Chapter 1
Foundational 15
Martinez Company’s relevant range of production is 7,500 units to 12,500
units. When is produces and sells 10,000 units, its average costs per unit are
as follows:
Average cost per unit
Direct Materials
$6.00
Direct Labor
$3.50
Variable Manufacturing OH
$1.50
Fixed Manufacturing OH
$4.00
Fixed Selling Expense
$3.00
Fixed Admin. Expense
$$2.00
Sales Commissions
$1.00
Variable Admin. Expense
$0.50
1. For Financial Accounting purposes, what is the total amount of
product costs incurred to make 10,000 units?
2. For Financial Accounting purposes, what is the total amount of period
costs incurred to sell 10,000 units?
3. If 8,000 units are produced and sold, what is the variable cost per unit
produced and sold?
4. If 12,500 units are produced and sold, what is the variable cost per
unit produced and sold?
5. If 8,000 units are produced and sold, what is the total amount of
variable costs related to the units produced and sold?
6. If 12,500 units are produced and sold, what is the total amount of
variable costs related to the units produced and sold?
7. If 8,000 units are produced, what is the average fixed manufacturing
cost per unit produced?
8. If 12,500 units are produced, what is the average fixed manufacturing
cost per unit produced?
9. If 8,000 units are produced, what is the total amount of fixed
manufacturing cost incurred to support this level of production?
10. If 12,500 units are produced, what is the total amount of fixed
manufacturing cost incurred to support the level of production?
11. If 8,000 units are produced, what is the total amount of manufacturing
overhead cost incurred to support this level of production? What is the
total amount expressed on a per unit basis?
12. If 12,500 units are produced, what is the total amount of
manufacturing overhead cost incurred to support this level of
production? What is this total amount expressed on a per unit basis?
1
13. If the selling price is $22 per unit, what is the contribution margin per
unit?
14. If 11,000 units are produced, what are the total amounts of direct and
indirect manufacturing costs incurred to support this level of
production?
15. What incremental manufacturing cost will Martinez incur if it
increases production from 10,000 to 10,001 units?
Exercises
1-3 Classifying Costs as Product or Period Costs
Suppose that you have been given a summer job as an intern at Issac
Aircams, a company that manufactures sophisticated spy cameras for remotecontrolled military reconnaissance aircraft. The company, which is privately
owned, has approached a bank for a loan to help finance its growth. The bank
requires financial statements before approving the loan.
Required:
Classify each cost listed below as either a product cost or a period cost for the
purpose of preparing financial statements for the bank.
1. Depreciation on salesperson’s cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods warehouse.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisors’ salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are
not normally boxed.)
9. Advertising costs.
10. Workers’ compensation insurance for factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Cost of leasing the corporate jet used by the company’s executives.
14. The cost of renting rooms at a Florida resort for the annual sales
conference.
15. The cost of packaging the company’s product.
2
1-4 Fixed and Variable Cost Behavior
Espresso Express operates a number of espresso coffee stands in busy
suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the
variable cost per cup of coffee served is $0.22.
Required:
1. Fill in the following table with your estimate of the company’s total
cost and average cost per cup of coffee at the indicated levels of
activity. Round off the average cost per cup of coffee to the nearest
tenth of a cent.
Cups of coffee served in a week
2,000
2,100
2,200
?
?
?
?
?
?
?
?
?
?
?
?
Fixed Cost
Variable Cost
Total Cost
Average cost per cup of coffee served
2. Does the average cost per cup of coffee served increase, decrease, or remain
the same as the number of cups of coffee served in a week increases? Explain.
1-6
Traditional and Contribution Format Income
Statements
Cherokee Inc. is a merchandiser that provided the following information:
Amount
20,000
$30
$4
$2
$40,000
$30,000
$24,000
$44,000
$180,000
Number of units sold
Selling price per unit
Variable selling exp. per unit
Variable admin. exp. per unit
Total fixed selling exp.
Total fixed admin. exp.
Beg. merchandise inventory
End. merchandise inventory
Merchandise purchases
Required:
1. Prepare a traditional income statement.
3
2. Prepare a contribution format income statement.
1-11 Cost Behavior; Contribution Format Income
Statement
Harris Company manufactures and sells a single product. A partially
completed schedule of the company’s total costs and costs per unit over the
relevant range of 30,000 to 50,000 units is given below:
Units Produced and Sold
30,000
40,000
50,000
Total Costs
Variable cost
Fixed cost
Total Cost
$180,000
300,000
$480,000
Costs per unit
Variable cost
Fixed cost
Total Cost per unit
?
?
?
?
?
?
?
?
?
?
?
?
?
?
?
Required:
1. Complete the above schedule of the company’s total costs and costs per
unit.
2. Assume that the company produces and sells 45,000 units during the
year at a selling price of $16 per unit. Prepare a contribution format
income statement for the year.
1-12 Product and Period Cost Flows
The Devon Motor Company produces automobiles. On April 1st the company
had no beginning inventories and it purchased 8,000 batteries at a cost of $80
per battery. It withdrew 7,600 batteries from the storeroom during the
month. Of these, 100 were used to replace batteries in cars being used by the
company’s traveling sales staff. The remaining 7,500 batteries withdrawn
from the storeroom were placed in cars being produced by the company. Of
the cars in production during April, 90 percent were completed and
transferred from work in process to finished goods. Of the cars completed
during the month, 30 percent were unsold at April 30th.
4
Required:
1. Determine the cost of batteries that would appear in each of the following
accounts on April 30th.
a. Raw Materials
b. Work in Process
c. Finished Goods
d. Cost of Goods Sold
e. Selling Expense
2. Specify whether each of the above accounts would appear on the balance
sheet or on the income statement at the end of the month
Chapter 2
Foundational 15
Sweeten Company had no jobs in progress at the beginning of March and no
beginning inventories. The company has two manufacturing departments –
Molding and Fabrication. It started, completed, and sold only two jobs during
March – Job P and Job Q. The following additional information is available
for the company as a whole and jobs P and Q (all data and questions relate to
the month of March):
Est. total machine-hours used
Est. total fixed man. OH
Est. variable man. OH per
machine hour
Molding
2,500
$10,000
$1.40
Direct materials
Direct labor cost
Actual machine-hours used:
Molding
Fabrication
Total
Fabrication
1,500
$15,000
$2.20
Total
4,000
$25,000
Job P
$13,000
$21,000
Job Q
$8,000
$7,500
1,700
600
800
900
2,300
1,700
Sweeten Company had no underapplied or overapplied manufacturing
overhead costs during the month.
5
Required:
For questions 1-8, assume that Sweeten Company used a plantwide
predetermined overhead rate with machine-hours as the allocation base. For
questions 9-15, assume that the company uses departmental predetermined
overhead rates with machine-hours as the allocation base in both
departments.
1. What was the company’s plantwide predetermined overhead rate?
2. How much manufacturing overhead was applied to Job P and how
much was applied to Job Q?
3. What was the total manufacturing cost assigned to Job P?
4. If Job P included 20 units, what was its unit product cost?
5. What was the total manufacturing cost assigned to Job Q?
6. I Job Q included 30 units, what was its unit product cost?
7. Assume that Sweeten Company used cost-plus pricing (and a markup
percentage of 80% of total manufacturing cost) to establish selling
prices for all of its jobs. What selling price would the company have
established for Jobs P and Q? What are the selling prices for both jobs
when stated on a per unit basis?
8. What was Sweeten Company’s cost of goods sold for March?
9. What were the company’s predetermined overhead rates in the
Molding Department and the Fabrication Department?
10. How much manufacturing overhead was applied from the Molding
Department to Job P and how much was applied to Job Q?
11. How much manufacturing overhead was applied from the Fabrication
Department to Job P and how much was applied to Job Q?
12. If Job P included 20 units, what was its unit product cost?
13. If Job Q included 30 units, what was its unit product cost?
14. Assume that Sweeten Company used cost-plus pricing (and a markup
percentage of 80% of total manufacturing cost) to establish selling
prices for all of its jobs. What selling price would the company have
established for Jobs P and Q? What are the selling prices for both jobs
when stated on a per unit basis?
