ACCOUNTING PRINCIPLES MANAGERIAL -TEST
1. Sand Canyon Enterprises is analyzing its sales mix to find out if it is maximizing its profits. The company produces three similar items: X, Y, and Z. All three of these products are made with the same equipment, and maximum productive capacity measured in machine hours is now being used. Product line statistics are as follows:
|
X
|
Y
|
Z
|
|
Current sales demand (units)
|
150,000
|
158,000
|
95,000
|
|
Machine hours per unit
|
10
|
5
|
13
|
|
Selling price per unit
|
$63
|
$48
|
$84
|
|
Unit variable cost
|
$33
|
$26
|
$49
|
|
Unit variable selling cost
|
$17
|
$13
|
$16
|
The current production capacity is 3,000,000 machine hours.
Part 1 - Determine whether the existing sales mix is the most profitable one possible. If your answer is no, offer your suggestion to improve the sales mix. Round answers to two decimal places.
Part 2 - How many of each product should be manufactured and sold to maximize the company's contribution margin based on the current production activity of 3,000,000 machine hours? What is the total contribution margin for that contribution?
2. On November 25, 2010, Marquez Golf Co. received a special order for 5,000 three-wood golf club sets. These golf clubs will be marketed in Japan. Ito Imports, Inc., the purchasing company, wants the clubs bulk packaged and is willing to pay $55 per set for the clubs. The president of Marquez Golf Co. has gathered the following product costing information about the set of woods being discussed: direct materials (wood), $500 per 100 sets; direct materials (metal shafts), $1,010 per 100 sets; and direct materials (grips), $140 per 100 sets. Direct labor is $18 per set. Variable manufacturing costs are $12 per set, and fixed manufacturing costs are 20 percent of direct labor dollars. Variable selling expenses are $10 per set, and variable shipping costs are $7 per set. Fixed general and administrative costs are figured at 30 percent of direct labor dollars. Bulk shipping costs will total $11,000, thus eliminating both variable selling and variable shipping costs from consideration. The company did not expect this order and will reach planned production capacity for the year. However, there is enough plant capacity for the special order. Round answers to two decimal places.
a. Prepare an analysis for the president to use in deciding whether to accept or reject the offer by Ito Imports, Inc. What decision should be made?
b. What is the lowest possible price Marquez Golf Co. profit could charge per set of woods and still make a $9,000 on this order?
3. The Big Bear Lumber Company is trying to decide whether to sell or process further rough-sawn lumber. The joint cost of producing the rough-sawn lumber is $10,500. The following data are available:
|
Lumber Type
|
Number of Boards
|
Selling Price per Board
|
|
Incremental Cost to Process Further
|
|
|
At Split-Off
|
After Additional Processing
|
|
|
A
|
2,000
|
$8
|
$12
|
$7,000
|
|
B
|
1,000
|
16
|
20
|
6,000
|
|
C
|
500
|
25
|
30
|
1,000
|
a. What is the incremental effect, increase or (decrease), on operating income of processing the lumber further?
b. Which type of lumber should be processed further?
4. e Wyckoff Company specializes in decorative fruit baskets. Currently, the company is analyzing purchase alternatives for a fruit-polishing machine. Data relevant to the decision are as follows:
|
Machine X
|
Machine Y
|
|
Cost
|
$80,000
|
$72,000
|
|
Useful life
|
5 years
|
5 years
|
|
Residual value
|
$2,000
|
$3,000
|
|
Estimated annual net cash flowa
|
$32,000
|
$28,000
|
|
Present value multipliers at 12 percent:
|
|
|
|
Dollar received at the end of five years
|
|
.567
|
|
Dollar received at the end of each of the next five years
|
|
3.605
|
a. Compute the payback period for each of the alternatives. Round answers to two decimal places.
b. Using the net present value method, prepare an analysis to determine which machine the company should purchase. (The company uses a 12 percent minimum desired rate of return.)
5. Management of the Krausse Savings and Loan Association is in the process of evaluating the purchase of a new check sorting machine. The model under review will cost $70,000 and will require installation costs of $10,000. Similar machines have a ten-year life, and management has estimated that this sorter will have a residual value of $10,000 at the end of its life. Annual cost savings to be generated by the sorter will average $14,000 over the ten-year period. Management's minimum desired rate of return is 12 percent.
Present value multipliers:
|
8 Percent
|
12 Percent
|
14 Percent
|
|
Present value of $1 at the end of ten years
|
0.463
|
0.322
|
0.27
|
|
Present value of $1 received in each of the next ten years
|
6.71
|
5.65
|
5.216
|
a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the check sorting machine. Support your answer.
b. If management had decided on a minimum desired before-tax rate of return of 14 percent, should the check sorting machine be purchased? Show all computations to support your answer.
6. Special Industries is considering investing $40 million in plant expansion. Management needs to know the average cost of capital to use in evaluating this capital investment decision. The company's capital structure consists of $4,000,000 of debt at 3 percent interest and $6,000,000 of stockholders' equity at 4 percent. What is the average cost of capital of Special Industries?
7. Contrast the circumstances where horizontal analysis would be an effective analysis tool with those where common-sized analysis would be more useful.
8. The following selected amounts were extracted from the financial statements of Flamingo Corporation.
|
Year 4
|
Year 3
|
Year 2
|
Year 1
|
|
Net sales
|
$175,000
|
$170,000
|
$165,000
|
$150,000
|
|
Cost of goods sold
|
109,000
|
104,500
|
100,500
|
93,000
|
|
Gross margin
|
66,000
|
65,500
|
64,500
|
57,000
|
Prepare a trend analysis for net sales, cost of goods sold and gross margin. Use Year 1 as the base year.
9. From the following information, compute the ratios indicated and place the proper numbers in the spaces provided. Assume the average for the year is the same as the ending balances for the balance sheet accounts. Round answer to one decimal place, and show your work.
|
Westwood Corporation Balance Sheet December 31, 2010
|
|
Assets
|
|
Cash
|
$15,000
|
|
Marketable securities
|
10,000
|
|
Accounts receivable (net)
|
20,000
|
|
Inventory
|
30,000
|
|
Prepaid expenses
|
8,000
|
|
Property, plant, and equipment
|
117,000
|
|
Total assets
|
$200,000
|
|
Liabilities and Stockholders's Equity
|
|
Current liabilities
|
$30,000
|
|
Long-term liabilities
|
50,000
|
|
Stockholder's equity
|
120,000
|
|
Total liabilities and stockholder's equity
|
$200,00
|
|
Westwood Corporation Income Statement For the Year Ended December 31, 2010
|
|
Net sales
|
|
$160,000
|
|
Cost of goods sold
|
|
12,000
|
|
Gross margin
|
|
$40,000
|
|
Operating expenses
|
|
|
|
Selling and administrative expenses
|
$16,00
|
|
|
Interest expense
|
8,000
|
|
|
Income taxes expense
|
4,000
|
28,000
|
|
Net income
|
|
$12,000
|
Westwood had 4,000 shares of common stock issued and outstanding. The market price of common stock at year end was $15.00 per share. Dividends paid in 2010 were $0.60 per share.