School of Accountancy
The University of Waterloo
AFM 481
Final Examination
April 22, 2009
Important Instructions
*********************************************************************
1.
This examination booklet contains 16 pages including this title page.
Please ensure that it is complete.
2.
You are allowed to consult the course text when completing this
examination. You may not consult any other materials for any reason.
Only non-programmable, non-communicating calculators may be
used. You may not listen to or use any communicating or receiving
hardware such as a cellular telephone, a Blackberry, or an iPod.
3.
If you have a question please ask one of the examination proctors. It
is unacceptable for you to communicate with another student for any
reason.
4.
When you leave the examination you should hand in the booklet in
which you have answered the examination questions. Do not hand in
the examination questions or your work booklet.
5.
Suggested Time and Grade Distribution on this Examination
Question 1
Question 2
Question 3
Question 4
Question 5
Question 6
Question 7
Total
Suggested
Time (Mins)
Point
Allocation
22
22
16
22
22
23
23
150
15
14
11
15
15
15
15
100
April 22, 2009
AFM 481
Final Examination
Question One (15 marks) – Suggested Time (22 Minutes)
Aiden Manufacturing Company has two service departments (Power and Maintenance)
and two production departments (Fabrication and Assembly).
During the most recent period, the following activities and costs were reported.
Power
Maintenance
Power Maintenance Fabrication Assembly Total Units Total Cost
1,500
7,500
45,000
25,000
79,000 $2,200,000
300
400
2,200
3,100
6,000 $1,200,000
REQUIRED:
a) Allocate the costs of the two service departments to the two production
departments using the direct method.
b) Allocate the costs of the two service departments to the two production
departments using the reciprocal method.
c) Given this cost structure and assuming that all Power costs are avoidable, what
is the maximum that Aiden Manufacturing should be willing to pay to an outside
supplier per unit of power supplied?
AFM 481 Final Examination
Page 2 of 16
April 22, 2009
AFM 481
Final Examination
Question 1 (15 Marks)
Power
Maintenance
Power
Maintenance
Fabrication
Assembly
Total Units
Total Cost
1,500
7,500
45,000
25,000
79,000
$2,200,000
300
400
2,200
3,100
6,000
$1,200,000
a) Direct Allocation:
Power Allocation Rate:
$2,200,000 / (45,000 + 25,000) =
Power
Maintenance
$
$
Sum
$
Maintenance Allocation Rate:
$1,200,000 / (2,200 + 3,100) =
$
31.43
Fabrication
1,414,286 $
498,113 $
Assembly
785,714
701,887
$
$
Total Units
2,200,000
1,200,000
1,487,601
$
3,400,000
1,912,399
$
$
226.42
8 Total Marks for Direct Allocations
Most Students correctly answered this part. Incorrect responses typically received a mark from 4 to 7 depending on technical correctness.
b) Reciprocal Allocation:
Power
1.90%
5.00%
Power
Maintenance
Array
P
M
P
Identity
P
M
P
Identity - Array
P
M
P
Inverse of I - A
P
M
P
Assembly
31.65%
51.67%
Using Substitution:
P = 2200000 + 1500/79000P + 300/6000M
M = 1200000 + 7500/79000P + 400/600M
0.000
1.000
Simplify Equations:
M - 400/6000M = 1200000 + 7500/79000P
M = 1285714.2857 + 0.1017179P
M
0.981013
-0.094937
Total Units
100.00%
100.00%
0.050000
0.066667
M
1.000
0.000
P = 2200000 + 1500/79000P + 300/6000(1285714.2857 + 0.1017129P)
P = 2200000 + 1500/79000P + 64285.7143 + 0.005085895P
0.975926763P = 2264285.7143
P = $2,320,138.97
-0.050000
0.933333
M
1.024667
0.104227
$
$
$
Fabrication
56.96%
36.67%
M
0.018987
0.094937
Allocation Amounts:
Power
$
Maintenance
$
Allocation:
Power
Maintenance
Sum
Maintenance
9.49%
6.67%
0.054893
1.077012
Subtitute into M Formula:
M = 1200000 + 7500/79000(2320138.97) + 400/6000M
M = $1,521,713.96
Continue with Allocation Below…
2,320,139
1,521,714
Fabrication
