Problem 1 -
A building materials supply company's material-handling department has studied its cost for the past year and has determined the following:
|
Month
|
Activity Level (pallets of material)
|
Material Handling Department Costs
|
|
January
|
3,600
|
$11,700
|
|
February
|
3,200
|
11,300
|
|
March
|
2,600
|
11,250
|
|
April
|
2,000
|
11,220
|
|
May
|
4,400
|
11,100
|
|
June
|
4,800
|
12,550
|
|
July
|
4,000
|
12,000
|
|
August
|
3,600
|
11,400
|
|
September
|
5,200
|
13,332
|
|
October
|
2,200
|
10,038
|
|
November
|
2,400
|
11,362
|
|
December
|
2,800
|
11,350
|
Required: Show all work.
1. Estimate the material-kindling department's cost behavior using the high-low method.
2. Provide an equation to express the results of this estimation method.
3. Construct an Excel spreadsheet to perform a least-squares regression to estimate the material handling department's cost behavior. Attach the spreadsheet to the examination file.
4. Provide an equation to express the results of this estimation method.
5. Predict the department's material-handling costs for a month when 2,250 units of activity are recorded. Use each of your cost equations to make the prediction.
a) High-Law
b) Regression
6. Which prediction would you prefer to me and why?
7. Use your Excel spreadsheet from requirement (3) to compute the R2value for the regression.
8. Interpret the R2 value - that is, what does R2 mean?
Problem 2 -
Ace Corporation produced and sold 140,000 units of its only product during the year just ended at an average price of $15 per unit. Variable manufacturing costs were $6 per unit, and variable marketing costs were $3 per unit sold. Fixed costs amounted to $370,000 for manufacturing and $108,000 for marketing. There was no year-end work-in-process inventory.
Required: Show all calculations.
1. Compute Ace Corporation's break-even point in sales units for the year just ended.
2. Compute the revenue that would have been required to earn an operating income of $270,000 during the year just ended.
3. Ace Corporation's variable costs are expected to increase by 25 percent in the coming year. Compute the break-even point in sales units for the coming year.
4. If Ace Corporation's variable manufacturing casts do in fact increase by 25 percent but the variable marketing costs remain the same (i.e., at $3 per unit), then compute the selling price that would yield the same contribution-margin ratio in the coming year as was achieved in the current year just ended.
Problem 3 -
You have been provided with the below selected data from World Corporation, a company with several divisions. Division managers are evaluated at year-end, and bonuses are awarded based on ROI Last year, World Corporation as a whole, produced a 14 percent return on its investment (ROI).
Just recently, the management of World's Eastern Division was approached about the possibility of acquiring a competitor. If the competitor is acquired, the investment required would be the competitor's net operating assets. The data that follow relate to recent performance of World's Eastern Division and the competitor company:
|
|
Eastern Division
|
Competitor Company
|
|
Sales
|
$4,200,000
|
$2,600,000
|
|
Variable Costs
|
70% of sales
|
65% of sales
|
|
Fixed Costs
|
$1,075,000
|
$900,000
|
|
Net Operating Assets
|
$925,000
|
$100,000
|
Eastern Division management has determined that merging the competitor company with World's operating systems would require an additional $187.500 investment in operating assets, that is, an additional $187,500 in invested capital would be needed.
Required: Show all calculations.
1. Compute the current ROI of the Eastern Division.
2. What would Eastern Division's ROI be if the competitor company was acquired?
3. What is the likely reaction of Eastern Division's management toward this acquisition and why (Be as specific as possible)?
4. What would the likely reaction of World's top management be toward this acquisition and why (Be as specific as possible)?
5. Suppose that World uses residual income to evaluate performance and desires a 14 percent minimum return on invested capital. Compute the current residual income of the Eastern Division.
6. Compute Eastern Division's residual income if the competitor company were acquired.
7. If Residual Income is used as the performance measure for divisions by World, what is the likely reaction of Eastern Division's management toward this acquisition and why (Be as specific as possible)?
Problem 4 -
SpamBlocker Inc. has developed a sophisticated application that screens incoming e-mail messages and eliminates unsolicited mass mailings. Sales of the software have been good at 50,000 units a month, but the company has been losing money as shown below:
|
Sales (50,000 units x $25 per unit)
|
$1,250,000
|
|
Variable cost (50,000 units x $6 per unit)
|
300,000
|
|
Contribution margin
|
950,000
|
|
Fixed expenses
|
960,000
|
|
Net operating loss
|
$(10,000)
|
The company's variable cost is the $6 fee it pays to another company to produce the software for download. Monthly fixed selling and administrative expenses are $960,000.