15. What was Sweeten Company’s cost of goods sold for March?
Exercises
2-1 Compute a Predetermined Overhead Rate
Harris Fabrics computes its plantwide predetermined overhead rate annually
on the basis of direct labor-hours. At the beginning of the year, it estimated
that 20,000 direct labor-hours would be required for the period’s estimated
level of production. The company also estimated $94,000 of fixed
6
manufacturing overhead cost for the coming period and variable
manufacturing overhead of $2.00 per direct labor-hour. Harris’s actual
manufacturing overhead cost for the year was $123,900 and its actual total
direct labor was 21,000 hours.
Required:
Compute the company’s plantwide predetermined overhead rate for the year.
2-3 Computing Total Job Costs and Unit Product Costs
Using a Plantwide Predetermined Overhead Rate
Mickley Company’s plantwide predetermined overhead rate is $14.00 per
direct labor-hour and its direct labor wage rate is $17.00 per hour. The
following information pertains to Job A-500:
Direct Materials
Direct Labor
$231
$153
Required:
1. What is the total manufacturing cost assigned to Job A-500?
2. If Job A-500 consists of 40 units, what is the unit product cost for this
job?
2-5 Computing Total Job Costs and Unit Product Costs
Using Multiple Predetermined Overhead Rates
Braverman Company has two manufacturing departments – Finishing and
Fabrication. The predetermined overhead rates in Finishing and Fabrication
are $18.00 per direct labor-hour and 110% of direct materials cost,
respectively. The company’s direct labor wage rate is $16.00 per hour. The
following information pertains to Job 700:
Direct Materials
Direct Labor
Finishing
$410
$128
Fabrication
$60
$48
Required:
1. What is the total manufacturing cost assigned to Job 700?
7
2. If Job 700 consists of 15 units, what is the unit product cost for this
job?
2-7 Job-Order Costing: Working Backwards
Hahn Company uses a job-order costing system. Its plantwide predetermined
overhead rate uses direct labor-hours as the allocation base. The company
pays its direct laborers $15 per hour. During the year, the company started
and completed only two jobs – Job Alpha, which used 54,500 direct laborhours, and Job Omega. The job cost sheets for these two jobs are shown
below:
Job Alpha
Direct materials
Direct labor
Manufacturing OH applied
Total job cost
?
?
__?__
$1,533,500
Job Omega
Direct materials
Direct labor
Manufacturing OH applied
Total job cost
$235,000
345,000
184,000
$764,000
Required:
1. Calculate the plantwide predetermined overhead rate.
2. Complete the job cost sheet for Job Alpha.
2-13 Departmental Predetermined Overhead Rates
White Company has two departments, Cutting and Finishing. The company
uses a job-order costing system and computes a predetermined overhead rate
in each department. The Cutting Department bases its rate on machinehours, and the Finishing Department bases its rate on direct labor-hours. At
the beginning of the year, the company made the following estimates:
8
Department
Direct labor-hours
Machine-hours
Total fixed manufacturing OH cost
Variable manufacturing OH per
machine-hour
Variable manufacturing OH per
direct labor-hour
Cutting
6,000
48,000
$264,000
$2.00
Finishing
30,000
5,000
$366,000
---
---
$4.00
Required:
1. Compute the predetermined overhead rate for each department.
2. The job cost sheet for Job 203, which was started and completed during
the year, showed the following:
Department
Direct labor-hours
Machine-hours
Direct materials
Direct labor cost
Cutting
6
80
$500
$108
Finishing
20
4
$310
$360
Using the predetermined overhead rates that you computed in (1) above,
compute the total manufacturing cost assigned to Job 203.
3. Would you expect substantially different amounts of overhead cost to
be assigned to some jobs if the company used a plantwide
predetermined overhead rate based on direct labor-hours, rather than
using departmental rates? Explain. No computations are necessary.
2-18 Job Order Costing for a Service Company
Speedy Auto Repairs uses a job-order costing system. The company’s direct
materials consist of replacement parts installed in customer vehicles, and its
direct labor consists of the mechanic’s hourly wages. Speedy’s overhead costs
include various items, such as the shop manager’s salary, depreciation of
equipment, utilities, insurance, and magazine subscriptions and
refreshments for the waiting room.
9
The company applies all of its overhead costs to jobs based on direct laborhours. At the beginning of the year, it made the following estimates:
Direct labor-hours required to
support estimated output
Fixed overhead cost
Variable overhead cost per direct
labor-hour
20,000
$350,000
$1.00
Required:
1. Compute the predetermined overhead rate.
2. During the year, Mr. Wilkes brought in his vehicle to replace his
brakes, spark plugs, and tires.
The following information was available with respect to his job:
Direct materials
Direct labor cost
Direct labor-hours used
$590
$109
6
Compute Mr. Wilkes’ total job cost.
3. If Speedy establishes its selling prices using a markup percentage of
40% of its total job cost, then how much would it have charged Mr.
Wilkes?
Chapter 5
Foundational 15
Oslo Company prepared the following contribution format income statement
based on a sales volume of 1,000 units (the relevant range of production is
500 units to 1,500 units):
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income
$20,000
12,000
8,000
6,000
$2,000
10
Required:
(Answer each question independently and always refer to the original data
unless instructed otherwise.)
1. What is the contribution margin per unit?
2. What is the contribution margin ratio?
3. What is the variable expense ratio?
4. If sales increase to 1,001 units, what would be the increase in net
operating income?
5. If sales decline to 900 units, what would be the net operating income?
6. If the selling price increases by $2 per unit and the sales volume
decreases by 100 units, what would be the net operating income?
7. If the variable cost per unit increases by $1, spending on advertising
increases by $1,500, and unit sales increase by 250 units, what would
be the net operating income?
8. What is the break-even point in unit sales?
9. What is the break-even point in dollar sales?
10. How many units must be sold to achieve a target profit of $5,000?
11. What is the margin of safety in dollars? What is the margin of safety
percentage?
12. What is the degree of operating leverage?
13. Using the degree of operating leverage, what is the estimated percent
increase in net operating income of a 5% increase in sales?
14. Assume that the amounts of the company’s total variable expenses and
total fixed expenses were reversed. In other words, assume that the
total variable expenses are $6,000 and the total fixed expenses are
$12,000. Under this scenario and assuming that total sales remain the
same, what is the degree of operating leverage?
15. Using the degree of operating leverage that you computed in the
previous question, what is the estimated percent increase in net
operating income of a 5% increase in sales?
Exercises
5-2 Prepare a Cost-Volume-Profit (CVP) Graph
Karlik Enterprises distributes a single product whose selling price is $24 per
unit and whose variable expense is $18 per unit. The company’s monthly
fixed expense is $24,000.
Required:
1. Prepare a cost-volume-profit graph for the company up to a sales level
of 8,000 units.
11
2. Estimate the company’s break-even point in unit sales using your costvolume-profit graph.
5-4 Computing and Using the CM Ratio
Last month when Holiday Creations Inc., sold 50,000 units, total sales were
$200,000, total variable expenses were $120,000, and fixed expenses were
$65,000.
Required:
1. What is the company’s contribution margin (CM) ratio?
2. What is the estimated change in the company’s net operating income if
it can increase total sales by $1,000?
5-6 Break-Even Analysis
Mauro Products distributes a single product, a woven basket whose selling
price is $15 per unit and whose variable expense is $12 per unit. The
company’s monthly fixed expense is $4,200.
Required:
1. Calculate the company’s break-even point in unit sales.
2. Calculate the company’s break-even point in dollars.
3. If the company’s fixed expenses increase by $600, what would become
the new break-even point in unit sales? In dollar sales?
5-7 Target Profit Analysis
Lin Corporation has a single product whose selling price is $120 per unit and
whose variable expense is $80 per unit. The company’s monthly fixed expense
is $50,000.