1,321,598.15
557,961.78
1,879,559.93
$
$
$
Assembly
734,221.19
786,218.88
1,520,440.07
$
$
$
Total Cost
2,055,819.34
1,344,180.66
3,400,000.00
5 Total Marks for Reciprocal Allocation
If System of Equations set up incorrectly: 2-3 marks depending on technical correctness
If System of Equations set up properly but allocation is incorrect: 4 marks
c) Maximum amount to be paid to outside supplier per unit of power
Total Cost Avoided =
Power Reciprocal Cost
Power Reciprocal Factor
Outside Units Needed =
AFM 481 Final Examination
$
2,320,139
1.024667
= $
2,264,285.71
Power Units
Power Reciprocal Factor
79,000
1.024667
=
Max Outside Cost Per Unit =
Total Cost Avoided
77098.21
$
2,264,285.71
Page 3 of 16
April 22, 2009
AFM 481
Final Examination
c) Maximum amount to be paid to outside supplier per unit of power
Total Cost Avoided =
Power Reciprocal Cost
Power Reciprocal Factor
Outside Units Needed =
$
2,320,139
1.024667
= $
2,264,285.71
Power Units
Power Reciprocal Factor
79,000
1.024667
=
Max Outside Cost Per Unit =
Total Cost Avoided
Outside Units Needed
77098.21
$
= $
2,264,285.71
77098.21
29.37
2 Total Marks for Part C
2 Marks automatically awarded to all students
Up to 2 Bonus Marks awarded if total cost avoided and outside units needed equations used with the correct reciprocal factor.
Question Two (14 marks) – Suggested Time (22 Minutes)
Yodel Inc. produces two sub-assemblies, B1 and R7, in its Gore Bay plant at the
unit standard costs exhibited below. They sell for $145.00 and $115.00 per unit
respectively
Expected annual unit sales and
production
Standard Costs of production:
Direct materials
Direct labour
*Variable overhead
*Fixed overhead
B1
22,000
R7
21,000
$35.00
40.00
15.00
30.00
$120.00
$43.00
20.00
10.00
20.00
$93.00
Selling expense:
Variable
**Fixed
Total cost
2.00
11.70
$133.70
2.00
9.20
$104.20
Selling price
$145.00
$115.00
Profit per unit
$11.30
$10.80
*Overhead is charged on the basis of available machine hours. Total annual
overhead, at full capacity, is estimated to be $1,800,000, of which 2/3 is fixed.
10,000 machine hours are available.
AFM 481 Final Examination
Page 4 of 16
April 22, 2009
AFM 481
Final Examination
**Fixed selling expense amounts to $500,000 per year and is allocated for pricing
purposes such that it would be absorbed at a sales level of $6,000,000 per year.
Recently the sales manager secured a tentative order to supply 15,000 units of
NYU sub-assemblies to a new customer at a price of $173.00. The order is
subject to the condition that Yodel guarantee to supply the entire 15,000 units.
Estimated costs of producing NYU’s are as follows:
Direct materials
Direct labour
Variable overhead
Fixed overhead
Cost per
Unit
$40.00
35.00
20.00
40.00
$135.00
Variable selling expenses will be $2.00 per unit and fixed selling expenses are
expected to remain unchanged.
The plant manager has asked you to go over the figures carefully. He informs
you that, if necessary, the required capacity will be made available through
refusing orders for the less profitable of the other two sub-assemblies.
REQUIRED:
a) Determine what net income would be without the NYU contract.
b) Assuming that expansion is not practical and that production of the other
sub-assemblies can be displaced if necessary, recommend a plan that will
optimize product mix and will yield the highest net income per year with
the added NYU volume.
c) Yodel Inc. wants to accept the NYU contract. Assume that the company is
contractually committed to provide 22,000 units of B1 and 21,000 units of
R7, and that expansion is not practical. Another firm is willing to produce
either B1 or R7 for Yodel. What is the highest unit price at which the least
profitable of B1 or R7 could be contracted-out so as to leave Yodel with
the same net income as that calculated in part (a) above?
