U N I V E RSI T Y O F C A L I F O R N I A , B E R K E L E Y
H A AS SC H O O L O F B USI N ESS
A
Suneel Udpa
U G B A102B
F all 2012
M idterm E xam - 2
Total Points 125
Student I D:_________________________
Instructions:
1. Write your Student No. on your exam. Do not write your name anywhere on the
exam
2. For Multiple Choice questions, you have to show all your work. If do not show all
your work, you will not get credit even if you get the correct answer.
3. Partial credit may be given for legible work. Therefore, be neat and show your
calculations on the Exam Booklet.
4. Sign the Honor Code below
H O N O R C O D E PL E D G E
I have neither given nor received any unauthorized assistance on this examination,
and I am not aware of any violations of the Honor Code. A lso, I promise not to
discuss any part of the exam with other students till after the exam week.
_________________________________________________________________
(signature)
I.
M ultiple C hoice ± E ach question is worth 4 points. Total = 52 points. You
have to show all your calculations on the exam booklet below the multiple
choice question to get credit
Bello Corporation produces and sells two products. In the most recent month, Product
D99P had sales of $33,000 and variable expenses of $15,840. Product G71P had sales of
$42,000 and variable expenses of $4,410. The fixed expenses of the entire company were
$49,790.
1. The break-even point for the entire company is closest to:
A. $25,210
B. $49,790
C . $68,205
D. $70,040
Overall contribution margin ratio = Total contribution margin y Total sales
= $54,750 y $75,000 = 73%
Break-even point in total sales dollars
= Fixed expenses y Overall contribution margin ratio
= $49,790 y 73% = $68,205 (rounded)
2. If the sales mix were to shift toward Product D99P with total sales remaining constant,
the overall break-even point for the entire company:
A. would not change.
B. would increase.
C. could increase or decrease.
D. would decrease.
Since the contribution margin ratio ($17,160 y $33,000 = 52%) for Product D99P is lower
than that of Product G71P ($37,590 y $42,000 = 89.5%), to shift to more sales of
Product D99P would cause the break-even point to increase.
Hooper Corporation produces and sells two models of vacuum cleaners, Standard and
Deluxe. The company records show the following monthly data relating to these two
products:
The company's total monthly fixed cost is $15,000.
3. The break-even in sales dollars for the expected sales mix is closest to:
A. $160,772
B. $95,178
C . $109,091
D. $175,644
Overall CM ratio = Total contribution margin/Total sales
= $39,600 y $288,000 = 13.75%
Break-even point in total sales dollars = Fixed expenses/Overall CM ratio
= $15,000 y 13.75% = $109,091 (rounded)
4. If the expected monthly sales in units were divided equally between the two models
(900 Standard and 900 Deluxe), the break-even level of sales would be:
A. the same as with the expected sales mix.
B. higher than with the expected sales mix.
C. lower than with the expected sales mix.
D. cannot be determined with the available data.
Since the contribution margin ratio of the Standard product is lower than that of the
Deluxe product, if the company were to shift more of its sales to Standard, the
company's break-even point would increase.
Hurst Co. manufacturers and sells a single product. Price and cost data regarding this
product are as follows:
5. The break-even point in units per year is:
A. 15,200 units
B. 26,600 units
C . 38,000 units
D. 40,000 units
Unit sales to break even = Fixed expenses y Unit contribution margin
= ($208,000 + $324,000) y ($40 - $20 - $6) = $532,000 y $14 = 38,000 units
6. How many units need to be sold to earn an annual net operating income equal to 10%
of sales?
A. 44,000 units
B. 53,200 units
C. 54,500 units
D. 47,500 units
Variable expenses per unit = $20 + $6 = $26
Total fixed expenses = $208,000 + $324,000 = $532,000
$40Q = $26Q + $532,000 + ($40Q u 10%)
$40Q = $26Q + $532,000 + $4Q
$10Q = $532,000
Q = 53,200 units
7. In the current year, the company sold 43,000 units. Due to competition, management
will be forced to lower the selling price by 10% next year. How many units must be sold
next year to earn the same income as was earned in the current year?