Required:
1. Calculate the unit sales needed to attain a target profit of $10,000.
2. Calculate the dollar sales needed to attain a target profit of $15,000.
12
5-8 Compute the Margin of Safety
Molander Corporation is a distributor of a sun umbrella used at resort hotels.
Data concerning the next month’s budget appear below:
Selling price per unit
Variable expense per unit
Fixed expense per unit
Unit sales per month
$30
$20
$7,500
1,000
Required:
1. What is the company’s margin of safety?
2. What is the company’s margin of safety as a percentage of its sales?
5-9 Compute and Use the Degree of Operating Leverage
Engberg Company installs lawn sod in home yards. The company’s most
recent monthly contribution format income statement follows:
Sales
Variable expenses
Contribution margin
Fixed expenses
Net operating income
Amount
$80,000
32,000
48,000
38,000
$10,000
Percent of Sales
100%
40%
60%
Required:
1. What is the operating leverage?
2. If Engberg had a 5% increase in sales, what effect would
this have on their net income?
13
5-10 Multiproduct Break-Even Analysis
Lucido Products markets two computer games: Claimjumper and Makeover.
A contribution format income statement for a recent month for the two games
appears below:
Sales
Variable exp.
Contribution
margin
Fixed exp.
Net operating
income
Claimjumper
$30,000
20,000
$10,000
Makeover
$70,000
50,000
$20,000
Total
$100,000
70,000
30,000
24,000
$6,000
Required:
1. What is the overall contribution margin (CM) ratio for the company?
2. What is the company’s overall break-even point in dollar sales?
3. Verify the overall break-even point for the company by constructing a
contribution format income statement showing the appropriate levels
of sales for the two products.
5-11 Missing Data; Basic CVP Concepts
Fill in the missing amounts in each of the eight case situations below. Each
case is independent of the others. (Hint: One way to find the missing amounts
would be to prepare a contribution format income statement for each case,
enter the known data, and then compute the missing items.)
a.
Assume that only one product is being sold in each of the four
following case situations:
Case
Units
Sold
Sales
1
2
3
15,000 $180,000
?
$100,000
10,000
?
Variable
Expense
Contribution
Margin per
Unit
Fixed
Expenses
$120,000
?
$70,000
?
$10
$13
$50,000
$32,000
?
14
Net
Operating
Income
(Loss)
?
$8,000
$12,000
4
6,000
b.
Case
1
2
3
4
$300,000
?
?
$100,000
$(10,000)
Assume that more than one product is being sold in each of the four
following case situations:
Sales
Variable
Expenses
$500,000
$400,000
?
$600,000
?
$260,000
?
$420,000
Average
Contribution
Margin
Ratio
20%
?
60%
?
Fixed
Expenses
?
$100,000
$130,000
?
Net
Operating
Income
(Loss)
$7,000
?
$20,000
$(5,000)
5-17 Break-Even and Target Profit Analysis
Outback Outfitters sells recreational equipment. One of the company’s
products, a small camp stove, sells for $50 per unit. Variable expenses are
$32 per stove, and fixed expenses associated with the stove total $108,000 per
month.
Required:
1. What is the break-even point in unit sales and in dollar sales?
2. If the variable expenses per stove increase as a percentage of the
selling price, will it result in a higher of a lower break-even point?
Why? (Assume that the fixed expenses remain unchanged.)
3. At present, the company is selling 8,000 stoves per month. The sales
manager is convinced that a 10% reduction in the selling price would
result in a 25% increase in monthly sales of stoves. Prepare two
contribution format income statements, one under present operating
conditions, and one as operations would appear after the proposed
changes. Show both total and per unit data on your statements.
4. Refer to the data in (3) above. How many stoves would have to be sold
at the new selling price to attain a target profit of $35,000 per month?
Chapter 8
Foundational 15
15
Morganton Company makes one product and it provided the following
information to help prepare the master budget:
a. The budgeted selling price per unit is $70. Budgeted unit sales for
June, July, August, and September are 8,400, 10,000, 12,000, and
13,000 units, respectively. All sales are on credit.
b. Forty percent of credit sales are collected in the month of the sale and
60% in the following month.
c. The ending finished goods inventory equals 20% of the following
month’s unit sales.
d. The ending raw materials inventory equals 10% of the following
month’s raw materials production needs. Each unit of finished goods
requires 5 pounds of raw materials. The raw materials cost $2.00 per
pound.
e. Thirty percent of raw materials purchases are paid for in the month of
purchase and 70% in the following month.
f. The direct labor wage rate is $15 per hour. Each unit of finished goods
requires two direct labor-hours.
g. The variable selling and administrative expense per unit sold is $1.80.
The fixed selling and administrative expense per month is $60,000.
Required:
1. What are the budgeted sales for July?
2. What are the expected cash collections for July?
3. What is the accounts receivable balance at the end of July?
4. According to the production budget, how many units should be
produced in July?
5. If 61,000 pounds of raw materials are needed to meet production in
August, how many pounds of raw materials should be purchased in
July?
6. What is the estimated cost of raw materials purchases for July?
7. In July what are the total estimated cash disbursements for raw
materials purchases? Assume the cost of raw material purchases in
June is $88,880.
8. What is the estimated accounts payable balance at the end of July?
9. What is the estimated raw material inventory balance at the end of
July?
10. What is the total estimated direct labor cost for July assuming the
direct labor workforce is adjusted to match the hours required to
produce the forecasted number of units produced?
11. If we assume that there is no fixed manufacturing overhead and the
variable manufacturing overhead is $10 per direct labor-hour, what is
the estimated unit product cost?
12. What is the estimated finished goods inventory balance at the end of
July?
16
13. What is the estimated cost of goods sold and gross margin for July?
14. What is the estimated total selling and administrative expense for
July?
15. What is the estimated net operating income for July?
Exercises
8-1 Schedule of Expected Cash Collections
Silver Company makes a product that is very popular as a Mother’s Day gift.
Thus, peak sales occur in May of each year, as shown in the company’s sales
budget for the second quarter given below:
Budgeted
sales (all on
account)
April
$300,000
May
$500,000
June
$200,000
Total
$1,000,000
From past experience, the company has learned that 20% of a month’s sales
are collected in the month of sale, another 70% are collected in the month
following sale, and the remaining 10% are collected in the second month
following sale. Bad debts are negligible and can be ignored. February sales
totaled $230,000, and March sales totaled $260,000.
Required:
1. Using Schedule 1 as your guide, prepare a schedule of expected cash
collections from sales, by month and in total, for the second quarter.
2. What is the accounts receivable balance on June 30th?
8-2 Production Budget
Down Under Products, Ltd., of Australia have budgeted sales of its popular
boomerang for the next four months as follows:
Unit Sales
50,000
75,000
90,000
80,000
April
May
June
July
17
The company is in the process of preparing a production budget for the
second quarter. Past experience has shown that end-of-month inventory
levels must equal 10% of the following month’s unit sales. The inventory at
the end of March was 5,000 units.
Required:
Using Schedule 2 as your guide, prepare a production budget by month and
in total, for the second quarter.
8-3 Direct Materials Budget
Three grams of musk oil are required for each bottle of Mink Caress, a very
popular perfume made by a small company in western Siberia. The cost of the
musk oil is $1.50 per gram. Budgeted production of Mink Caress is given
below by quarters for Year 2 and for the first quarter of Year 3
Year 2
First Second
Budgeted production, in
bottles
60,000 90,000
150,000
Year 3
Third
Fourth
First
100,000
70,000
Musk oil has become so popular as a perfume ingredient that it has become
necessary to carry large inventories as a precaution against stock-outs. For
this reason, the inventory of musk oil at the end of a quarter must be equal to
20% of the following quarter’s production needs. Some 36,000 grams of musk
oil will be on hand to start the first quarter of Year 2.
Required:
Using Schedule 3 as your guide, prepare a direct materials budget for musk
oil, by quarter and in total, for Year 2.
