RESEARCH PROJECT 2
LEARNING OBJECTIVES:
- Explain the role of managerial accounting and the primary informational needs of managers.
- Perform cost-volume-profit analysis, including calculation of contribution margin, breakeven, target net income, safety margin, and use it as a predictive tool.
- Prepare operating and financial budgets as parts of the master budget.
- Describe the development and use of the flexible budget and standard costs.
- Identify and interpret performance measurements including return on investment, residual income and the use of a balanced scorecard.
- Perform incremental analysis identifying opportunity costs and sunk costs, and criteria for special orders, outsourcing, adding/dropping a product or service, and selling or processing a product further.
- Describe the role of management accounting in supporting sustainability and creating environmental accounting systems.
Activity 1 - FORECAST COSTS AT DIFFERENT VOLUMES
Princeton Drycleaners has capacity to clean up to 5,000 garments per month.
Requirements -
1. Complete the following schedule for the three volumes shown.
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2,000 Garments
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3,500 Garments
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5,000 Garments
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Total variable costs
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$2,100
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Total fixed costs
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------
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Total operating costs
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Variable cost per garment
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Fixed cost per garment
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$2.00
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Average cost per garment
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------
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2. Why does the average cost per garment change?
3. Suppose the owner, Dale Princeton, erroneously uses the average cost per unit at full capacity to predict total costs at a volume of 2,000 garments. Would he overestimate or underestimate his total costs? By how much?
Activity 2 - PREPARE INCOME STATEMENT IN TWO FORMATS
Refer to the Princeton Drycleaners in Activity 1. Assume that Princeton charges customers $8 per garment for dry cleaning. Prepare Princeton's projected income statement if 4,300 garments are cleaned in March. First, prepare the income statement using the traditional format; then prepare Princeton's contribution margin income statement.
Activity 3 - DETERMINE COST BEHAVIOR AND PREDICT OPERATING COSTS
Pondview Apartments is a 900-unit apartment complex. When the apartments are 90% occupied, monthly operating costs total $224,650. When occupancy dips to 80%, monthly operating costs fall to $218,800. The owner of the apartment complex is worried because many of the apartment residents work at a nearby manufacturing plant that has just announced that it will close in three months. The apartment owner fears that occupancy of her apartments will drop to 70% if residents lose their jobs and move away. Assuming the same relevant range, what can the owner expect her operating costs to be if occupancy falls to 70%?
Activity 4 - FIND BREAKEVEN AND TARGET PROFIT VOLUME
Owner Li Soo is considering franchising her Happy Noodles restaurant concept. She believes people will pay $5.25 for a large bowl of noodles.. Variable costs are $2.10 a bowl. Soo estimates monthly fixed costs for franchisees at $7,500.
Requirements
1. Find a franchisee's breakeven sales in dollars.
2. Is franchising a good idea for Soo if franchisees want a minimum monthly operating income of $7,050 and Soo believes that most locations could generate $25,000 in monthly sales?
Activity 5 - CONTINUATION OF ACTIVITY 4: CHANGING BUSINESS CONDITION
Refer to Happy Noodles in Activity 4. Soo did franchise her restaurant concept. Because of Happy Noodles' success, Value Noodles has come on the scene as a competitor. To maintain its market share, Happy Noodles will have to lower its sales price to $4.75 per bowl. At the same time, Happy Noodles hopes to increase each restaurant's volume to 7,000 bowls per month by embarking on a marketing campaign. Each franchise will have to contribute $600 per month to cover the advertising costs. Prior to these changes, most locations were selling 6,500 bowls per month.
Requirements
1. What was the average restaurant's operating income before these changes?
2. Assuming that the price cut and advertising campaign are successful at increasing volume to the projected level, will the franchisees still earn their target profit of $7,050 per month? Show your calculations.
Activity 6 - SPECIAL ORDER DECISIONS GIVEN TWO SCENARIOS
Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Hobby Memorabilia & More with a special order. The Hall of Fame wants to purchase 58,000 baseball card packs for a special promotional campaign and offers 50.43 per pack, a total of 524,940. Hobby Memorabilia & More's total production cost is 50.63 per pack, as follows:
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Variable costs:
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Direct materials
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$0.14
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Direct labor
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0.08
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Variable overhead
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0.11
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Fixed overhead
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0.30
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Total cost
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$0.63
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Hobby Memorabilia & More has enough excess capacity to handle the special order.
Requirements:
1. Prepare an incremental analysis to determine whether Hobby Memorabilia & More should accept the special sales order assuming fixed costs would not be affected by the special order.
2. Now assume that the Hall of Fame wants special hologram baseball cards. Hobby Memorabilia & More must spend 55,500 to develop this hologram, which will be useless after the special order is completed. Should Hobby Memorabilia & More accept the special order under these circumstances? Show your analysis.
