Questions

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Julia’s Candy Co. reports the following information from its sales account and sales budget:

SalesMay    $105,000

June          93,000

Expected Sales     July        $90,000

August         110,000

September  120,000

Cash sales are normally 25% of total sales and all credit sales are expected to be collected in the month following the date of sale. The total amount of cash expected to be received from customers in September is:

$ 30,000

$ 82,500

$ 112,500

$ 120,000

$ 202,500

Question 2

Which of the following budgets must be completed before a cash budget can be prepared?

Capital expenditures budget

Sales budget

Merchandise purchases budget

General and administrative expense budget

All of the above

Question 3

The master budget includes:

Operating budgets

A capital expenditures budget

A budgeted income statement

A cash budget

All of the above

Question 4

Bentels Co. desires a December 31 ending inventory of 2,840 units. Budgeted sales for December are 4,000 units. The November 30 inventory was 1,800 units. Budgeted purchases are:

5,040 units

1,240 units

6,840 units

4,000 units

5,800 units

Question 5

The standard materials cost to produce 1 unit of Product M is 6 pounds of material at a standard price of $50 per pound. In manufacturing 8,000 units, 47,000 pounds of material were used at a cost of $51 per pound. What is the total direct material cost variance?

$48,000 unfavorable

$51,000 favorable

$51,000 unfavorable

$ 3,000 favorable

$ 3,000 unfavorable

Question 6

Actual fixed overhead for Kapok Company during March was $92,780. The flexible budget for fixed overhead this period is $89,000 based on a production level of 5,000 units. If the company actually produced 4,200 units what is the fixed overhead spending variance for March?

$3,780 favorable

$800 unfavorable

$14,240 unfavorable

$3,780 unfavorable

$14,240 favorable

Question 7

Kabuki Company’s policy is to have 16% of the next month’s sales as desired ending inventory. Estimated sales are shown in the table below. Given this data, what is Kabuki’s estimated purchases for April?

March     April          May

Expected Sales Units                                9,400        8,900   7,300

8,584

9,176

8,644

9,256

9,000

Question 8

The usual starting point for preparing a master budget is forecasting or estimating:

Expenditures

Sales

Production

Income

Cash payments

Question 9

The sum of the variable overhead spending variance, the variable overhead efficiency variance, and the fixed overhead spending variance is the:

Production variance

Quantity variance

Volume variance

Price variance

Controllable variance

Question 10

A department store has budgeted sales of 12,000 men’s suits in September. Management wants to have 6,000 suits in inventory at the end of the month to prepare for the winter season. Beginning inventory for September is expected to be 4,000 suits. What is the dollar amount of purchase of suits? Each suit has a cost of $75.

$ 750,000

$ 900,000

$ 1,050,000

$ 1,200,000

$ 1,350,000

Questions

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1.      City Farm Insurance has collection centers across the country to speed up collections. The company also makes its disbursements from remote disbursement centers. The collection time has been reduced by two days and disbursement time increased by one day because of these policies. Excess funds are being invested in short-term instruments yielding 12 percent per annum.

         a.      If City Farm has $5 million per day in collections and $3 million per day in disbursements, how many dollars has the cash management system freed up?

         b.      How much can City Farm earn in dollars per year on short-term investments made possible by the freed-up cash?

Nicholas Birdcage Company of Hollywood ships cages throughout the country. Nicholas has determined that through the establishment of local collection centers around the country, he can speed up the collection of payments by one and one-half days. Furthermore, the cash management department of his bank has indicated to him that he can defer his payments on his accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

         a.      If the company has $4 million per day in collections and $2 million per day in disbursements, how many dollars will the cash management system free up?

         b.      If the company can earn 9 percent per annum on freed-up funds, how much will the income be?

         c.      If the annual cost of the new system is $700,000, should it be implemented?

Megahurtz International Car Rentals has rent-a-car outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2003, it held 100,000 reals in Brazil worth 35,000 dollars. It drew 12 percent interest, but the Brazilian real declined 20 percent against the dollar.

         a.      What is the value of its holdings, based on U.S. dollars, at year-end (Hint: multiply $35,000 times 1.12 and then multiply the resulting value by 80 percent.)

         b.      What is the value of its holdings, based on U.S. dollars, at year-end if it drew 9 percent interest and the real went up by 10 percent against the dollar?

Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000. Compute the value of the average collection period.

7.      Darla’s Cosmetics has annual credit sales of $1,440,000 and an average collection period of 45 days in 2008. Assume a 360-day year.

What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period.

Knight Roundtable Co. has annual credit sales of $1,080,000 and an average collection period of 32 days in 2008. Assume a 360-day year. What is the company’s average accounts receivable balance? Accounts receivable are equal to the average daily credit sales times the average collection period.

Lone Star Petroleum Co. has annual credit sales of $2,880,000 and accounts receivable of $272,000. Compute the value of the average collection period.

In Problem 7, if accounts receivable change to $200,000 in the year 2009, while credit sales are $1,800,000, should we assume the firm has a more or a less lenient credit policy?

Hubbell Electronic Wiring Company has an average collection period of 35 days. The accounts receivable balance is $105,000. What is the value of its credit sales?