AFM 481 Final Examination
Page 5 of 16
April 22, 2009
Part A) Net Income
Units
AFM 481
22000
B1
Revenue
$ 3,190,000
Direct Materials$
770,000
Direct Labour $
880,000
Variable Overhead
$
330,000
Fixed Overhead$
660,000
Variable Selling$Expense
44,000
Fixed Selling Expense257,400
$
Net Income
Final Examination
21000
$
$
$
$
$
$
$
R7
2,415,000
903,000
420,000
210,000
420,000
42,000
193,200
$
$
$
$
$
$
$
$
Total
5,605,000
1,673,000
1,300,000
540,000
1,200,000
86,000
500,000
306,000
8 Total Marks for Calculating Net Income
1 Mark Deduction for not using Full Fixed Costs (OH and Selling)
Part B)
Contribution Margin (B1) = $145 - $35 - $40 - $15 - $2 = $53
CM (B1) / MH= $53 / 0.25 hours
$
212.00
Contribution Margin (R7) = $115 - $43 - $20 - $10 - $2 = $40
CM (R7) / MH=$40 / 0.17 hours
$
240.00
Contribution Margin (NYU) = $173 - $40 - $35 - $20 - $2 = $76
Machine Hours (NYU) = $20/$60 = 0.33 hours
CM (NYU)/MH=$76 / 0.33 hours
$
228.00
Scarce Resource: 10,000 machine hours
Produce B1
Produce R7
Produce NYU
6000 units
21000 units
15000 units
1500 machine hours
3500 machine hours
5000 machine hours
Units of Production of B1 = 10,000 - 3500 - 5000 = 1500MH
Units to Produce = 1500MH / 0.25hours/unit = 6000 units
5 Total Marks for Determining Proper Production Plan
Only 2 Marks awarded if Machine Hours required for each product not calculated
such that the student did not realize that there was a scarce resource (machine hours).
3 to 4 Marks awarded if scarce resource calculation attempted but is incorrect.
Part C)
Units
6000
B1
Revenue
$
870,000
Direct Materials$
210,000
Direct
Labour
$
AFM 481 Final Examination240,000
Variable Overhead
$
90,000
Fixed Overhead$
180,000
$
$
$
$
$
21000
R7
2,415,000
903,000
420,000
210,000
420,000
$
$
$
$
$
15000
NYU
2,595,000
600,000
525,000
300,000
600,000
$
$
$
$
$
Total
5,880,000
1,713,000
1,185,000
Page 6 of 16
600,000
1,200,000
April 22, 2009
AFM 481
Final Examination
Question Three (11 marks) – Suggested Time (16 Minutes)
Daz Manufacturing Company buys Liquid Charcoal for $.80 a gallon. At the
end of processing in Department 1, the liquid charcoal splits off into Products
U, V, and W. Product U is sold at the split-off point with no further
processing. Products V and W require further processing before they can be
sold; Product V is processed in Department 2, and Product W is processed in
Department 3. Following is a summary of costs and other related data for the
most recent accounting period:
Department
2.
1.
Cost of Liquid
charcoal
Direct Labour
Manufacturing
Overhead
$25,000
$14,000
$45,000
$65,000
$10,000
$27,000
$49,000
20,000
Products
V
30,000
15,000
-
15,000
$30,000
$96,000
$141,750
U
Gallons sold
Gallons on hand
at end of period
Sales in dollars
3.
W
50,000
There were no beginning inventories and there was no liquid charcoal on hand at
the end of the period. All gallons on hand in ending inventory were complete as
to processing. DAZ uses the net realizable value method of allocating joint costs.
REQUIRED:
a) What is the net realizable value of Product U that should be used for
allocation purposes?
a. ($30,000/20,000) x (20,000 + 15,000) = $52 500
b) What is the amount of the joint costs to be allocated to Product W for the
period?
First Solution using .80 a gallon:
Joint costs = $.80 (35,000 + 30,000 + 65,000) = $104,000 + 24,000 =$128,000
NRV (W) = ($141,750/50,000) x 65,000] - $114,000 = $70,275
[($70,275/146,775) x $128,000] = $61,286
AFM 481 Final Examination
Page 7 of 16
April 22, 2009
AFM 481
Final Examination
Second: [($70,275/146,775) x $49,000] = $23,461
c) What is the total cost of Product V sold for the accounting period?