A. 50,000 units
B. 53,200 units
C. 58,800 units
D. 60,200 units
Variable expenses per unit = $20 + $6 = $26
Total fixed expenses = $208,000 + $324,000 = $532,000
Last year's net operating income:
New selling price per unit = $40 - (10% u $40) = $36
New contribution margin per unit = $36 - $26 = $10
Sales to achieve target profit = ($532,000 + $70,000) y $10 = 60,200 units
8. Isaac Corporation processes sugar beets in batches that it purchases from farmers for
$47 a batch. A batch of sugar beets costs $14 to crush in the company's plant. Two
intermediate products, beet fiber and beet juice, emerge from the crushing process. The
beet fiber can be sold as is for $22 or processed further for $13 to make the end product
industrial fiber that is sold for $42. The beet juice can be sold as is for $45 or processed
further for $27 to make the end product refined sugar that is sold for $67. Which of the
intermediate products should be processed further?
A. beet fiber should NOT be processed into industrial fiber; beet juice should NOT be
processed into refined sugar
B. beet fiber should NOT be processed into industrial fiber; beet juice should be
processed into refined sugar
C . beet fiber should be processed into industrial fiber; beet juice should N O T be
processed into refined sugar
D. beet fiber should be processed into industrial fiber; beet juice should be processed into
refined sugar
The constraint at Artis Corporation is time on a particular machine. The company makes
three products that use this machine. Data concerning those products appear below:
9. Rank the products in order of their current profitability from most profitable to least
profitable. In other words, rank the products in the order in which they should be
emphasized.
A . C T , L N,SI
B. SI,CT,LN
C. CT,SI,LN
D. LN,SI,CT
10. Assume that sufficient time is available on the constrained machine to satisfy demand
for all but the least profitable product. Up to how much should the company be willing to
pay to acquire more of this constrained resource?
A . $12.40 per minute
B. $12.80 per unit
C. $15.10 per minute
D. $58.89 per unit
The company should be willing to pay up to $12.40 per minute to obtain more of the
constrained resource since this is the value to the company of using this constrained
resource to make more of product SI. By assumption, the other products will already
have been produced up to demand.
Steinmann Inc. is considering the acquisition of a new machine that costs $410,000 and
has a useful life of 5 years with no salvage value. The incremental net operating income
and incremental net cash flows that would be produced by the machine are:
11. The payback period of this investment is closest to:
A. 2.9 years
B. 3.2 years
C. 4.8 years
D. 5.0 years
The cumulative cash flow after three years is $386,000 ($139,000 + $139,000 +
$108,000), therefore an additional $24,000 of cash flow is needed in year four to recover
the initial $410,000 investment. It will take approximately 20% of the fourth year
($24,000 y $107,000) to recover the additional $24,000. The payback period is therefore
3.2 years.
Fast Food, Inc., has purchased a new donut maker. It cost $16,000 and has an estimated
life of 10 years. The following annual donut sales and expenses are projected:
12. The payback period on the new machine is closest to:
A. 5 years
B. 2.7 years
C. 3.6 years
D. 1.4 years
Payback period = $16,000 y ($4,400 + $1,600) = $16,000 y $6,000 = 2.67 years
13. The simple rate of return for the new machine is closest to:
A. 20%
B. 37.5%
C . 27.5%
D. 80.0%
Simple rate of return = $4,400 y $16,000 = 0.275
I I.
(25 points)
Royal Caribbean is a cruise ship company that currently has twenty-six ships and plans to
add two more. It offers luxury passenger cruises in the Caribbean, Alaska, and the Far
East. Management is currently addressing what to do with an existing ship, the S.S.
SinkHole, when she is replaced by a new ship.
The S.S. SinkHole was built 10 years ago for $400 million. For accounting purposes, she
was assumed to have a 10-year life and hence is now fully depreciated. The S. S.
SinkHole current market value is $371,250,000. The Royal Caribbean Line can borrow or
lend money at 10 percent.
The management of Royal Caribbean is thinking about moving the S.S. SinkHole to the
Mediterranean for a new seven-day Greek island tour. A seven-day cruise would depart
Athens Sunday night, stop at four ports before returning to Athens Sunday morning, and
prepare for a new cruise that afternoon. The S. S. S inkHole can carry as many as 1,500
passengers.
The accompanying data summarize the operating cost for this seven-day (one-week)
cruise.