The company's marketing manager has been arguing for some time that the software is priced too high. She estimates that every 5% decrease in price would yield an 8% increase in unit sales. The marketing manager would like your help in preparing a presentation to the company's owners concerning the pricing issue.
Required: Show all work.
1. Given the data provided by the SpamBlocker marketing manager, what price do you recommend that SpamBlocker charge to maximize its profits?
2. The owners have invested $3,500,000 in the company and feel that they should be earning at least 2% per month on their investment before taxes. Suppose your recommended selling price would result in projected sales of 90,000 units per month. Would the owner's objective be achieved? Explain why or why not and what the target selling price would have to be to achieve the owner's objective if your recommended price per unit would not generate sufficient operating income before taxes.
Problem 5 -
E.B. Foxx Corporation developed a new product that it believes will have broad market appeal. The company's recent cost and marketing studies revealed the following:
a. New equipment costing $360,000 would need to be acquired to produce the product The equipment is estimated to have a six-year useful life, with no salvage value at the end of the six years.
b. Sales in units over the next six years are projected as follows:
|
Year
|
Unit Sales
|
|
1
|
27,000
|
|
2
|
45,000
|
|
3
|
54,000
|
|
4-6
|
66,000
|
Production and sales of the new product would require working capital of $50,000 to finance accounts receivable, inventory, and day-to-day cash needs. This working capital would be released at the end of the project's life.
c. The product would sell for S40 each; variable costs for production administration, and sales would be $25 per unit.
d. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $225,000 per year (Annual depreciation on the new equipment (see item a above) is on a straight-line basis over the six-year life.)
e. To gain rapid entry into the market, the company would need to advertise heavily. The advertising program would be:
|
Year
|
Annual Advertising
|
|
1-2
|
$180,000
|
|
3
|
$150,000
|
|
4-6
|
$120,000
|
f. The company's overall tax rate is 45% and it's required after tax rate of return is 18%.
Required: Show all work.
1. Determine the net present value of the investment.
2. Would you recommend that E.B. Foxx Corporation accept the new product in its product line? Why or why not?
Problem 6 -
The owner of American Goods, Inc. provides you the following data:
|
Current assets as of March 31:
|
|
|
Cash
|
$8,000
|
|
Accounts receivable
|
$20,000
|
|
Inventory
|
$36,000
|
|
Building and equipment, net
|
$120,000
|
|
Accounts payable
|
$21,750
|
|
Common stock
|
$150,000
|
|
Retained earnings
|
$12,250
|
The gross margin is 35% of sales. Thus, the cost of goods sold is 65% of sales.
Actual and budgeted sales data:
|
March (actual)
|
$50,000
|
|
April
|
$60,000
|
|
May
|
$72,000
|
|
June
|
$90,000
|
|
July
|
$48,000
|
Sales are 60% for cash and 40% on credit. Credit sales are collected in the month following sale. The accounts receivable at March 31 are a result of March credit sales.
Each month's ending inventory should equal 80% of the following month's budgeted cost of goods sold.
Forty percent of a month's inventory purchases is paid for in the month of purchase, the other sixty percent is paid for in the following month. The accounts payable at March 31 are the result of March purchases of inventory.
Monthly expenses are as follows: commissions, 10% of sales; rent, $2,500 per month; other expenses (excluding depreciation), 5% of sales. These expenses are paid monthly. Depreciation is $1,000 per month (includes depreciation on new assets).
Equipment costing $3,000 will be purchased for cash in April.
Management would like to maintain a minimum cash balance of at least $5,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow in increments of $1,000 at the beginning of each month, up to a total loan balance of $20,000. The interest rate on these loans is 1% per month and interest is not compounded. The company would, insofar as it is able to do so, repay any loans plus accumulated interest at the end of the quarter.
Required: Show all calculations.
1. Create a cash budget for April, May, June and the quarter.
2. Prepare an income statement for the quarter ended June 30.
3. Prepare a balance sheet as of June 30.
4. Determine the following for American Goods, Inc. as of June 30:
a. Working Capital
b. Accounts Receivable Turnover
c. Inventory Turnover
d. Net Margin
e. Total Asset Turnover