Using the high-low method estimate the cost formula for

Question

Q1. Explain how knowledge of managerial accounting can assist a manager with regard to the following concerns:

a. He is deciding whether to push through with a project.

b. He is determining whether a branch is profitable or not.

c. He is deciding whether to process a certain product further before selling.

d. He would like to show to the Board of Directors how the business is financially performing and how cash is being used.

e. He would like to plan for the year so that he will be prepared to deal with shortage of cash fund.

2. Gold Company's comparative balance sheet and income statement for last year appear below:

Statement of Financial Position
	Ending			Beginning
	Balance			Balance
Cash...........................................................	$ 70,000			$ 38,000
Accounts receivable...................................	76,000			52,000
Inventory...................................................	24,000			42,000
Prepaid expenses........................................	8,000			16,000
Long-term investments..............................	260,000			210,000
Plant and equipment..................................	530,000			510,000
Accumulated depreciation.........................	( 398,000)			( 350,000)
Total assets.................................................	$570,000			$518,000
Accounts payable.......................................	$ 32,000			$ 54,000
Accrued liabilities......................................	34,000			25,000
Taxes payable.............................................	4,000			11,000
Bonds payable...........................................	160,000			200,000
Deferred taxes...........................................	38,000			25,000
Common stock...........................................	150,000			120,000
Retained earnings......................................	152,000			83,000
Total liabilities and owners' equity............	$570,000			$518,000
Income Statement
Sales...........................................................		$610,000
Cost of goods sold.....................................		310,000
Gross margin..............................................		300,000
Selling and administrative expense............		190,000
Net operating income.................................		110,000
Income taxes..............................................		33,000
Net income.................................................		$ 77,000

The company declared and paid $8,000 in cash dividends during the year.

Required: Construct in good form the operating activities section of the company's statement of cash flows for the year using the direct method.

Q3. Diamond Company is considering purchasing a machine that would cost $756,000 and have a useful life of 8 years. The machine would reduce cash operating costs by $132,632 per year. The machine would have a salvage value of $151,200 at the end of the project.

Compute:

a. Net present value

b. Internal rate of return

c. Profitability index

d. Payback period

e. Simple rate of return

f. Should the company purchase the machine? Why or why not?

Q4. Pearl, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

	Product F	Product G	Product H
Selling price...................................	$50	$80	$70
Variable costs.................................	$40	$50	$55
Fixed costs.....................................	$15	$20	$12
Milling machine time (minutes).....	4	2	5

Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity. The milling machine is the constraint, with only 2,400 minutes of milling machine time available this week.

Required:

a. Given the milling machine constraint, which product should be emphasized? Support your answer with appropriate calculations.

b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of milling machine time?

Q5. Emerald, Inc, produces a single product. The results of the company's operations for a typical month are summarized in contribution format as follows:

Sales...................................	$540,000
Variable expenses..............	360,000
Contribution margin...........	180,000
Fixed expenses...................	120,000
Net operating income.........	$ 60,000

The company produced and sold 120,000 kilograms of product during the month. There was no beginning or ending inventories.

Required:

a. Given the present situation, compute

1) The break-even sales in kilograms.

2) The break-even sales in dollars.

3) The sales in kilograms that would be required to produce net operating income of $90,000.

4) The margin of safety in dollars.

b. An important part of processing is performed by a machine that is currently being leased for $20,000 per month. The company has been offered an arrangement whereby it would pay $0.10 royalty per kilogram processed by the machine rather than the monthly lease.

1) Should the company choose the lease or the royalty plan?

2) Under the royalty plan compute break-even point in kilograms.

3) Under the royalty plan compute break-even point in dollars.

4) Under the royalty plan determine the sales in kilograms that would be required to produce net operating income of $90,000.

Q6. Selected data about Ruby Company's manufacturing operations at two levels of activity are given below:

Number of units produced............	10,000	15,000
Total manufacturing costs.............	$157,000	$225,000
Direct material cost per unit..........	$4	$4
Direct labor cost per unit...............	$6	$6

Required:

a. Using the high-low method, estimate the cost formula for manufacturing overhead. Assume that both direct material and direct labor are variable costs.

b. What is the purpose of knowing the cost formula?

Q7. Jade Company manufactures and sells premium tomato juice by the gallon. The company just finished its first year of operations. The following data relates to this first year:

Number of gallons produced	75,000
Number of gallons sold	70,000
Sales price	$3.00 per gallon
Unit product cost under variable costing	$1.45 per gallon
Total contribution margin	$84,000
Total fixed manufacturing overhead cost	$63,000
Total fixed selling and administrative expense	$10,500

Required:

a. Using the absorption costing method, prepare the company's income statement for the year.

b. Using variable costing method, prepare the company's income statement for the year.

c. For decision making purpose, which is the better method? Why?

Q8. Platinum Corporation belongs to the rubber tire trading industry. Its most recent balance sheet and income statement appear below:

Statement of Financial Position December 31, Year 2 and Year 1 (in thousands of dollars)
	Year 2	Year 1
Assets
Current assets:
Cash....................................................................	$     30	$   110
Accounts receivable............................................	210	260
Inventory............................................................	190	170
Prepaid expenses.................................................	70	70
Total current assets................................................	500	610
Plant and equipment, net.......................................	810	740
Total assets.............................................................	$1,310	$1,350
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable................................................	$   140	$   150
Accrued liabilities...............................................	30	30
Notes payable, short term...................................	40	40
Total current liabilities...........................................	210	220
Bonds payable.......................................................	190	240
Total liabilities........................................................	400	460
Stockholders' equity:
Preferred stock, $100 par value, 5%...................	100	100
Common stock, $2 par value..............................	400	400
Additional paid-in capital-common stock..........	130	130
Retained earnings...............................................	280	260
Total stockholders' equity.....................................	910	890
Total liabilities & stockholders' equity..................	$1,310	$1,350

 

Income Statement For the Year Ended December 31, Year 2 (in thousands of dollars)
Sales (all on account).............................................	$1,260
Cost of goods sold.................................................	770
Gross margin..........................................................	490
Selling and administrative expense........................	400
Net operating income.............................................	90
Interest expense.....................................................	26
Net income before taxes........................................	64
Income taxes (30%)...............................................	19
Net income.............................................................	$     45

Required:

A. Compute the following for Year 2:

a. Working capital.

b. Current ratio.

c. Acid-test ratio.

d. Accounts receivable turnover.             

e. Average collection period.

f. Inventory turnover.

g. Average sale period

B. What can you say about the company's short-term liquidity?

C. If the industry average in terms of collection period is 45 days, and inventory turnover is 6 times, how is the company performing compared to the industry?