Estimated O perating Cost of Seven-Day G reek Island C ruise
(S.S. SinkHole)
Labor
Food
Fuel
Port fees and services
Marketing, advertising, promotion
Supplies
Totals
*Based on 1,200 passengers
**Fixed costs per weekly cruise.
Variable Cost*
$ 60,000
236,000
28,000
F ixed Cost**
$ 80,000
10,500
177,000
62,000
240,000
38,000
$324,000
$607,500
Required:
a. Assuming the seven-day Greek island cruise can be priced at $1,620, calculate the
break-even number of passengers per cruise using the data provided in the table
³(VWLPDWHG2SHUDWLQJ&RVWVRI6HYHQ-'D\*UHHN,VODQG&UXLVH´(9 points)
Before the break-even point can be calculated, the variable cost per passenger is
computed as
Variable cost per passenger = $324,000/1,200
= $270
Contribution margin per passenger = $1,620±$270
= $1,350
Break-even number of passengers = Fixed Cost/Contribution margin
$607,500
1,350
= 450 passengers
b. What major cost component is not included in the calculation of break-even in part
(a)?
The cost of the ship itself is not included. The weekly opportunity cost of the
Mediterranean cruise is not using the ship elsewhere. One alternative use is to sell the
ship and invest the proceeds. Since no other information is provided regarding
alternative uses of the ship and assuming there are no capital gains taxes on the sale
proceeds, the weekly opportunity cost of the ship is:
Sales proceeds
x Interest rate
$371,250,000
10%
$ 37,125,000
c. Include the omitted cost component identified in (b) and recalculate the break-even
point for the 666LQN+ROH¶V Greek island cruise. Assume there are 50 weeks (and hence
50 cruises) in a year What implicit assumption have you made in adding the omitted
cost component? ((b) and (c) together = 10points)
The cost of the ship itself is not included. The weekly opportunity cost of the
Mediterranean cruise is not using the ship elsewhere. One alternative use is to sell the
ship and invest the proceeds. Since no other information is provided regarding
alternative uses of the ship and assuming there are no capital gains taxes on the sale
proceeds, the weekly opportunity cost of the ship is:
Sales proceeds
x Interest rate
$371,250,000
10%
$ 37,125,000
divided by number of weeks/year
Weekly opportunity cost
50
$
742,500
The revised break-even including the cost of the ship:
Total fixed costs
=
=
$ 607,500 + 742,500
$1,350,000
Break-even = $1,350,000/1350 = 1,000 passengers
The implicit assumption we are making in adding the opportunity cost of the ship based
on the 10% interest rate is that the riskiness of putting the S.S. SinkHole into service in
the Mediterranean is the same as lending money for 10%.
d. Passengers purchase beverages, souvenirs, and services while on the ship. The ship
makes money on the purchases. If the ship line has a contribution margin of 50 percent
on all such on-board purchases, how much would the average passenger have to
purchase for the break-even point to be 900 passengers (include the omitted cost
component you identified in c)?
(6 points)
Let C = contribution margin from additional sales
900 = 1,350,000/(1350+C)
900(1,350+C) = 1,350,000
900C = 1.350,000±1,350x900
C = $150
Additional purchases per passenger = 150/0.5 = $300.
I I I.
(25 points)
Required:
1. ,VWKHRIRYHUKHDGDOORFDWHGWRWKHSURGXFWXQGHUWKHFRPSDQ\¶VDEVRUSWLRQ
cost system a relevant cost? Why? (2 points)
The $90,000 in fixed overhead cost charged to the new product is a common cost that
will be the same whether the tubes are produced internally or purchased from the
outside. Hence, it is not relevant.
2. Should Silven Industries make or buy the tubes? Show your calculations. (8 points)
Note: The $90,000 of overhead allocated to the product is included on a per unit basis in
the Manufacturing Overhead of $1.40/unit.