8-4 Direct Labor Budget
The production manager of Rordan Corporation has submitted the following
quarterly production forecast for the upcoming fiscal year:
1st Quarter
2nd Quarter
18
3rd Quarter
4th Quarter
Units to be
produced
8,000
6,500
7,000
7,500
Each unit requires 0.35 direct labor-hours, and direct laborers are paid
$12.00 per hour.
Required:
1. Using Schedule 4 as your guide, prepare the company’s direct labor
budget for the upcoming fiscal year. Assume that the direct labor
workforce is adjusted each quarter to match the number of hours
required to produce the forecasted number of units produced.
2. Prepare the company’s direct labor budget for the upcoming fiscal year,
assuming that the direct labor workforce is not adjusted each quarter.
Instead, assume that the company’s direct labor workforce consists of
permanent employees who are guaranteed to be paid for at least 2,600
hours of work each quarter. If the number of required direct laborhours is less that this number, the workers are paid for 2,600 hours
anyway. Any hours worked in excess of 2,600 hours in a quarter are
paid at the rate of 1.5 times the normal hourly rate for direct labor.
8-5 Manufacturing Overhead Budget
The direct labor budget of Yuvwell Corporation for the upcoming fiscal year
contains the following details concerning budgeted direct labor-hours:
Budgeted
direct laborhours
1st Quarter
8,000
2nd Quarter
8,200
3rd Quarter
8,500
4th Quarter
7,800
The company uses direct labor-hours as its overhead allocation base. The
variable portion of its predetermined manufacturing overhead rate is $3.25
per direct labor-hour and its total fixed manufacturing overhead is $48,000
per quarter. The only noncash item included in fixed manufacturing overhead
is depreciation, which is $16,000 per quarter.
Required:
1. Using Schedule 5 as your guide, prepare the company’s manufacturing
overhead budget for the upcoming fiscal year.
19
2. Compute the company’s predetermined overhead rate (including both
variable and fixed manufacturing overhead) for the upcoming fiscal
year. Round off to the nearest whole cent.
8-6 Selling and Administrative Expense Budget
Weller Company’s budgeted unit sales for the upcoming fiscal year are
provided below:
Budgeted
unit sales
1st Quarter
15,000
2nd Quarter
16,000
3rd Quarter
14,000
4th Quarter
13,000
The company’s variable selling and administrative expense per unit is $2.50.
Fixed selling and administrative expenses include advertising expenses of
$8,000 per quarter, executive salaries of $35,000 per quarter, and
depreciation of $20,000 per quarter. In addition, the company will make
insurance payments of $5,000 in the first quarter and $5,000 in the third
quarter. Finally, property taxes of $8,000 will be paid in the second quarter.
Required:
Using Schedule 7 as your guide, prepare the company’s selling and
administrative expense budget for the upcoming fiscal year.
8-7 Cash Budget
Garden Depot is a retailer that is preparing its budget for the upcoming fiscal
year. Management has prepared the following summary of its budgeted cash
flows:
Total cash
receipts
Total cash
disbursements
1st Quarter
$180,000
2nd Quarter
$330,000
3rd Quarter
$210,000
4th Quarter
$230,000
$260,000
$230,000
$220,000
$240,000
20
The company’s beginning cash balance for the upcoming fiscal year will be
$20,000. The company requires minimum cash balance of $10,000 and may
borrow any amount needed from a local bank at a quarterly interest rate of
3%. The company may borrow any amount at the beginning of any quarter
and may repay it loans, or any part of its loans, at the end of any quarter.
Interest payments are due on any principal at the time it is repaid. For
simplicity, assume that interest is not compounded.
Required:
Using Schedule 8 as your guide, prepare the company’s cash budget for the
upcoming fiscal year.
8-12 Schedules of Expected Cash Collections and Disbursements;
Income Statement; Balance Sheet
Beech Corporation is a merchandising company that is preparing a master
budget for the third quarter of the calendar year. The company’s balance
sheet as of June 30th is shown below:
Beech Corporation
Balance Sheet
June 30
Assets
Cash
90,000
Accounts Receivable
136,000
Inventory
62,000
Plant and Equipment, Net of Depreciation
210,000
Total Assets
$498,000
Liabilities and Stockholder’s Equity
Accounts Payable
$71,100
Common Stock
327,000
Retained Earnings
99,900
21
$
Total Liabilities and Stockholder’s Equity
$498,000
Beech’s managers have made the following additional assumptions and
estimates:
1. Estimated sales for July, August, September, and October will be
$210,000, $230,000, $220,000, and $240,000, respectively.
2. All sales are on credit and all credit sales are collected. Each month’s
credit sales are collected 35% in the month of sale and 65% in the
month following the sale. All of the accounts receivable at June 30 will
be collected in July.
3. Each month’s ending inventory must equal 30% of the cost of the next
month’s sales. The cost of goods sold is 60% of sales. The company pays
for 40% of its merchandise purchases in the month of the purchase and
the remaining 60% in the month following the purchase. All of the
accounts payable at June 30 will be paid in July.
4. Monthly selling and administrative expenses are always $60,000. Each
month $5,000 of this total amount is depreciation expense and the
remaining $55,000 relates to expenses that are paid in the month they
are incurred.
5. The company does not plan to borrow money or pay or declare
dividends during the quarter ended September 30. The company does
not plan to issue any common stock or repurchase its own stock during
the quarter ended September 30.
Required:
1. Prepare a schedule of expected cash collections for July, August, and
September. Also compute total cash collections for the quarter ended
September 30.
2. a.
Prepare a merchandise purchases budget for July, August, and
September. Also compute total merchandise purchases for the
quarter ended September 30.
b.
Prepare a schedule of expected cash disbursements for
merchandise purchases for the quarter ended September 30.
3. Using Schedule 9 as your guide, prepare an income statement for the
quarter ended September 30.
4. Prepare a balance sheet as of September 30.
8-13 Schedules of Expected Cash Collections and Disbursements;
Income Statement; Balance Sheet
22
Refer to the data for Beech Corporation in Exercise 8-12. The company is
considering making the following changes to the assumptions underlying its
master budget:
1. Each month’s credit sales are collected 45% in the month of sale and
55% in the month following the sale.
2. Each month’s ending inventory must equal 20% of the cost of next
month’s sales.
3. The company pays for 30% of its merchandise purchases in the month
of the purchase and the remaining 70% in the month following the
purchase.
All other information from Exercise 8-12 that is not mentioned above remains
the same.
Required:
Using the new assumptions described above, complete the following
requirements:
1. Prepare a schedule of expected cash collections for July, August, and
September. Also compute total cash collections for the quarter ended
September 30.
2. a.
Prepare a merchandise purchases budget for July, August, and
September. Also compute total merchandise purchases for the
quarter ended September 30.
b.
Prepare a schedule of expected cash disbursements for
merchandise purchases for July, August, and September. Also
compute total cash disbursements for merchandise purchases for
the quarter ended September 30.
3. Using Schedule 9 as your guide, prepare an income statement for the
quarter ended September 30.
4. Prepare a balance sheet as of September 30.
Chapter 9
Foundational 15
Adger Corporation is a service company that measures its output based on
the number of customers served. The company provided the following fixed
and variable cost estimates that it uses for budgeting purposes and the actual
results for May as shown below:
Fixed element per
month
23
Variable
element per
Actual total
for May
Revenue
Employee salaries
and wages
Travel expenses
Other expenses
$50,000
customer
served
$5,000
$1,100
$600
$36,000
$160,000
$88,000
$19,000
$34,500
When preparing its planning budget the company estimated that it would
serve 30 customers per month; however, during May the company actually
served 35 customers.
Required (all computations pertain to the month of May):
1. What amount of revenue would be included in Adger’s flexible budget?
2. What amount of employee salaries and wages would be included in
Adger’s flexible budget?
3. What amount of travel expenses would be included in Adger’s flexible
budget?
4. What amount of other expenses would be included in Adger’s flexible
budget?