NRV (V) = $96,000 - 72,000 = $24,000
Allocated joint costs = $49,000 x ($24,000/146,775) = $8,012
$8,012 + 45,000 + 27,000 = $80,012
d) What is the value of the ending inventory for Product U?
Allocated joint costs = [($52,500/146,775) x $49,000 = $17,568
($17,568/35,000) x 15,000 = $7,511
Question 3 (Alternative Solution using $0.80/gallon of Liquid Charcoal)
Total Gallons Produced = 20k + 15k + 30k+ 50k +
15K
130000.00
Cost of Charcoal
Direct Labour
Manufacturing Overhead
Joint Costs
$
104,000.00
$
14,000.00
$
10,000.00
$
128,000.00
Allocated Joint Process Cost
Product U
Product V
Product W
Total
52500
96000
184275
332775
72000
114000
186000
52500
24000
70275
146775
35.77%
16.35%
47.88%
100.00%
$
$
$
45,784.36
20,929.99
61,285.64
a) $52,500.00
b) $61,285.64
c) $72000 + $20,929.99
d) $45,784.36 x (15,000/35,000) =
$ 92,929.99
$ 19,621.87
Sales Revenue
Less: Further Processing Costs
Net Realizable Value
Proportionate Share of NRV
Alternative Solution for #3. No students answered using this solution key.
AFM 481 Final Examination
Page 8 of 16
April 22, 2009
AFM 481
Final Examination
Question Four (15 marks) – Suggested Time (22 Minutes)
Part 1
Esa of Helsinki produces three products for sale throughout Finland. The first is a
convertible scarf with fox fur ‘pom-poms’ and trim, the second a scarf with fur
trim, and the last a simple scarf. All three are woven wool. The cost structures
and information for each are as follows (all figures are in Euros):
Multi with fur
60€
Scarf with Fur Scarf only
50€
25€
1.5€
5.0
3.0
1.5
4.0
1.5€
3.0
2.0
1.0
4.0
1.0€
0
1.0
0.5
4.0
Gross Margin
45€
38.5€
18.5€
2006 year sales
(units)
5,000
15,000
20,000
Sales Price
Costs:
Wool
Fur
Labour
Var. O/H
Fixed Mfg. O/H
Fixed Administrative overhead is budgeted at 65% of fixed Manufacturing
Overhead.
REQUIRED:
a) Calculate the 2007 sales volume in units of each of the styles at Esa’s
break-even point. Assume the same sales mix as 2006.
b) Due to the negative publicity surrounding the use of fur in clothing, Esa is
considering substituting an artificial ‘fun fur’ in the production of his two
premium styles. If the cost of this substitute material is 50% of the fur and
sales increase for both products by 10% as a result of positive publicity,
determine the new break-even point in units. The selling prices remain
constant.
AFM 481 Final Examination
Page 9 of 16
April 22, 2009
AFM 481
Final Examination
Part 2
Cripton Inc. manufactures and sells oak bedroom suites. A bedroom suite
consists of one dresser, a headboard and two night tables. The sales prices for
each item are as follows:
Dresser
Headboard
Night table
$1,200 each
$350 each
$300 each
The markup on a headboard is 40% over variable cost and on a night table is
25% over variable cost. Cripton Inc. must sell 400 complete bedroom suits to
cover $400,000 of fixed costs.
REQUIRED:
What is the contribution margin for each dresser?
Question Five (15 marks) – Suggested Time (22 Minutes)
The next year’s budget for Green, Inc, a multiproduct company is given below:
Sales
Variable
Costs
Fixed costs
Net Income
Units
Market share
Product A
$1,890,000
926,100
Product B
$1,377,000
596,700
500,000
$463,900
252,000
12.5%
500,000
$280,300
108,000
20.0%
At the end of the year, the total fixed costs and the variable costs per unit were
exactly as budgeted, but the following units per product line were sold. Green
analyzes the effects its sales variances have on the profitability of the company.
Year End Actual:
Product
Line
A
B
Units
Sales
Market Share
253,230
113,770
$1,848,579
$1,479,010
15.0%
17.0%
REQUIRED:
Analyze the revenue variances for the company as far as the data permits.
