash flow.

B) Will have no effect on net present value.

C) Will reduce the present value of future cash flow.

D) Is one method of compensating for reduced risk?

8- Which of the following are benefits of decentralization?

I- Giving a manager of a division greater decision making controlling over his/her division provides vital training for a manager who is on the rise in the company.

II- Managers at corporate headquarters have greater control in seeing that the goals of the company are realized.

III- Added decision-making authority and responsibility often leads to increased job satisfaction and often persuades a manager to put forth his/her best efforts. 

A) Only I and II. 

B) Only II and III.

C) Only I and III.

D) Only I.

9- If company A has a higher degree of operating leverage than company B, then:

A) Company A has higher variable expenses.

B) Company A’s profits are more sensitive to percentage changes is sales.

C) Company A is more profitable.

D) Company A is less risky.

Problem 1 (7 marks)

A downtown restaurant added an ice cream counter to its operations for the spring and summer. The owner wished to evaluate the profitability of the counter and received the following statement from his accountant:

  

Ice cream sales

$33,650

 

Cost of goods sold

 

Gross margin

18,750

 

Operating expenses:

 

Wages of counter servers *

$9,000

 

Napkins and plastic spoons – counter   service 

3,000

 

Amortization expense – freezer

(freezer used only for ice cream counter)

500

 

Amortization expense – building   (allocated based on square footage used by ice cream counter)

3,000

 

Restaurant manager’s salary (allocated   based on sales revenues)

 

Total operating expenses

 

Loss

$(750)

The owner is disappointed by the results; the counter had been quite popular in attracting customers. However, he does not wish to incur a loss so has decided not to open the ice cream counter next summer.

* The wages are for student hired to work only at the ice cream counter.

Required:

Is the owner’s decision to close the ice cream counter correct? Calculate the advantage or disadvantage if the counter is closed. Show your work.

Answer:

Problem 2 (9 marks)

Mega Boxes Inc. expects its divisions to earn a minimum rate of return of 15%. One of its divisions, Cube Storage, is an investment centre the manufactures storage containers. The division has average operating assets of $2,500,000 and achieved the following results in the current year:

Cube Storage

Income Statement

  

Sales

$4,800,000

 

Cost of goods sold

 

Gross margin 

1,640,000

 

Operating expenses:

 

Administrative

$428,000

 

Selling

 

Operating income

Required

A) Calculate the margin and turnover for Cube Storage division for the current year. (2 marks)

B) Calculate the return on investment for cube storage division for the current year. (1 mark)

C) Calculate the residual income for Cube Storage division for the current year. (2 marks)

D) An investment opportunity is available to Cube Storage that would require an investment of $500,000 in new operating assets and earn net income of $85,000-.

I. Would the management of Cube Storage likely accept the investment opportunity if they are evaluated based on return on investment of the division? Explain. (2 marks)

II. Would the management of Cube Storage likely accept the investment opportunity if they are evaluated based on residual income? Explain. (2 marks)

Problem 3 (11 marks)

Conrad Company is evaluating its two divisions, North division and south division. Data for the north Division include sales of $530,000, variable costs of $290,000and fixed costs of $260,000, 50% of which are traceable to the division. South Divison’s data include sales of $610,000, variable costs of $340,000 and fixed costs of $290,000, 60% of which are traceable to the Division. 

Required: 

A) Prepare a segmented income statement Showing the details for the divisions and the company as a whole. Use a format that is useful for decision- making.(7 marks)

B) Should either of the divisions be considered for elimination? Explain. (1 marks)

C) The company’s sales manager believes that sales volume in the North Division could be increased by 15% if advertising was increased by $25,000. Would you recommend the increased advertising? Show calculation. (3 marks)

Problem 4 (10 marks)

Norhtstar uses 200 units of component RT82 each month. One of Northstar’s suppliers has offered to supply this component at a price of 4,300 per unit. Northstar’s cost of manufacturing one unit of component RT82 at its own facilities is as follows:

     

Direct material 

$300

 

Material handing (20% of direct     material cost)

60

 

Direct labour

1,400

 

Variable manufacturing overhead

1,000

  

Fixed manufacturing overhead

 

Total manufacturing cost per unit

Other information: 

– Material handling costs are variable costs of receiving these materials.

– Of the fixed manufacturing overhead, two-thirds of the cost would continue even if the component was manufactured by the supplier.

– If Norhthstar purchased the units from supplier, the idle plant capacity could be rented out to earn revenue of $15,000 per month 

Required: 

A) If Northstar purchases the units from the supplier, by how much will net income increase or decrease? Should Northstar purchase these units from the supplier? Show your work 

(8 marks)

B) List two other factors besides the above costs that management should consider in making this decision. (2 marks)

  

Problem 5 (9 Marks)

Holt Company makes three products in a single facility. Data concerning products follow:

  

A B C

Selling price per unit $58 $68   $44  

Variable production cost per unit $20   $29   $17

Variable selling cost per unit $2  $3  $2

Mixing minutes per unit 4  2  5

Monthly demand in units 3,000  1,000  3,000 

This mixing machines are potentially the constraint in the production facility. A total of 27,000 minutes are available per month on these machines.