5. What net operating income would appear in Adger’s flexible budget?
6. What is Adger’s revenue variance?
7. What is Adger’s employee salaries and wages spending variance?
8. What is Adger’s travel expenses spending variance?
9. What is Adger’s other expenses spending variance?
10. What amount of revenue would be included in Adger’s planning
budget?
11. What amount of employee salaries and wages would be included in
Adger’s planning budget?
12. What amount of travel expenses would be included in Adger’s planning
budget?
13. What amount of other expenses would be included in Adger’s planning
budget?
14. What activity variance would Adger report with respect to its revenue?
15. What activity variances would Adger report with respect to each of its
expenses?
Exercises
9-1 Prepare a Flexible Budget
24
Puget Sound Divers is a company that provides diving services such as
underwater ship repairs to clients in the Puget Sound area. The company’s
planning budget for May appears below:
Puget Sound Divers
Planning Budget
For the Month Ended May 31
Budgeted diving-hours (q)
100
Revenue ($365.00q)
$36,500
Expenses:
Wages and salaries ($8,000+$125.00q)
20,500
Supplies ($3.00q)
300
Equipment rental ($1,800+$32.00q)
5,000
Insurance ($3,400)
3,400
Miscellaneous ($630+$1.80q)
810
Total expense
30,010
Net operating income
$6,490
During May, the company’s actual activity was 105 diving-hours.
Required:
Using Exhibit 9-5 as your guide, prepare a flexible budget for May.
9-2 Activity Variances
Flight Café prepares in-flight meals for airlines in its kitchen located next to
a local airport. The company’s planning budget for July appears below:
Flight Café
Planning Budget
For the Month Ended July 31
Budgeted meals (q)
Revenue ($4.50q)
Expenses:
Raw materials ($2.40q)
Wages and salaries ($5,200+$0.30q)
Utilities ($2,400+$0.05q)
Facility rent ($4,300)
Insurance ($2,300)
25
18,000
$81,000
43,200
10,600
3,300
4,300
2,300
Miscellaneous ($680+$0.10q)
Total expense
Net operating income
2,480
66,180
$14,820
In July, 17,800 meals were actually served. The company’s flexible budget for
this level of activity appear below:
Flight Café
Flexible Budget
For the Month Ended July 31
Budgeted meals (q)
Revenue ($4.50q)
Expenses:
Raw materials ($2.40q)
Wages and salaries ($5,200+$0.30q)
Utilities ($2,400+$0.05q)
Facility rent ($4,300)
Insurance ($2,300)
Miscellaneous ($680+$0.10q)
Total expense
Net operating income
17,800
$80,100
42,720
10,540
3,290
4,300
2,300
2,460
65,610
$14,490
Required:
1. Calculate the company’s activity variances for July. (Hint: Refer to
Exhibit 9-6.)
2. Which of the activity variances should be of concern to management?
Explain.
9-4 Prepare a Flexible Budget Performance Report
Vulcan Flyovers offers scenic overflights of Mount St. Helens, the volcano in
Washington State that explosively erupted in 1982. Data concerning the
company’s operations in July appear below:
Vulcan Flyovers
Operating Data
For the Month Ended July 31 Actual
Results
Flights (q)
48
Revenue ($320.00q)
$13,650
Expenses:
26
Flexible Planning
Budget
Budget
48
50
$15,360
$16,000
Wages and Salaries
__($4,000+$82.00q)
Fuel ($23.00q)
Airport Fees ($650+$38.00q)
Aircraft Depreciation __($7.00q)
Office Expenses ($190+2.00q)
Total Expense
Net Operating Income
8,430
7,936
8,100
1,260
2,350
336
460
12,836
$814
1,104
2,474
336
286
12,136
$3,224
1,150
2,550
350
290
12,440
$3,560
The company measures its activity in term of flights. Customers can buy
individual tickets for overflights or hire an entire plane for an overflight at a
discount.
Required:
1. Using Exhibit 9-8 as your guide, prepare a flexible budget performance
report for July that includes revenue and spending variances and
activity variances.
2. Which of the variances should be of concern to management? Explain.
9-5 Prepare a Flexible Budget with More Than One Cost
Driver
Alyeski Tours operates day tours of coastal glaciers in Alaska on its tour boat
the Blue Glacier. Management has identified two cost drivers – the number
of cruises and the number of passengers – that it uses in its budgeting and
performance reports. The company publishes a schedule of day cruises that it
may supplement with special sailings if there is sufficient demand. Up to 80
passengers can be accommodated on the tour boat. Data concerning the
company’s cost formulas appear below:
Vessel operating
costs
Advertising
Admin. Costs
Insurance
Fixed Cost per
Month
$5,200
Cost per Cruise
$1,700
$4,300
$2,900
$480.00
Cost per
Passenger
$2.00
$24.00
$1.00
For example, vessel operating costs should be $5,200 per month plus $480 per
cruise plus $2 per passenger. The company’s sales should average $25 per
27
passenger. In July, the company provided 24 cruises for a total of 1,400
passengers.
Required:
Using Exhibit 9-9 as your guide, prepare the company’s flexible budget for
July.
9-8 Flexible Budgets and Activity Variances
Jake’s Roof Repair has provided the following data concerning its costs:
Wages and salaries
Parts and supplies
Equipment depreciation
Truck operating exp.
Rent
Administrative exp.
Fixed Costs per Month
$23,200
$1,600
$6,400
$3,480
$4,500
Costs per Repair-Hour
$16.30
$8.60
$0.40
$1.70
$0.80
For example, wages and salaries should be $23,200 plus $16.30 per repair
hour. The company expected to work 2,800 repair-hours in May, but actually
worked 2,900 repair-hours. The company expects its sales to be $44.50 per
repair-hour.
Required:
Compute the company’s activity variances for May.
9-10 Planning Budget
Lavage Rapide is a Canadian company that owns and operates a large
automatic car wash facility near Montreal. The following table provides data
concerning the company’s costs:
Fixed Cost per Month
Cleaning supplies
Electricity
Maintenance
Wages and salaries
Depreciation
Rent
Admin. Expenses
$1,200
$5,000
$6,000
$8,000
$4,000
28
Cost per Car Washed
$0.80
$0.15
$0.20
$0.30
$0.10
For example, electricity costs are $1,200 per month plus $0.15 per car
washed. The company expects to wash 9,000 cars in August and to collect an
average of $4.90 per car washed.
Required:
Using Exhibit 9-2 as your guide, prepare the company’s planning budget for
August.
9-11 Flexible Budget
Refer to the data for Lavage Rapide in Exercise 9-10. The company acutally
washed 8,800 cars is August.
Required:
Using Exhibit 9-5 as your guide, prepare the company’s flexible budget for
August.
9-12 Activity Variances
Refer to the data for Lavage Rapide in Exercise 9-10. The company actually
washed 8,800 cars in August.
Required:
Calculate the company’s activity variances for August.
9-13 Revenue and Spending Variances
Refer to the data for Lavage Rapide in Exercise 9-10. Also assume that the
company’s actual operating results for August are as follows:
Lavage Rapide
Income Statement
For the Month Ended
August 31
Actual Cars Washed
Revenue
8,800
$43,080
29
Expenses:
Cleaning Supplies
Electricity
Maintenance
Wages and Salaries
Depreciation
Rent
Admin Expenses
Total Expense
Net Operating Income
7,560
2,670
2,260
8,500
6,000
8,000
4,950
39,940
$3,140
Required: Calculate the company’s revenue and spending variances for
August.
Chapter 10
Foundational 15
Preble Company manufactures one product. Its variable manufacturing
overhead is applied to production based on direct labor-hours and its
standard cost card per unit is as follows:
Inputs
Direct materials
Direct labor
Variable OH
Total standard cost
per unit
(1)
Standard Quantity
or Hours
(2)
Standard Price
or Rate
Standard
Cost
(1) X (2)
5 pounds
2 hours
2 hours
$8.00 per pound
$14 per hour
$5 per hour
$40.00
28.00
10.00
$78.00
30
The planning budget for March was based on producing and selling 25,000
units. However, during March the company actually produced and sold
30,000 units and incurred the following costs:
a. Purchased 160,000 pounds of raw materials at a cost of $7.50 per
pound. All of this material was used in production.
b. Direct laborers worked 55,000 hours at a rate of $15.00 per hour.
c. Total variable manufacturing overhead for the month was $280,500.
