Connect - Managerial Accounting Exam (Ch 10-12)

1.

Calla Company produces skateboards that sell for $63 per unit. The company currently has the capacity to produce 90,000 skateboards per year, but is selling 81,500 skateboards per year. Annual costs for 81,500 skateboards follow.

Direct materials	$	896,500
Direct labor		676,450
Overhead		953,000
Selling expenses		554,000
Administrative expenses		463,000
Total costs and expenses	$	3,542,950

A new retail store has offered to buy 8,500 of its skateboards for $58 per unit. The store is in a different market from Calla's regular customers and it would not affect regular sales. A study of its costs in anticipation of this additional business reveals the following:

•		Direct materials and direct labor are 100% variable.
•		40 percent of overhead is fixed at any production level from 81,500 units to 90,000 units; the remaining 60% of annual overhead costs are variable with respect to volume.
•		Selling expenses are 70% variable with respect to number of units sold, and the other 30% of selling expenses are fixed.
•		There will be an additional $2.5 per unit selling expense for this order.
•		Administrative expenses would increase by a $860 fixed amount.

Required:

Prepare a three-column comparative income statement that reports the following:

a.	Annual income without the special order.
b.	Annual income from the special order.
c.	Combined annual income from normal business and the new business.
(Do not round intermediate calculations and round your answers to the nearest whole dollar.)

CALLA COMPANY COMPARATIVE INCOME STATEMENTS Normal Volume Additional Volume Combined Total Sales $5,134,500 $493,000 $5,627,500 Costs and expenses: Direct materials 896,500 93,500 990,000 Direct labor 676,450 70,550 747,000 Overhead 953,000 59,636 1,012,636 Selling expenses 554,000 61,695 615,695 Administrative expenses 463,000 860 463,860 Total costs and expenses 3,542,950 286,241 3,829,191 Operating income $1,591,550 $206,759 $1,798,309

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2.

Haver Company currently produces component RX5 for its sole product. The current cost per unit to manufacture the required 52,000 units of RX5 follows.

   

Direct materials	$	5.00
Direct labor		9.00
Overhead		10.00
Total costs per unit	$	24.00

    

Direct materials and direct labor are 100% variable. Overhead is 70% fixed. An outside supplier has offered to supply the 52,000 units of RX5 for $20.00 per unit.

  

Required:

1.	Calculate the per unit incremental costs of making and buying component RX5.

	Total incremental costs of: Making the units Buying the units Total direct materials $260,000 Total direct labor 468,000 Variable overhead costs 156,000 Cost to buy the units 1,040,000 Total costs $884,000 $1,040,000 Should the company continue to manufacture the part, or should it buy the part from the outside supplier? Make the units

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3.

Harold Manufacturing produces denim clothing. This year, it produced 5,110 denim jackets at a manufacturing cost of $41.00 each. These jackets were damaged in the warehouse during storage. Management investigated the matter and identified three alternatives for these jackets.

1.	Jackets can be sold to a second-hand clothing shop for $7.00 each.
2.	Jackets can be disassembled at a cost of $31,900 and sold to a recycler for $11.00 each.
3.	Jackets can be reworked and turned into good jackets. However, with the damage, management estimates it will be able to assemble the good parts of the 5,110 jackets into only 2,920 jackets. The remaining pieces of fabric will be discarded. The cost of reworking the jackets will be $101,500, but the jackets can then be sold for their regular price of $44.00 each.

  

Required:
1.	Calculate the incremental income.

	Alternative 1 Sell as is Alternative 2 Disassemble and sell to a recycler Alternative 3 Rework and turn into good jackets Incremental revenue $35,770 $56,210 $128,480 Incremental costs 0 31,900 101,500 Incremental income $35,770 $24,310 $26,980 The company should choose: Alternative 1

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4.

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.

	Product G						Product B
Selling price per unit			$	230					$	260
Variable costs per unit				100						156
Contribution margin per unit			$	130					$	104
Machine hours to produce 1 unit		0.4	hours					1	hours
Maximum unit sales per month		650	units					250	units

The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $13,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place.)