AFM 481 Final Examination
Page 10 of 16
April 22, 2009
AFM 481
Final Examination
Question Six (15 marks) – Suggested Time (23 Minutes)
The Fasting Artists Company mass produces paintings which are sold by
retailers out of motel rooms. The firm is organized into departments. Each
department specializes in a specific painting. This problem concerns the
department which produces “sofa sized” seascapes. A unit is considered to be
started when a canvas board is placed on the assembly line. Various “artists”
specialize in painting portions of the picture. The least experienced painters do
the sky and seagulls first. Then another artist paints the beach, another the
waves, and so on. A unit is completed after the picture is placed into a frame.
The pictures are inspected after the sky and seagulls have been painted (the
point at which they are considered to be 25% complete). Rejected units are
returned to the beginning of the assembly line to be repainted (the zero percent
complete point, however, a new canvasboard is not required). Normal rework is
considered to be 20% of the units inspected. Units are inspected again just
before they are framed (the 95% complete point). Any rejected units at this
inspection are cut into 10” x 10” squares and sold to a firm that makes graduation
hats. A rejected unit is old for a total of $1.50. A 10% spoilage rate is
considered normal.
There are two items considered direct materials: the canvasboard and frame. All
labour and overhead costs are considered to be incurred uniformly through the
process. The firm began the current period with 50 units in process, 40%
complete. Work was begun on an additional 800 units and the firm ended the
period with 80 units in process, 70% complete. During the period, the firm
inspected 1,100 units for rework. Also during the period, 100 units were rejected
as spoiled and were sold as mortarboards. The costs attached to beginning work
in process were $62.50 for the canvasboard and $20 for conversion costs. The
costs incurred during the period were $1,000 for the canvasboards, $652 for
conversion costs and $2,010 for frames.
REQUIRED:
a) Prepare a cost of production report, assigning costs to the appropriate
balance sheet and income statement accounts.
b) If the paintings are sold for $12.95 each, what was the gross margin
earned per unit for this period’s production?
AFM 481 Final Examination
Page 11 of 16
April 22, 2009
AFM 481
Final Examination
Question Seven (15 marks) – Suggested Time (23 Minutes)
Lichen Products has the capability to produce three products that are simply
referred to as X1, X2 and X3, on which they make a contribution margin of $10,
$4, and $8 respectively. For the next accounting period, they anticipate some
resource shortages. They set up and solved the following linear program using
Excel:
Maximize: 10X1 +4X2 +8X3
s.t. X1 +2X2 +X3
X1+0.5X2+2X3
2X1+X2+0.5X3
≤ 1002 pounds of materials
≤ 800 hours of machine time
≤ 1200 hours of labour time
The result of their analysis follows the REQUIREDs.
REQUIRED:
a) What products should be produced and in what quantities?
a. 571 of X1 and 114 of X2 2 marks
b) What contribution margin does this firm expect to earn in total?
a. $6,628.57 2 marks
c) If the analysis were done on gross margin per unit, would the results be
the same?
a. No
b. Why or why not? – because that would include the fixed cost per
unit, which is not scalable up and down. 1 mark
d) If the firm can hire another hour of labour for $4.00 an hour, should they
do it? No
a. Why? Because the shadow price (increase in the objective function
by a one unit change in the labour constraint is only $3.43 2 marks
e) If the firm can obtain another hour of machine time, should it?