Required:
1. What raw materials cost would be included in the company’s planning
budget for March?
2. What raw materials cost would be included in the company’s flexible
budget for March?
3. What is the materials price variance for March?
4. What is the materials quantity variance for March?
5. If Preble had purchased 170,000 pounds of materials at $7.50 per
pound and used 160,000 pounds in the production, what would be the
materials price variance for March?
6. If Preble had purchased 170,000 pounds of materials at $7.50 per
pound and used 160,000 pounds in the production, what would be the
materials quantity variance for March?
7. What direct labor cost would be included in the company’s planning
budget for March?
8. What direct labor cost would be included in the company’s flexible
budget for March?
9. What is the labor rate variance for March?
10. What is the labor efficiency variance for March?
11. What is the labor spending variance for March?
12. What variable manufacturing overhead cost would be included in the
company’s planning budget for March?
13. What variable manufacturing overhead cost would be included in the
company’s flexible budget for March?
14. What is the variable overhead rate variance for March?
15. What is the variable overhead efficiency variance for March?
Exercises
10-1 Direct Materials Variances
Bandar Industries Berhad of Malaysia manufactures sporting
equipment. One of the company’s products, a football helmet for the North
American market, requires a special plastic. During the quarter ending June
31
30, the company manufactured 35,000 helmets, using 22,500 kilograms of
plastic. The plastic cost the company $171,000.
According to the standard cost card, each helmet should require 0.6
kilograms of plastic, at a cost of $8 per kilogram.
Required:
1. What is the standard quantity of kilograms of plastic (SQ) that is
allowed to make 35,000 helmets?
2. What is the standard materials cost allowed (SQ X SP) to make 35,000
helmets?
3. What is the materials spending variance?
4. What is the materials price variance and the materials quantity
variance?
10-2 Direct Labor Variances
SkyChefs, Inc., prepares in-flight meals for a number of major airlines.
One of the company’s products is grilled salmon in dill sauce with baby new
potatoes and spring vegetables. During the most recent week, the company
prepared 4,000 of these meals using 960 direct labor-hours. The company
paid its direct labor workers a total of $19,200 for this work, or $20.00 per
hour.
According to the standard cost card for this meal, it should require 0.25
direct labor-hours at a cost of $19.75 per hour.
Required:
1. What is the standard labor-hours allowed (SH) to prepare 4,000 meals?
2. What is the standard labor cost allowed (SH X SR) to prepare 4,000
meals?
3. What is the labor spending variance?
4. What is the labor rate variance and the labor efficiency variance?
10-5 Working Backwards from Labor Variances
The auto repair shop of Quality Motor Company uses standards to
control the labor time and labor cost in the shop. The standard labor cost for
a motor tune-up is given below:
Motor Tune-up
Standard Hours
2.5
Standard Rate
$25.00
32
Standard Cost
$62.50
The record showing the time spent in the shop last week on motor
tune-ups has been misplaced. However, the shop supervisor recalls that 50
tune-ups were completed during the week, and the controller recalls the
following variance data relating to tune-ups:
Labor rate variance
Labor spending variance
$150 F
$200 U
Required:
1. Determine the number of actual labor-hours spent on tune-ups during
the week.
2. Determine the actual hourly rate of pay for tune-ups last week. (Round
your answer to the nearest cent.)
(Hint: A useful way to proceed would be to work from known to unknown
data either by using the variance formulas in Exhibit 10-7 or by using the
columnar format shown in Exhibit 10-6.)
10-6 Direct Materials and Direct Labor Variances
Huron Company produces a commercial cleaning compound known as Zoom.
The direct materials and direct labor standards for one unit of Zoom are
given below:
Direct materials
Direct labor
Standard
Quantity or
Hours
4.6 pounds
0.2 hours
Standard Price
or Rate
Standard Cost
$2.50 per pound
$18.00 per hour
$11.50
$3.60
During the most recent month, the following activity was recorded:
a. Twenty thousand pounds of material were purchased at a cost of $2.35
per pound.
b. All of the material purchased was used to produce 4,000 units of Zoom.
c. 750 hours of direct labor time were recorded at a total labor cost of
$14,925.
Required:
1. Compute the materials price and quantity variances for the month.
2. Compute the labor rate and efficiency variances for the month.
33
10-7 Direct Materials Variances
Refer to the data in Exercise 10-6. Assume that instead of producing
4,000 units during the month, the company produced only 3,000 units, using
14,750 pounds of material. (The rest of the material purchased remained in
raw materials inventory.)
Required:
Compute the materials price and quantity variances for the month.
Chapter 11
Exercise 11-7 Creating a Balanced Scorecard
Ariel Tax Services prepares tax returns for individual and corporate
clients. As the company has gradually expanded to 10 offices, the founder
Max Jacobs has begun to feel as though he is losing control of operations. In
response to this concern, he has decided to implement a performance
measurement system that will help control current operations and facilitate
his plans of expanding to 20 offices.
Jacobs describes the keys to the success of his business as follows:
“Our only real asset is our people. We must keep our employees highly
motivated and we must hire the ‘cream of the crop.’ Interestingly, employee
morale and recruiting success are both driven by the same two factors –
compensation and career advancement. In other words, providing superior
compensation relative to the industry average coupled with fast-track career
advancement opportunities keeps morale high and makes us a very attractive
place to work. It drives a high rate of job offer acceptances relative to job
offers tendered.”
“Hiring highly qualified people and keeping them energized ensures
operational success, which in our business is a function of productivity,
34
efficiency, and effectiveness. Productivity boils down to employees being
billable rather that idle. Efficiency relates to the time required to complete a
tax return. Finally, effectiveness is critical to our business in the sense that
we cannot tolerate errors. Completing a tax return quickly is meaningless if
the return contains errors.”
“Our growth depends of acquiring new customers through word-ofmouth from satisfied repeat customers. We believe that our customers come
back year after year because they value error-free, timely, and courteous tax
return preparation. Common courtesy is an important aspect of our business!
We call it service quality, and it all ties back to employee morale in the sense
that happy employees treat their clients with care and concern.”
“While sales growth is obviously important to our future plans, growth
without a corresponding increase in profitability is useless. Therefore, we
understand that increasing our profit margin is a function of cost-efficiency
as well as sales growth. Given that payroll is our biggest expense, we must
maintain an optimal balance between staffing levels and the revenue being
generated. As I alluded to earlier, the key to maintaining this balance is
employee productivity. If we can achieve cost-efficient sales growth, we
should eventually have 20 profitable offices!”
Required:
1. Create a balanced scorecard for Ariel Tax Services. Link in your
scorecard measures using the framework from Exhibit 11-5. Indicate
whether each measure is expected to increase of decrease. Feel free to
create measures that may not be specifically mentioned in the chapter,
but make sense given the strategic goals of the company.
2. What hypotheses are built into the balanced scorecard for Ariel Tax
Services? Which of these hypotheses do you believe are most
questionable and why?
3. Discuss the potential advantages and disadvantages of implementing
an internal business process measure called total dollar amount of tax
refunds generated. Would you recommend using this measure in
Ariel’s balanced scorecard?
4. Would it be beneficial to attempt to measure each office’s individual
performance with respect to the scorecard measures you created? Why
or why not?
Chapter 13
Foundational 15
35
Cardinal Company is considering a five-year project that would require a
$2,975,000 investment in equipment with a useful life of five years and no
salvage value. The company’s discount rate is 14%. The project would provide
net operating income in each of five years as follows:
Sales
Variable Exp.
Contribution Margin
Fixed Exp.:
Advertising, salaries,
and other fixed out-ofpocket costs
Depreciation
Total Fixed Exp.