1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit $130.00 $104.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour $325.00 $104.00 Product G Product B Total Maximum number of units to be sold 650 250 Hours required to produce maximum units 260 250 510 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product 176 176 Units produced for most profitable sales mix 440 Contribution margin per unit $130.00 Total contribution margin - one shift $57,200 $57,200 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month? Product G Product B Total Hours dedicated to the production of each product 260 92 352 Units produced for most profitable sales mix 650 92 Contribution margin per unit $130.00 $104.00 Total contribution margin - two shifts $84,500 $9,568 $94,068 Total contribution margin - one shift 57,200 Change in contribution margin 36,868 Change in fixed costs 13,000 Change in operating income $23,868 Should the company add another shift? Yes 4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $12000 per month in marketing efforts. Should the company pursue this strategy and the double shift? Product G Product B Total Hours dedicated to the production of each product 280 72 352 Units produced for most profitable sales mix 700 72 Contribution margin per unit $130.00 $104.00 Total contribution margin - two shifts and marketing campaign $91,000 $7,488 $98,488 Contribution margin - two shifts without marketing campaign 94,068 Change in contribution margin 4,420 Additional marketing costs 12,000 Change in fixed costs 13,000 Change in operating income $(20,580) Should the company pursue the marketing campaign? No

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5.

Elegant Decor Company’s management is trying to decide whether to eliminate Department 200, which has produced losses or low profits for several years. The company’s 2013 departmental income statement shows the following.

   

ELEGANT DECOR COMPANY Departmental Income Statements For Year Ended December 31, 2013
	Dept. 100					Dept. 200					Combined
Sales		$	438,000				$	309,539				$	747,539
Cost of goods sold			265,000					214,000					479,000
Gross profit			173,000					95,539					268,539
Operating expenses
Direct expenses
Advertising			15,000					12,000					27,000
Store supplies used			6,000					5,500					11,500
Depreciation—Store equipment			5,000					3,800					8,800
Total direct expenses			26,000					21,300					47,300
Allocated expenses
Sales salaries			78,000					46,800					124,800
Rent expense			9,440					4,740					14,180
Bad debts expense			10,100					8,100					18,200
Office salary			18,720					12,480					31,200
Insurance expense			1,900					1,100					3,000
Miscellaneous office expenses			2,700					2,100					4,800
Total allocated expenses			120,860					75,320					196,180
Total expenses			146,860					96,620					243,480
Net income (loss)		$	26,140				$	(1,081	)			$	25,059

   

In analyzing whether to eliminate Department 200, management considers the following:

   

a.	The company has one office worker who earns $600 per week, or $31,200 per year, and four sales clerks who each earn $600 per week, or $31,200 per year for each salesclerk.
b.	The full salaries of two salesclerks are charged to Department 100. The full salary of one salesclerk is charged to Department 200. The salary of the fourth clerk, who works half-time in both departments, is divided evenly between the two departments.
c.	Eliminating Department 200 would avoid the sales salaries and the office salary currently allocated to it. However, management prefers another plan. Two salesclerks have indicated that they will be quitting soon. Management believes that their work can be done by the other two clerks if the one office worker works in sales half-time. Eliminating Department 200 will allow this shift of duties. If this change is implemented, half the office worker’s salary would be reported as sales salaries and half would be reported as office salary.
d.	The store building is rented under a long-term lease that cannot be changed. Therefore, Department 100 will use the space and equipment currently used by Department 200.
e.	Closing Department 200 will eliminate its expenses for advertising, bad debts, and store supplies; 68% of the insurance expense allocated to it to cover its merchandise inventory; and 21% of the miscellaneous office expenses presently allocated to it.

Required:
1.	Complete the three-column report that lists items and amounts for (a) the company’s total expenses (including cost of goods sold)—in column 1, (b) the expenses that would be eliminated by closing Department 200—in column 2, and (c) the expenses that will continue—in column 3. The statement should reflect the reassignment of the office worker to one-half time as salesclerk.

ELEGANT DECOR COMPANY Analysis of Expenses under Elimination of Department 200 Total Expenses Eliminated Expenses Continuing Expenses Cost of goods sold $479,000 $214,000 $265,000 Direct expenses Advertising 27,000 12,000 15,000 Store supplies used 11,500 5,500 6,000 Depreciation—Store equipment 8,800 8,800 Allocated expenses Sales salaries 124,800 46,800 78,000 Rent expense 14,180 14,180 Bad debts expense 18,200 8,100 10,100 Office salary 31,200 15,600 15,600 Insurance expense 3,000 748 2,252 Miscellaneous office expenses 4,800 441 4,359 Total expenses $722,480 $303,189 $419,291

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6.

Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $495,000 cost with an expected four-year life and a $26,000 salvage value. All sales are for cash, and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Expected annual sales of new product	$	1,870,000
Expected annual costs of new product
Direct materials		495,000
Direct labor		675,000
Overhead excluding straight-line depreciation on new machine		339,000
Selling and administrative expenses		163,000
Income taxes		30	%

Required:
1.	Compute straight-line depreciation for each year of this new machine’s life.

	Straight-line depreciation $117,250

Annual straight-line depreciation	=	$495,000 − $26,000	=	$117,250
		4 years

2.	Determine expected net income and net cash flow for each year of this machine’s life.

Expected net income Revenues Sales $1,870,000 Expenses Direct materials $495,000 Direct labor 675,000 Overhead excluding straight-line depreciation on new machine 339,000 Straight-line depreciation on new machine 117,250 Selling and administrative expenses 163,000 Total expenses 1,789,250 Income before taxes 80,750 Income tax expense 24,225 Net income $56,525 Expected net cash flow Net income $56,525 Straight-line depreciation on new machine 117,250 Net cash flow $173,775

3.	Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year.

	Payback period Choose Numerator: / Choose Denominator: = Payback period Cost of investment / Annual net cash flow = Payback period $495,000 / $173,775 = 2.85 years

4.	Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year.

Accounting rate of return Choose Numerator: / Choose Denominator: = Accounting rate of return Annual after-tax net income / Annual average investment = Accounting rate of return $56,525 / $260,500 = 21.70 % 5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.) Chart values are based on: n = 4 i = 7% Cash flow Select chart Amount x Table factor = Present Value Annual cash flow Present Value of an Annuity of 1 $173,775 x 3.3872 = $588,611 Salvage value Present Value of 1 $26,000 x 0.7629 = 19,835 Present value of cash inflows $608,446 Present value of cash outflows (495,000) Net present value $113,446

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7.

Sentinel Company is considering an investment in technology to improve its operations. The investment will require an initial outlay of $257,000 and will yield the following expected cash flows. Management requires investments to have a payback period of 3 years, and it requires a 9% return on investments. (PV of $1,FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the table provided.)

  

Period	Cash Flow
1	$ 47,000
2	53,900
3	75,600
4	94,700
5	125,400

  

Required:
1.	Determine the payback period for this investment. (Enter cash outflows with a minus sign. Round your answer to 1 decimal place.)

Year Cash inflow (outflow) Cumulative Net Cash Inflow (outflow) 0 $(257,000) $(257,000) 1 47,000 (210,000) 2 53,900 (156,100) 3 75,600 (80,500) 4 94,700 14,200 5 125,400 139,600 $139,600 Calculate the payback period: Payback occurs between year: 3 and year: 4 Calculate the portion of the year: Numerator for partial year $80,500 0.9 years Denominator for partial year $94,700 Payback period = 3.9 years

2.	Determine the break-even time for this investment. (Enter cash outflows with a minus sign. Round your answer to 1 decimal place.)

Year Cash inflow (outflow) Table factor Present Value of Cash Flows Cumulative Present Value of Cash Flows 0 $(257,000) 1.0000 $(257,000) $(257,000) 1 47,000 0.9174 $43,118 (213,882) 2 53,900 0.8417 $45,368 (168,514) 3 75,600 0.7722 $58,378 (110,136) 4 94,700 0.7084 $67,085 (43,051) 5 125,400 0.6499 $81,497 38,446 $139,600 Calculate the break even time: Break-even time occurs between year: 4 and year: 5 Calculate the portion of the year: Numerator for partial year $43,051 0.5 years Denominator for partial year $81,497 Break-even time = 4.5 years

3.	Determine the net present value for this investment. Net present value $38,446

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8.

Forten Company, a merchandiser, recently completed its calendar-year 2013 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s balance sheets and income statement follow.

  

FORTEN COMPANY Comparative Balance Sheets December 31, 2013 and 2012
	2013			2012
Assets
Cash	$	50,404		$	68,000
Accounts receivable		73,525			57,125
Merchandise inventory		265,906			238,800
Prepaid expenses		1,440			1,900
Equipment		154,300			112,000
Accum. depreciation—Equipment		(45,400)			(52,000)
Total assets	$	500,175		$	425,825
Liabilities and Equity
Accounts payable	$	58,875		$	110,000
Short-term notes payable		8,400			5,200
Long-term notes payable		33,575			39,000
Common stock, $5 par value		161,500			148,000
Paid-in capital in excess of par, common stock		40,500			0
Retained earnings		197,325			123,625
Total liabilities and equity	$	500,175		$	425,825