The variable manufacturing overhead per box of Chap-­Off would be $0.50, as shown below: Total manufacturing overhead cost per box of Chap-­Off .. $1.40 Less fixed portion ($90,000 ÷ 100,000 boxes) ............... 0.90 Variable overhead cost per box ..................................... $0.50 The total variable cost of producing one box of Chap-­Off would be: Direct materials ............................................................ $3.60 Direct labor .................................................................. 2.00 Variable manufacturing overhead .................................. 0.50 Total variable cost per box ............................................ $6.10 If the tubes for the Chap-­Off are purchased from the outside supplier, then the variable cost per box of Chap-­Off would be: Direct materials ($3.60 × 75%) .................................... Direct labor ($2.00 × 90%) ....................................... Variable manufacturing overhead ($0.50 × 90%) ........ Cost of tube from outside ............................................. Total variable cost per box ............................................ $2.70 1.80 0.45 1.35 $6.30 7KHUHIRUHWKHFRPSDQ\VKRXOGUHMHFWWKHRXWVLGHVXSSOLHU¶VRIIHU
A savings of $0.20 per box of Chap-­Off will be realized by producing the tubes internally. 3. What would be the maximum price acceptable to Silven Industries? Explain. (5 points)
The maximum purchase price would be $1.15 per box. The company would not be willing to pay more than this amount because the $1.15 represents the cost of producing one box of tubes internally, as shown in Part 1. To make purchasing the tubes attractive, however, the purchase price should be less than $1.15 per box. 4. Instead of sales of 100,000 boxes, revised estimates show a sales volume of 120,000
boxes. At this new volume, additional equipment must be acquired to manufacture the tubes
at an annual rental of $40,000. Assume the outside supplier will accept an order for any size
at the rate of $1.35 per box. What is the best strategy for Silven? Show your calculations and
explain your answer. (7 points)
Cost of making 120,000 boxes: 120,000 boxes × $6.10 per box ................... Rental cost of equipment ............................ Total cost ...................................................... Cost of buying 120,000 boxes: 120,000 boxes × $6.30 per box ................... $732,000 40,000 $772,000 $756,000 Under these circumstances, the company should make the 100,000 boxes of tubes and purchase the remaining 20,000 boxes from the outside supplier. The costs would: Cost of making: 100,000 boxes × $1.15 per box ...... $115,000 Cost of buying: 20,000 boxes × $1.35 per box ......... 27,000 Total cost ............................................................... $142,000 Or, on a total cost basis, the computation would be: Cost of making: 100,000 boxes × $6.10 per box ...... $610,000 Cost of buying: 20,000 boxes × $6.30 per box ......... 126,000 Total cost ............................................................... $736,000 Because the amount of cost under this alternative is $20,000 less than the best alternative, the company should make as many tubes as possible with the current equipment and buy the remaining tubes from the outside supplier. 5. What qualitative factors should Silven consider in determining whether they should
make or buy the tubes? (3 points)
Management should take into account at least the following additional factors: a) The ability of the supplier to meet required delivery schedules. b) The quality of the tubes purchased from the supplier. c) Alternative uses of the capacity that would be used to make the tubes. d) The ability of the supplier to supply tubes if volume increases in future years. e) The problem of finding an alternative source of supply if the supplier proves to be undependable. I V.
(23 points)
Required:
a) Compute the Net present value of buying a new truck. Complete the format on the next
page
b) Compute the Net present value of keeping the old truck. Complete the format on the
next page
c) Based on your analysis above, what should the firm do?
* Book value of old trucks ..... $120,000 Less sale price (above) ...... 85,000 Loss on the sale ................ $ 35,000 (2) Tax Effect $60,000 1 ± 0.30 $(650,000) ² $85,000 ² $35,000 0.30 $(110,000) 1 ± 0.30 $130,000 0.30 (1) Amount $42,000 $(650,000) $85,000 $10,500 $(77,000) $39,000 (1)×(2) After-­Tax Cash Flows ,WLV2ND\LIWKH³7D[6DYLQJVIURPORVVRQ6DOHLVDW³<HDU´(YHU\WKLQJLVWKHVDPH39IDFWRU Now Now 1 1-­7 1-­5 Buy the new trucks: Investment in the trucks .............................. Cash from the sale of the old trucks: Sale price received ................................... Tax savings from loss on sale*,** ............. Annual cash operating costs ........................ Depreciation deductions ($650,000 ÷ 5 years = $130,000 per year) ...................... Salvage value of the new trucks ................... Net present value ........................................ 7 Year(s
) 1. Items a) Buying New Trucks: 0.452 1.000 1.000 0.893 4.564 3.605 12% Facto
r 18,984 $(747,472) $(650,000) 85,000 9,377 (351,428) 140,595 Present Value of Cash Flows Items and Computations The new trucks should not be purchased. W hat should the firm do?
Net present value ........................................... Net present value in favor of keeping the old trucks ................................................... $60,000 $15,000 $(170,000) Depreciation deductions ................................. 1-­2 Salvage value of the old trucks ....................... 7 (1) Amount $(200,000) 1 Year(s
) Annual cash operating costs ........................... 1-­7 Keep the old trucks: Repairs needed .............................................. b) K eep Old Trucks:
1 ± 0.30 1 ± 0.30 0.30 1 ± 0.30 (2) Tax Effect $18,000 $10,500 $(140,000) $(119,000) (1)×(2) After-­Tax Cash Flows 1.690 0.452 4.564 0.893 12% Facto
r $(710,061) $ 37,411 30,420 4,746 (638,960) $(106,267) Present Value of Cash Flows