Net Operating Income
$2,735,000
1,000,000
1,735,000
$735,000
595,000
1,330,000
$405,000
Required:
(Answer each question by referring to the original data unless instructed
otherwise.)
1. Which item(s) in the income statement shown above will not affect
cash flows?
2. What are the project’s annual net cash inflows?
3. What is the present value of the project’s annual net cash inflows?
4. What is the project’s net present value?
5. What is the project profitability index for the project? (Round your
answer to the nearest whole percent.)
6. What is the project’s internal rate of return to the nearest whole
percent?
7. What is the project’s payback period?
8. What is the project’s simple rate of return for each of the five years?
9. If the company’s discount rate was 16% instead of 14%, would you
expect the project’s net present value to be higher than, lower than, or
the same as your answer to requirement 4? No computations are
necessary.
10. If the equipment had a salvage value of $300,000 at the end of five
years, would you expect the project’s payback period to be higher than,
lower than, or the same as you answer to requirement 7? No
computations are necessary.
11. If the equipment had a salvage value of $300,000 at the end of five
years, would you expect the project’s net present value to higher than,
lower than, or the same as your answer to requirement 3? No
computations are necessary.
36
12. If the equipment had a salvage value of $300,000 at the end of five
years, would you expect the project’s simple rate of return to be higher
than, lower than, or the same as you answer to requirement 8? No
computations are necessary.
13. Assume a postaudit showed that all estimates (including total sales)
were exactly correct except for the variable expense ratio, which
actually turned out to be 45%. What was the project’s actual net
present value?
14. Assume a postaudit showed that all estimates (including total sales)
were exactly correct for the variable expense ratio, which actually
turned out to be 45%. What was the project’s actual payback period?
15. Assume a postaudit showed that all estimates (including total sales)
were exactly correct except for the variable expense ratio, which
actually turned out to be 45%. What was the project’s actual simple
rate of return?
Exercises
13-1 Payback Method
The management of Unter Corporation, an architectural design firm, is
considering an investment with the following cash flows:
Year
1
2
3
4
5
6
7
8
9
10
Investment
$15,000
$8,000
Required:
1. Determine the payback period of the investment
37
Cash Inflow
$1,000
$2,000
$2,500
$4,000
$5,000
$6,000
$5,000
$4,000
$3,000
$2,000
2. Would the payback period be affected if the cash inflow in the last year
were several times as large?
13-2 Net Present Value Analysis
The management of Kunkel Company is considering the purchase of a
$27,000 machine that would reduce operating costs by $7,000 per year. At the
end of the machine’s five-year useful life, it will have zero salvage value. The
company’s required rate of return is 12%.
Required:
1. Determine the net present value of the investment in the machine.
2. What is the difference between the total, undiscounted cash inflows
and cash outflows over the entire life of the machine?
13-3 Internal Rate of Return
Wendell’s Donut Shoppe is investigating the purchase of a new $18,600
donut-making machine. The new machine would permit the company to
reduce the amount of part-time help needed, at a cost savings of $3,800 per
year. In addition, the new machine would allow the company to produce one
new style of donut, resulting in the sale of 1,000 dozen more donuts each
year. The company realizes a contribution margin of $1.20 per dozen donuts
sold. The new machine would have a six-year useful life.
Required:
1. What would be the total annual cash inflows associated with the new
machine for capital budgeting purposes?
2. What discount factor should be used to compute the new machine’s
internal rate of return to the nearest whole percent?
3. Using Exhibit 13B-2 in Appendix 13B as a reference, what is the new
machine’s internal rate of return?
4. In addition to the data given previously, assume that the machine will
have a $9,125 salvage value at the end of six years. Under these
conditions, what is the internal rate of return to the nearest whole
percent? (Hint: You may find it helpful to use the net present value
approach; find the discount rate that will cause the net present value
to be closest to zero.)
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13-4 Uncertain Future Cash Flows
Lukow Products is investigating the purchase of a piece of automated
equipment that will save $400,000 each year in direct labor and inventory
carrying costs. This equipment costs $2,500,000 and is expected to have a 15year life with no salvage value. The company’s required rate of return is 20%
on all equipment purchases. Management anticipates that this equipment
will provide intangible benefits such as greater flexibility and higher-quality
output that will result in additional future cash inflows.
Required:
1. What is the net present value of the piece of equipment before
considering its intangible benefits?
2. What minimum dollar value per year must be provided by the
equipment’s intangible benefits to justify the $2,500,000 investment?
13-5 Preference Ranking
Information on four investment proposals is given below:
Investment
required
PV of cash
inflows
NPV
Life of the
project
A
$(90,000)
Investment
B
$(100,000)
Proposal
C
$(70,000)
D
$(120,000)
126,000
138,000
105,000
160,000
$36,000
5 years
$38,000
7 years
$35,000
6 years
$40,000
6 years
Required:
1. Compute the project profitability index for each investment proposal.
2. Rank the proposals in terms of preference.
13-6 Simple Rate of Return Method
The management of Ballard MicroBrew is considering the purchase of an
automated bottling machine for $120,000. The machine would replace an old
39
piece of equipment that costs $30,000 per year to operate. The new machine
would cost $12,000 per year to operate. The old machine currently is use
could be sold now for a salvage value of $40,000. The new machine would
have a useful life of 10 years with no salvage value.
Required:
1. What is the annual depreciation expense associated with the new
bottling machine?
2. What is the annual incremental net operating income provided by the
new bottling machine?
3. What is the amount of the initial investment associated with this
project that should be used for calculating the simple rate of return?
4. What is the simple rate of return on the new bottling machine?
13-7 Net Present Value Analysis of Two Alternatives
Perit Industries has $100,000 to invest. The company is trying to decide
between two alternative uses of the finds. The alternatives are:
Cost of equipment
required
Working capital
investment required
Annual cash inflows
Salvage value of
equipment in six years
Life of the project
Project A
$100,000
Project B
$0
$0
$100,000
$21,000
$8,000
$16,000
$0
6 years
6 years
The working capital needed for project B will be released at the end of six
years for investment elsewhere. Perit Industries’ discount rate is 14%.
Required:
1. Compute the net present value of Project A.
2. Compute the net present value of Project B.
3. Which investment alternative (if either) would you recommend that
the company accept?
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13-8 Payback Period and Simple Rate of Return
Nick’s Novelties, Inc., is considering the purchase of new electronic games to
place in its amusement houses. The games would cost a total of $300,000,
have an eight-year useful life, and have a total salvage value of $20,000. The
company estimates that annual revenues and expenses associated with the
games would be as follows:
Revenues
$200,000
Less operating
expenses:
Commissions to
$100,000
amusement houses
Insurance
7,000
Depreciation
35,000
Maintenance
18,000
160,000
Net operating income
$40,000
Required:
1. What is the payback period for the new electronic games? Assume that
Nick’s Novelties, Inc., will not purchase new games unless they provide
a payback period of five years or less. Would the company purchase the
new games?
2. What is the simple rate of return promised by the games? If the
company requires a simple rate of return of at least 12%, will the
games be purchased?
13-10 Net Present Value Analysis
Kathy Myers frequently purchases stocks and bonds, but she is uncertain
how to determine the rate of return that she is earning. For example, three
years ago she paid $13,000 for 200 share of Malti Company’s common stock.
She received a $420 cash dividend on the stock at the end of each year for
three years. At the end of three years, she sold the stock for $16,000. Kathy
would like to earn a return of at least 14% on all of her investments. She is
not sure whether the Malti Company stock provided a 14% return and would
like some help with the necessary computations.
Required:
41
1. Compute the net present value that Kathy earned on her investment
in Malti Company stock. Round your answer to the nearest whole
dollar.
2. Did the Malti Company stock provide a 14% return?
13-12 Uncertain Cash Flows
The Cambro Foundation, a nonprofit organization, is planning to invest
$104,950 in a project that will last for three years. The project will produce
net cash inflows as follows:
Year 1
$30,000
Year 2
$40,000
Year 3
?
Required:
Assuming that the project will yield exactly a 12% rate of return, what is the
expected net cash inflow for Year 3?