Marv’s Women’s Wear has the following schedule for aging of accounts receivable.

         a.      Fill in column (4) for each month.

         b.      If the firm had $960,000 in credit sales over the four-month period, compute the average collection period. Average daily sales should be based on a 120-day period.

         c.      If the firm likes to see its bills collected in 30 days, should it be satisfied with the average collection period?

         d.      Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?

         e.      What additional information does the aging schedule bring to the company that the average collection period may not show?

Nowlin Pipe & Steel has projected sales of 72,000 pipes this year, an ordering cost of $6 per order, and carrying costs of $2.40 per pipe.

         a.      What is the economic ordering quantity?

         b.      How many orders will be placed during the year?

         c.      What will the average inventory be?

Howe Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Howe anticipates sales of 126,000 units per year, an ordering cost of $4 per order, and carrying costs of $1.008 per unit.

         a.      What is the economic ordering quantity?

         b.      How many orders will be placed during the year?

         c.      What will the average inventory be?

         d.      What is the total cost of inventory expected to be?

(See Problem 12 for basic data.) In the second year, Howe Corporation finds it can reduce ordering costs to $1 per order but that carrying costs will stay the same at $1.008 per unit.

         a.      Recompute a, b, c, and d in Problem 12 for the second year.

         b.      Now compare years one and two and explain what happened.

Higgins Athletic Wear has expected sales of 22,500 units a year, carrying costs of $1.50 per unit, and an ordering cost of $3 per order.

         a.      What is the economic order quantity?

         b.      What will be the average inventory? The total carrying cost?

         c.      Assume an additional 30 units of inventory will be required as safety stock. What will the new average inventory be? What will the new total carrying cost be?

Dimaggio Sports Equipment, Inc., is considering a switch to level production. Cost efficiencies would occur under level production, and aftertax costs would decline by $35,000, but inventory would increase by $400,000. Dimaggio would have to finance the extra inventory at a cost of 10.5 percent.

         a.      Should the company go ahead and switch to level production?

         b.      How low would interest rates need to fall before level production would be feasible?

Johnson Electronics is considering extending trade credit to some customers previously considered poor risks. Sales will increase by $100,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 3 percent of sales, and production and selling costs will be 79 percent of sales. The firm is in the 40 percent tax bracket.

         a.      Compute the incremental income after taxes.

         b.      What will Johnson’s incremental return on sales be if these new credit customers are accepted?

         c.      If the receivable turnover ratio is 6 to 1, and no other asset buildup is needed to serve the new customers, what will Johnson’s incremental return on new average investment be?

Collins Office Supplies is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 78 percent, and accounts receivable turnover is five times. Assume income taxes of 30 percent and an increase in sales of $80,000. No other asset buildup will be required to service the new accounts.

         a.      What is the level of accounts receivable to support this sales expansion?

         b.      What would be Collins’s incremental aftertax return on investment?

         c.      Should Collins liberalize credit if a 15 percent aftertax return on investment is required?

Assume Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times.

         d.      What would be the total incremental investment in accounts receivable and inventory to support a $80,000 increase in sales?

         e.      Given the income determined in part b and the investment determined in part d, should Collins extend more liberal credit terms?

Curtis Toy Manufacturing Company is evaluating the extension of credit to a new group of customers. Although these customers will provide $240,000 in additional credit sales, 12 percent are likely to be uncollectible. The company will also incur $21,000 in additional collection expense. Production and marketing costs represent 72 percent of sales. The company is in a 30 percent tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10 percent desired return on investment.

         a.      Should Curtis extend credit to these customers?

         b.      Should credit be extended if 14 percent of the new sales prove uncollectible?

         c.      Should credit be extended if the receivables turnover drops to 1.5 and 12 percent of the accounts are uncollectible (as was the case in part a).

Reconsider problem 18. Assume the average collection period is 120 days. All other factors are the same (including 12 percent uncollectibles). Should credit be extended?

Apollo Data Systems is considering a promotional campaign that will increase annual credit sales by $600,000. The company will require investments in accounts receivable, inventory, and plant and equipment. The turnover for each is as follows:

All $600,000 of the sales will be collectible. However, collection costs will be 3 percent of sales, and production and selling costs will be 77 percent of sales. The cost to carry inventory will be 6 percent of inventory. Depreciation expense on plant and equipment will be 7 percent of plant and equipment. The tax rate is 30 percent.

         a.      Compute the investments in accounts receivable, inventory, and plant and equipment based on the turnover ratios. Add the three together.

         b.      Compute the accounts receivable collection costs and production and selling costs and add the two figures together.

         c.      Compute the costs of carrying inventory.

         d.      Compute the depreciation expense on new plant and equipment.

         e.      Add together all the costs in parts b, c, and d.

         f.       Subtract the answer from part e from the sales figure of $600,000 to arrive at income before taxes. Subtract taxes at a rate of 30 percent to arrive at income after taxes.

         g.      Divide the aftertax return figure in part f by the total investment figure in part a. If the firm has a required return on investment of 12 percent, should it undertake the promotional campaign described throughout this problem.