Activity 7 - PRICING DECISIONS GIVEN TWO SCENARIOS
Preston Builders builds 1,500-square-foot starter tract homes in the fast-growing suburbs of Houston. Land and labor are cheap, and competition among developers is fierce. The homes are "cookie-cutter," with any upgrades added by the buyer after the sale. Preston Builders' costs per developed sublot are as follows:
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Land
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$51,000
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Construction
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$121,000
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Landscaping
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$9,000
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Variable marketing costs
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$5,000
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Preston Builders would like to earn a profit of 15% of the variable cost of each home sale. Similar homes offered by competing builders sell for 5204,000 each.
Requirements -
1. Which approach to pricing should Preston Builders emphasize? Why?
2. Will Preston Builders be able to achieve its target profit levels? Show your computations.
3. Bathrooms and kitchens are typically the most important selling features of a home. Preston Builders could differentiate the homes by upgrading bathrooms and kitchens. The upgrades would cost $20,000 per home but would enable the company to increase the selling prices by $35,000 per home (in general, kitchen and bathroom upgrades typically add at least 150% of their cost to the value of any home). If Preston Builders upgrades, what will the new cost-plus price per home be? Should the company differentiate its product in this manner? Show your analysis.
Activity 8 - DISCONTINUING A PRODUCT LINE
Suppose Better Harvest is considering discontinuing its organic dried fruit product line. Assume that during the past year, the organic dried fruit's product line income statement showed the following:
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Sales revenue
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$5,250,000
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Less: Cost of goods sold
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6,450,000
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Gross profit
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$(1,200,000)
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Less: Operating expenses
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1,500,000
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Operating income (loss)
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$(2,700,000)
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Fixed manufacturing overhead costs account for 40% of the cost of goods, while only 30% of the operating expenses are fixed. Since the organic dried fruit line is just one of the company's fruit operations, only 5775,000 of direct fixed costs (the majority of which is advertising) will be eliminated if the product line is discontinued. The remainder of the fixed costs will still be incurred by the company. If the company decides to discontinue the product line, what will happen to the company's operating income? Should Better Harvest discontinue the product line?
Activity 9 - SALES BUDGET FOR A RETAIL ORGANIZATION
Miami College Bookstore is the bookstore on campus for students and faculty. The bookstore shows the following sales projections in units by quarter for the upcoming year:
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Quarter
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Books
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School Supplies
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Apparel
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Miscellaneous
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1st
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1,510
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250
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520
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630
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2nd
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850
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110
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340
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550
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3rd
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1,760
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210
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840
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830
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4th
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600
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170
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530
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420
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The average price of an item in each of the departments is as follows:
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Average sales price per unit
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Books
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$81
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Scholl supplies
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$14
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Apparel
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$20
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Miscellaneous
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$6
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Requirement -
Prepare a sales budget for the upcoming year by quarter for the Miami College Book-store, with sales categorized by the four product groupings (books, school supplies, apparel, and miscellaneous).
Activity 10 - OPERATING EXPENSES BUDGET AND AN INCOME STATEMENT
Start Smart Preschool operates a not-for-profit morning preschool that operates nine months of the year. The preschool has 160 kids enrolled in its various programs. The pre-school's primary expense is payroll. Teachers are paid a flat salary each of the nine months as follows:
Teachers of two-day program - $ 434 per month
Teachers of three-day program - $ 648 per month
Teachers of four-day program - $ 884 per month
Teachers of five-day program - $1,060 per month
Preschool director's salary - $1,500 per month
Start Smart Preschool has 7 two-day program teachers, 2 three-day program teachers, 5 four-day program teachers, and 4 five-day program teachers. The preschool also has a director.
In addition to the salary expense, the preschool must pay federal payroll taxes (FICA taxes) in the amount of 7.65% of salary expense. The preschool leases its facilities from a local church, paying $4,012 every month it operates. Fixed operating expenses (telephone, Internet access, bookkeeping services, and so forth) amount to $890 per month over the nine-month school year. Variable monthly expenses (over the nine-month school year) for art supplies and other miscellaneous supplies are $6 per child. Revenue for the entire nine-month school year from tuition, registration fees, and the lunch program is projected to be $241,200.
Activity 11 - COMBINED CASH BUDGET
Monette Health Center provides a variety of medical services. The company is preparing its cash budget for the upcoming third quarter. The following transactions are expected to occur:
a. Cash collections from services in July, August, and September are projected to be $96,000, $159,000, and $122,000, respectively.
b. Cash payments for the upcoming third quarter are projected to be $149,000 in July, $105,000 in August, and $133,000 in September.
c. The cash balance as of the first day of the third quarter is projected to be $32,000.
d. The health center has a policy that it must maintain a minimum cash balance of $25,000. The health center has a line of credit with the local bank that allows it to borrow funds in months that it would not otherwise have its minimum balance. If the company has more than its minimum balance at the end of any given month, it uses the excess funds to pay off any outstanding line of credit balance. Each month, Monette Health Center pays interest on the prior month's line of credit ending balance. The actual interest rate that the health center will pay floats since it is tied to the prime rate. However, the interest rate paid during the budget period is expected to be 2% of the prior month's line of credit ending balance (if the company did not have an outstand¬ing balance at the end of the prior month, then the health center does not have to pay any interest). All line of credit borrowings are taken or paid off on the first day of the month. As of the first day of the third quarter, Monette Health Center did not have a balance on its line of credit.