Chapter 15
Foundational 15
Markus Company’s common stock sold for $2.75 per share at the end of this
year. The company paid a common stock dividend of $0.55 per share this
year. It also provided the following data excerpts from this year’s financial
statements:
Cash
Accounts Receivable
Inventory
Current Assets
Total Assets
Current Liabilities
Total Liabilities
Ending Balance
$35,000
$60,000
$55,000
$150,000
$450,000
Beginning Balance
$30,000
$50,000
$60,000
$140,000
$460,000
$60,000
$130,000
$40,000
$120,000
42
Common Stock, $1 Par
Value
Total SH’s Equity
Total Liab. & SH’s
Equity
Sales (all on account)
Cost of goods sold
Gross margin
Net operating income
Interest expense
Net income
$120,000
$120,000
$320,000
$450,000
$340,000
$460,000
This Year
$700,000
$400,000
$300,000
$140,000
$8,000
$92,400
Required:
1. What is the earnings per share?
2. What is the price-earnings ratio?
3. What is the dividend payout ratio and the dividend yield ratio?
4. What is the return on total assets (assuming a 30% tax rate)?
5. What is the return on equity?
6. What is the book value per share at the end of this year?
7. What is the amount of working capital and the current ratio at the end
of this year?
8. What is the acid-test ratio at the end of this year?
9. What is the accounts receivable turnover and the average collection
period?
10. What is the inventory turnover and the average sale period?
11. What is the company’s operating cycle?
12. What is the total asset turnover?
13. What is the times interest earned ratio?
14. What is the debt-to-equity ratio at the end of this year?
15. What is the equity multiplier?
15-1 Common-Size Income Statement
A comparative income statement is given below for McKenzie Sales, Ltd., of
Toronto:
McKenzie Sales, Ltd.
Comparative Income Statement
This Year
43
Last Year
Sales
Cost of Goods Sold
Gross Margin
Sell. & Admin. Exp.
Selling Exp.
Admin. Exp.
Total Expenses
Net Operating Income
Interest Expense
Net Income Before Taxes
$8,000,000
4,984,000
3,016,000
$6,000,000
3,516,000
2,484,000
1,480,000
712,000
2,192,000
824,000
96,000
$728,000
1,092,000
618,000
1,710,000
774,000
84,000
$690,000
Members of the company’s board of directors are surprised to see that net
income increased by only $38,000 when sales increased by $2,000,000.
Required:
1. Express each year’s income statement in common-size percentages.
Carry computations to one decimal place.
2. Comment briefly on the changes between the two years.
15-2 Financial Ratios for Assessing Liquidity
Comparative financial statements for Well Corporation, a merchandising
company, for the year ending December 31 appear below. The company did
not issue any new common stock during the year. A total of 80,000 shares of
common stock were outstanding. The interest rate on the bond payable was
12%, the income tax rate was 40%, and the dividend per share of common
stock was $0.75 last year and $0.40 this year. The market value of the
company’s common stock at the end of this year was $18. All of the company’s
sales are on account.
Weller Corporation
Comparative Balance Sheet
(dollars in thousands)
Assets
Current assets:
Cash
Accounts Rec., net
Inventory
Prepaid expenses
Total current assets
This Year
Last Year
$1,280
12,300
9,700
1,800
25,080
$1,560
9,100
8,200
2,100
20,960
44
Property and equipment:
Land
Buildings and equipment, net
Total property and equipment
Total assets
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued liabilities
Notes payable, short term
Total current liabilities
Long-term liabilities:
Bonds payable
Total Liabilities
Stockholders’ equity:
Common stock
Additional paid-in capital
Total paid-in capital
Retained earnings
Total stockholders’ equity
Total Liabs. & SHs’ equity
6,000
19,200
25,200
$50,280
6,000
19,000
25,000
$45,960
$9,500
600
300
10,400
$8,300
700
300
9,300
5,000
15,400
5,000
14,300
800
4,200
5,000
29,880
34,880
$50,280
800
4,200
5,000
26,660
31,660
$45,960
Weller Corporation
Comparative IS & Reconciliation
(dollars in thousands)
Sales
Cost of goods sold
Gross margin
Selling and admin. exp.:
Selling expenses
Admin. expenses
Total selling and admin. exp.
Net operating income
Interest expense
Net income before taxes
Income taxes
Net income
Dividends to common SHs’
Net income added to RE
Beginning retained earnings
Ending retained earnings
45
This Year
$79,000
52,000
27,000
Last Year
$74,000
48,000
26,000
8,500
12,000
20,500
6,500
600
5,900
2,360
3,540
320
3,220
26,660
$29,880
8,000
11,000
19,000
7,000
600
6,400
2,560
3,840
600
3,240
23,420
$26,660
Required:
Compute the following financial data and ratios for this year:
1. Working capital.
2. Current ratio.
3. Acid-test ratio.
15-3 Financial Ratios for Asset Management
Refer to the data in Exercise 15-2 for Weller Corporation.
Required:
Compute the following financial data for this year:
1. Accounts receivable turnover. (Assume that all sales are on account.)
2. Average collection period.
3. Inventory turnover.
4. Average sale period.
5. Operating cycle.
6. Total asset turnover.
15-4 Financial Ratios for Debt Management
Refer to the data in Exercise 15-2 for Weller Corporation.
Required:
Compute the following financial ratios for this year:
1. Times interest earned ratio.
2. Debt-to-equity ratio.
3. Equity multiplier.
15-5 Financial Ratios for Assessing Profitability
Refer to the data in Exercise 15-2 for Weller Corporation.
Required:
Compute the following financial data for this year:
1. Gross margin percentage.
2. Net profit margin percentage.
3. Return on total assets.
46
4. Return on equity.
15-6 Financial Ratios for Assessing Market Performance
Refer to the data in Exercise 15-2 for Weller Corporation.
Required:
Compute the following financial data for this year:
1. Earnings per share.
2. Price-earnings ratio.
3. Dividend payout ratio.
4. Dividend yield ratio.
5. Book value per share.
15-8 Selected Financial Ratios
The financial statements for Castile Products, Inc., are given below:
Castile Products, Inc.
Balance Sheet
December 31
Assets
Currents assets:
Cash
Accounts receivable, net
Merchandise inventory
Prepaid expenses
Total current assets
Property and equipment, net
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
$6,500
35,000
70,000
3,500
115,000
185,000
$300,000
47
Current liabilities
Bonds payable, 10%
Total liabilities
Stockholders’ equity:
Common stock, $5 par value
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$50,000
80,000
130,000
30,000
140,000
170,000
$300,000
Castile Products, Inc.
Income Statement For the Year Ended
December 31
Sales
$420,000
Cost of Goods Sold
292,500
Gross Margin
127,500
Selling & Admin. Expenses
89,500
Net Operating Income
38,000
Interest Expense
8,000
Net Income Before Taxes
30,000
Income Taxes (30%)
9,000
Net Income
$21,000
Account balances at the beginning of the year were: Accounts receivable,
$25,000; and inventory, $60,000. All sales were on account.
Required:
Compute the following financial data and ratios:
1. Working capital.
2. Current ratio.
3. Acid-test ratio.
4. Debt-to-equity ratio.
5. Times interest earned ratio.
6. Average collection period.
7. Average sale period.
8. Operating cycle.
15-12 Selected Financial Measures for Assessing Liquidity
Norsk Optronics, ALS, or Bergen, Norway, had a current ratio of 2.5 on June
30 of the current year. On that date, the company’s assets were:
Cash
$90,000
48
Accounts receivable, net
Inventory
Prepaid expenses
Plant and equipment, net
Total assets
260,000
490,000
10,000
800,000
$1,650,000
Required:
1. What was the company’s working capital on June 30?
2. What was the company’s acid-test ratio on June 30?
3. The company paid an account payable of $40,000 immediately after
June 30.
a. What effect did this transaction have on working capital?
Show computations.
b. What effect did this transaction have on the current ratio?
Show computations.
49