a. Yes, if it can be obtained for less than $3.14
b. Why? The shadow price is 3.43 (ie, the increase in the obj
function) 2 marks
f) What is the minimum number of machine hours the firm can have
available without changing the relative product mix of output? 600 1 mark
g) What is the amount and type of excess resources which this firm has
available? materials – the firm has 316 pounds of excess materials 2
marks
h) What will happen to the firm’s profits if an additional unit of X2 is
produced? Profit will drop by $1.00 1 mark
i) If the firm could obtain additional machine time for free, how many hours
of time could it obtain without changing the relative product mix? 738
hours 1 mark
AFM 481 Final Examination
Page 12 of 16
April 22, 2009
AFM 481
Final Examination
j) At the end of the period, the firm discovered that they had miscalculated
the contribution margin on X1. Instead of $10 per unit, it was only $7.00
per unit. They reran the solver program with the correct parameters, and it
follows the original three exhibits. What is the cost of their prediction
error? (show your work)
Current results
571.42857 x 7
4000.00
114.2857 x 8
914.28
Total
4914
Correct Amount
Incorrect amts at correct parameters
Cost of Prediction Error
2 marks max of 15 marks
AFM 481 Final Examination
5,019
4,914
105
Page 13 of 16
April 22, 2009
AFM 481
Final Examination
Exhibits
Target Cell (Max)
Cell
$C$3
Name
Original
Value
10X1+4X2+8X3
Final Value
0
6628.571429
0
0
0
Final Value
571.4285714
0
114.2857143
Adjustable Cells
Cell
$B$6
$B$7
$B$8
Name
X1 10X1+4X2+8X3
X2 10X1+4X2+8X3
X3 10X1+4X2+8X3
Original
Value
Constraints
Cell
Name
$C$11 1X1+2X2+1X3
$C$12 1X1+0.5X2+2X3
$C$13 2x1+1X2+0.5X3
Cell Value
Formula
Status
Not
685.7142857 $C$11<=$D$11 Binding
800 $C$12<=$D$12 Binding
1200 $C$13<=$D$13 Binding
Slack
316.2857143
0
0
Microsoft Excel 12.0 Sensitivity Report
Worksheet: [Book1]Sheet1
Report Created: 12/04/2009 6:00:33 PM
Adjustable Cells
Final
Reduced
Objective
Allowable
Allowable
Cost
Coefficient
Increase
Decrease
Cell
Name
Value
$B$6
X1 10X1+4X2+8X3
571.4285714
0
10
22
2
$B$7
X2 10X1+4X2+8X3
0
-1
4
1
1E+30
$B$8
X3 10X1+4X2+8X3
114.2857143
0
8
12
5.5
Constraints
Cell
Name
$C$11
1X1+2X2+1X3
$C$12
$C$13
Final
Shadow
Constraint
Allowable
Allowable
Value
Price
R.H. Side
Increase
Decrease
685.7142857
0
1002
1E+30
316.2857143
1X1+0.5X2+2X3
800
3.142857143
800
738
200
2x1+1X2+0.5X3
1200
3.428571429
1200
400
1000
AFM 481 Final Examination
Page 14 of 16
April 22, 2009
AFM 481
Final Examination
Microsoft Excel 12.0 Limits Report
Worksheet: [Book1]Limits Report 1
Report Created: 12/04/2009 6:00:33 PM
Target
Cell
Name
$C$3
10X1+4X2+8X3
Value
6628.571429
Adjustable
Cell
Name
Value
Lower
Target
Upper
Target
Limit
Result
Limit
Result
$B$6
X1 10X1+4X2+8X3
571.4285714
0
914.2857143
571.4285714
6628.571428
$B$7
X2 10X1+4X2+8X3
0
0
6628.571429
0
6628.571429
$B$8
X3 10X1+4X2+8X3
114.2857143
0
5714.285714
114.2857143
6628.571428
Microsoft Excel 12.0 Answer Report
Worksheet: [Question Five Excel Spreadsheet.xlsx]Corrected Data
Report Created: 12/04/2009 6:16:57 PM
Target Cell (Max)
Cell
$C$3
Name
7X1+4X2+8X3
Original
Value
5019.714286
Final Value
5019.714286
Original
Value
466
210.8571429
114.2857143
Final Value
466
210.8571429
114.2857143
Adjustable Cells
Cell
$B$6
$B$7
$B$8
Name
X1 7X1+4X2+8X3
X2 7X1+4X2+8X3
X3 7X1+4X2+8X3
Constraints
Cell
Name
$C$11 1X1+2X2+1X3
$C$12 1X1+0.5X2+2X3
$C$13 2x1+1X2+0.5X3
AFM 481 Final Examination
Cell Value
Formula
Status Slack
1002 $C$11<=$D$11 Binding
0
800 $C$12<=$D$12 Binding
0
1200 $C$13<=$D$13 Binding
0
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April 22, 2009
AFM 481 Final Examination
AFM 481
Final Examination
Page 16 of 16