In Problem 20, if inventory turnover had only been 4 times:

         a.      What would be the new value for inventory investment?

         b.      What would be the return on investment? You need to recompute the total investment and the total costs of the campaign to work toward computing income after taxes. Should the campaign be undertaken?

Maddox Resources has credit sales of $180,000 yearly with credit terms of net 30 days, which is also the average collection period. Maddox does not offer a discount for early payment, so its customers take the full 30 days to pay.

What is the average receivables balance? What is the receivables turnover?

If Maddox were to offer a 2 percent discount for payment in 10 days and every customer took advantage of the new terms, what would the new average receivables balance be? Use the full sales of $180,000 for your calculation of receivables.

24.       If Maddox reduces its bank loans, which cost 12 percent, by the cash generated from its reduced receivables, what will be the net gain or loss to the firm?

Assume that the new trade terms of 2/10, net 30 will increase sales by 20 percent because the discount makes the Maddox price competitive. If Maddox earns 16 percent on sales before discounts, should it offer the discount? (Consider the same variables as you did for problems 22 through 24.)

Questions

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Question 1.     Alyeska Services Company, a division of a major oil company, provides various services to the operators of the North Slope oil field in Alaska. Data concerning the most recent year appear below:

Required:

1. Compute the margin for Alyeska Services Company. (Round your answer to 2 decimal places.)
2. Compute the turnover for Alyeska Services Company. (Round your answer to 2 decimal places.)
3. Compute the return on investment (ROI) for Alyeska Services Company. (Round your intermediate calculations and final answer to 2 decimal places.)

Question 2.  Data Span, Inc., automated its plant at the start of the current year and installed a flexible manufacturing system. The company is also evaluating its suppliers and moving toward Lean Production. Many adjustment problems have been encountered, including problems relating to performance measurement. After much study, the company has decided to use the performance measures below, and it has gathered data relating to these measures for the first four months of operations.

Management has asked for your help in computing throughput time, delivery cycle time, and MCE. The following average times have been logged over the last four months:

Required:

1-a. Compute the throughput time for each month.

1-b. Compute the delivery cycle time for each month.

1-c. Compute the manufacturing cycle efficiency (MCE) for each month.

2. Evaluate the company’s performance over the last four months.

3-a. Refer to the move time, process time, and so forth, given for month 4. Assume that in month 5 the move time, process time, and so forth, are the same as in month 4, except that using Lean Production the company can eliminate the queue time during production.  Compute the new throughput time and MCE.

3-b. Refer to the move time, process time, and so forth, given for month 4. Assume in month 6 that the move time, process time, and so forth, are again the same as in month 4, except that the company can eliminate both the queue time during production and the inspection time. Compute the new throughput time and MCE.

Question 3. 

“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of Billings Company’s Office Products Division. “But I want to see the numbers before I make any move. Our division’s return on investment (ROI) has led the company for three years, and I don’t want any letdown.”

Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company’s Office Products Division for this year are given below:

The company had an overall return on investment (ROI) of 18.00% this year (considering all divisions). Next year the Office Products Division has an opportunity to add a new product line that would require an additional investment that would increase average operating assets by $2,126,350. The cost and revenue characteristics of the new product line per year would be:

Required:

1. Compute the Office Products Division’s ROI for this year.
2. Compute the Office Products Division’s ROI for the new product line by itself.
3. Compute the Office Products Division’s ROI for next year assuming that it performs the same as this year and adds the new product line.
4. If you were in Dell Havasi’s position, would you accept or reject the new product line?
5. Why do you suppose headquarters is anxious for the Office Products Division to add the new product line?
6. Suppose that the company’s minimum required rate of return on operating assets is 14% and that performance is evaluated using residual income.
7. Compute the Office Products Division’s residual income for this year.
8. Compute the Office Products Division’s residual income for the new product line by itself.

1. Compute the Office Products Division’s residual income for next year assuming that it performs the same as this year and adds the new product line.
2. Using the residual income approach, if you were in Dell Havasi’s position, would you accept or reject the new product line?

Question 4. 

The Regal Cycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow:

*Allocated based on sales dollars.

Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out.

Required:

1. What is the financial advantage (disadvantage) per quarter of discontinuing the Racing Bikes?
2. Should the production and sale of racing bikes be discontinued?
3. Prepare a properly formatted segmented income statement that would be more useful to management in assessing the long-run profitability of the various product lines.

 Question 5.

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $40 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required:

1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier?
2. Should the outside supplier’s offer be accepted?
3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $180,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 18,000 carburetors from the outside supplier?
4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

Question 6.

Imperial Jewelers manufactures and sells a gold bracelet for $401.00. The company’s accounting system says that the unit product cost for this bracelet is $261.00 as shown below:

The members of a wedding party have approached Imperial Jewelers about buying 11 of these gold bracelets for the discounted price of $361.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $456 and that would increase the direct materials cost per bracelet by $11. The special tool would have no other use once the special order is completed.

To analyze this special-order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $12.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party’s order using its existing manufacturing capacity.

Required:

1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party?
2. Should the company accept the special order?