  

FORTEN COMPANY Income Statement For Year Ended December 31, 2013
Sales				$	615,000
Cost of goods sold					298,000
Gross profit					317,000
Operating expenses
Depreciation expense	$	19,200
Other expenses		141,000			160,200
Other gains (losses)
Loss on sale of equipment					(4,300)
Income before taxes					152,500
Income taxes expense					29,000
Net income				$	123,500

  

Additional Information on Year 2013 Transactions
a.	The loss on the cash sale of equipment was $4,300 (details in b).
b.	Sold equipment costing $44,800, with accumulated depreciation of $25,800, for $14,700 cash.
c.	Purchased equipment costing $87,100 by paying $50,000 cash and signing a long-term note payable for the balance.
d.	Borrowed $3,200 cash by signing a short-term note payable.
e.	Paid $42,525 cash to reduce the long-term notes payable.
f.	Issued 2,700 shares of common stock for $20 cash per share.
g.	Declared and paid cash dividends of $49,800.

  

Required:
1.	Prepare a complete statement of cash flows; report its operating activities using the indirect method.(Amounts to be deducted should be indicated with a minus sign.)

FORTEN COMPANY Statement of Cash Flows For Year Ended December 31, 2013 Cash flows from operating activities Net Income $123,500 Adjustments to reconcile net income to net cash provided by operations: Depreciation expense 19,200 Accounts receivable increase (16,400) Inventory increase (27,106) Prepaid expense decrease 460 Accounts payable decrease (51,125) Loss on disposal of equipment 4,300 Net cash provided by operating activities $52,829 Cash flows from investing activities Cash paid for equipment (50,000) Cash received from sale of equipment 14,700 Net cash used in investing activities (35,300) Cash flows from financing activities: Cash borrowed on short-term note 3,200 Cash paid on long-term note (42,525) Cash received from issuing stock 54,000 Cash paid for dividends (49,800) Net cash used in financing activities (35,125) Net increase (decrease) in cash $(17,596) Cash balance at beginning of year 68,000 Cash balance at end of year $50,404

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9.

Golden Corp., a merchandiser, recently completed its 2013 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, (5) Other Expenses are all cash expenses, and (6) any change in Income Taxes Payable reflects the accrual and cash payment of taxes. The company’s balance sheets and income statement follow.

GOLDEN CORPORATION Comparative Balance Sheets December 31, 2013 and 2012
	2013			2012
Assets
Cash	$	229,000		$	159,000
Accounts receivable		95,000			79,000
Merchandise inventory		631,000			541,000
Equipment		373,000			329,000
Accum. depreciation—Equipment		(183,000	)		(119,000	)
Total assets	$	1,145,000		$	989,000
Liabilities and Equity
Accounts payable	$	97,000		$	86,000
Income taxes payable		46,000			40,000
Common stock, $2 par value		626,000			598,000
Paid-in capital in excess of par value, common stock		217,000			175,000
Retained earnings		159,000			90,000
Total liabilities and equity	$	1,145,000		$	989,000

  

GOLDEN CORPORATION Income Statement For Year Ended December 31, 2013
Sales				$	1,867,000
Cost of goods sold					1,101,000
Gross profit					766,000
Operating expenses
Depreciation expense	$	64,000
Other expenses		509,000			573,000
Income before taxes					193,000
Income taxes expense					25,000
Net income				$	168,000

Additional Information on Year 2013 Transactions
a.	Purchased equipment for $44,000 cash.
b.	Issued 14,000 shares of common stock for $5 cash per share.
c.	Declared and paid $99,000 in cash dividends.

  

Required:

Prepare a complete statement of cash flows; report its cash inflows and cash outflows from operating activities according to the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

GOLDEN CORPORATION Statement of Cash Flows For Year Ended December 31, 2013 Cash flows from operating activities Net Income $168,000 Adjustments to reconcile net income to net cash provided by operations: Accounts receivable increase (16,000) Inventory increase (90,000) Accounts payable increase 11,000 Income taxes payable increase 6,000 Depreciation expense 64,000 Net cash provided by operating activities $143,000 Cash flows from investing activities: Cash paid for equipment (44,000) Net cash used in investing activities (44,000) Cash flows from financing activities: Cash received from stock issuance 70,000 Cash paid for cash dividends (99,000) Net cash used in financing activities (29,000) Net increase (decrease) in cash $70,000 Cash balance at beginning of year 159,000 Cash balance at end of year $229,000