Direct labour is a variable cost in this company. 

Required:

A) How many minutes of mixing machine time would be required to satisfy demand for all three products? (2 marks)

B) Which orders would you advise the company to accept first? Second? Third? Show work to support your decision. (5 marks)

C) How much would the company be willing to pay for one additional minute mixing machine time in excess of the normal price if the company has made the best use of the existing mixing machine capacity? (2 marks)

Problem 6 (13marks)

Kintek ltd produces electronic election calculators. The firm recently received a special- order inquiry from Anderson electronics Inc. which has offered to purchase a large order of 6,000 calculators for a price of $38 each. Kintek’s normal selling price for calculator is $55.

The cost data for one calculator is as follows: 

Direct material $16

Direct labour 7

Manufacturing overhead   17

Variable selling expense   

Total unit cost  

Additional information:

– Kintek has decided that, if it accepts the order, it will purchase additional specialized equipment costing $4,500 and will spend an additional $5,000 in set up costs.

– The manufacturing overhead costs include $6 of variable overhead and $11 of fixed overhead per unit.

– There would be no shipping expense would be eliminated.

– Kiintek would allocate $3,000 of fixed administrative costs to the order as part of the cost of doing business.

– Kintek has sufficient unused capacity to produce the order.

Required: 

A) Assume regular sales would not be affected by this special order. Should Kintek Ltd accept the order? By how much would profit increase or decrease if the order is accepted? Show your work. (9 marks)

B) Assume that by accepting this order this order Kintek Ltd would lose 1,000 units of regular sales. 

– Calculate the opportunity cost from accepting the special order? (2 marks)

– Should kintek accept the special order in this situation? (1 marks) 

C) Refer to the original cost data. Kintek Ltd has 100 of last-years’ model calculators that it has been unable to sell, even at reduced price. Another company, Baily’s Bargain Basement stores Ltd. Has agreed to buy all 100 last year’s calculators from kintek if the “price is right” The agreement specifies that Kintek would have to pay $3 per calculators to have the batteries replaced. Assume that no selling expenses would be incurred and that the other unit costs( given above) have not changed since last year. What is the minimum price that Kintek should charge Bailey’s? (1 marks)

  

Problem7 (10 marks) 

XYZ Co. is planning to buy a machine that would allow it to automate certiain procedures currently done manually. The machine would cost $100,000 and has an estimated life of 8 years. At the end of the 4th year, several key parts of the machine would have to be replaced at an installed cost of $8,000. The estimated salvage value at the end of the machine’s life is $6,500.

The machine would increase production by 7,000 units per year and each unit has a contribution margine of $1.20. The annual operating costs of the new machine would be $6,000 annual direct labor costs $20,000 would be eliminated through using the machine. The company’s cost of capital is 15% which is an appropriate discount rate. 

Required: 

a) Using an incremental approach, compute the net present value using the machine in its operations over the next 8 years (compared to not using the machine). (7 marks)

b) Based on your result for part A, should the company invest in the machine? (1 marks)

c) Another company used the net present value method to decide whether to purchase an investment. The net present value was zero. Should the company purchase the investment? Explain (2 marks)   

Problem 8:

corporation is considering is considering investing in the following projects:

 Project A   Project B

Initial cash outlay         

Future cash inflows: 

Year 1 $ 50,000   $ –

Year 2 50,000   –

Year 3  50,000   –

Year 4 50,000 $40,000

Year 5  50,000 90,000

Year 6

Total cash inflows:    

The company’s cost of capital is 9%, which is an appropriate discount rate. 

Required:

A) Compute the net present value of each project. (6 marks)

B) Assume Q Corporation has limited funds to invest and is considering two projects, both with positive net present value. Explain (no calculations needed) how the two projects should be ranked. (2 marks) 

Problem 9:

The following information is available for the Challenger Company and its only product, product SW:

  

Total 

Per unit

 

Sales (400 units)

$110,000

$275

 

Variable expenses 

 

Contribution margin

66,000

$165

 

Fixed expenses

 

Net Income

$13,200

Required: 

A) Without resorting to calculations, what is the total contribution margin at the break-even

Point? (1 mark)

B) Calculate the break-even point in sales dollar. (2 mark).

C) Calculate the degree of operation leverage. (1 mark).

D) Management is contemplating the use of plastic gearing rather than metal gearing in product SW. This change would reduce variable costs by $15. The company’s marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline sales to a level of 350 units per month. Calculate the effect on net income using an incremental approach. Should this chance be made? (4 mark).

E) Management is contemplating the use of plastic gearing rather than metal gearing in product SW. This change would reduce variable costs by $15. The company’s marketing manager predicts that this would reduce the overall quality of the product and thus would result in a decline sales to a level of 350 units per month. Calculate the effect on net income using an incremental approach. Should this chance be made? (4 mark).

F) Assess the risk of the investment in part e. Provide a calculation to support your answer. (2 marks).