Requirement -
Prepare a combined cash budget for Monette Health Center for the third quarter, with a column for each month and for the quarter total.
Activity 12 - COMPLETE AND ANALYZE A PERFORMANCE REPORT
One subunit of Pacific Sports Manufacturing Company had the following financial results last month:
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Pacific Sports Manufacturing Company-Water Sports Subunit Monthly Performance Report For the Month
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Product
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Actual
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Budgeted
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Variance*
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Variance Percentage*
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Direct materials
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$13,400
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$12,500
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Direct labor
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18,940
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20,000
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Indirect labor
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35,220
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30,000
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Utilities
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9,555
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8,750
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Depreciation
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26,125
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26,125
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Repairs and maintenance
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8,430
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10,000
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Total
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$111,670
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$107,375
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*Be sure to indicate whether each variance is favorable (F) or unfavorable (U).
Requirements -
1. Complete the performance evaluation report for this subunit (round to four decimals).
2. Based on the data presented, what type of responsibility center is the subunit?
3. Which items should be investigated if part of the management's decision criteria is to investigate all variances exceeding 52,900 or 13%?
4. Should only unfavorable variances be investigated? Explain.
Activity 13 - COMPUTE AND INTERPRET THE EXPANDED ROI EQUATION
Zachs, a national manufacturer of lawn-mowing and snow-blowing equipment, segments its business according to customer type: Professional and Residential. Assume the following divisional information was available for the past year (in thousands of dollars):
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Sales
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Operating Income
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Total Assets
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Residential
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$585,000
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$70,200
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$195,000
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Professional
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$1,013,600
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$152,040
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$362,000
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Assume that management has a 24% target rate of return for each division.
Requirements -
Round all of your answers to four decimal places.
1. Calculate each division's ROI.
2. Calculate each division's sales margin. Interpret your results.
3. Calculate each division's capital turnover. Interpret your results.
4. Use the expanded ROI formula to confirm your results from Requirement 1. What can you conclude?
5. Calculate each division's residual income (RI). Interpret your results.
Activity 14 - DETERMINE TRANSFER PRICE RANGE
Gibson Motors manufactures specialty tractors. It has two divisions: a Tractor Division and a Tire Division. The Tractor Division can use the tires produced by the Tire Division. The market price per tire is $85.
The Tire Division has the following costs per tire:
Direct material cost per tire $17
Conversion costs per tire $1
Fixed manufacturing overhead cost for the year is expected to total $102,000. The Tire Division expects to manufacture $1,000 tires this year, The fixed manufacturing overhead per tire is $2 ($102,000 divided by 51,000 tires).
Requirements -
1. Assume that the Tire Division has excess capacity, meaning that it can produce tires for the Tractor Division without giving up any of its current tire sales to outsiders. If Gibson Motors has a negotiated transfer price policy, what is the lowest acceptable transfer price? What is the highest acceptable transfer price?
2. If Gibson Motors has a cost-plus transfer price policy of full absorption cost plus 10%, what would the transfer price be?
3. If the Tire Division is currently producing at capacity (meaning that it is selling every single tire it has the capacity to produce), what would likely be the most fair transfer price strategy to use? What would be the transfer price in this case?
Activity 15 - PREPARE A FLEXIBLE BUDGET PERFORMANCE REPORT
Echo Canyon Muffins sells its muffins to restaurants and coffee houses for an average selling price of $27 per case. The following information relates to the budget for Echo Canyon Muffins for this year (all figures are annual totals unless otherwise noted):
Budgeted sales in cases - 7,900 cases
Packaging cost per case - $ 1
Shipping expense per case - $ 3
Sales commission expense - 4% of sales price
Salaries expense - $6,600
Office rent - $3,200
Depreciation - $2,800
Insurance expense - $1,800
Office supplies expense - $800
During the year, Echo Canyon Muffins actually sold 8,100 cases resulting in total sales revenue of $226,200. Actual expenses (in total) from this year are as follows:
Packaging cost - 8,600
Shipping expense - $25,100
Sales commission expense - $9,048
Salaries expense - $7,000
Office rent - $3,200
Depreciation - $2,800
Insurance expense - $1,500
Office supplies expense - $1,400
Requirement -
Construct a flexible budget performance report for Echo Canyon Muffins for the year. Be sure to indicate whether each variance is favorable (F) or unfavorable (U).
Attachment:- Assignment Files.rar