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. |
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Direct materials | $ | 896,500 |
Direct labor | | 676,450 |
Overhead | | 953,000 |
Selling expenses | | 554,000 |
Administrative expenses | | 463,000 |
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Total costs and expenses | $ | 3,542,950 |
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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.) |
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| 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. |
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Direct materials | $ | 5.00 | |
Direct labor | | 9.00 | |
Overhead | | 10.00 | |
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Total costs per unit | $ | 24.00 | |
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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. |
1. | Calculate the per unit incremental costs of making and buying component RX5. |
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| | 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. |
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| | 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 | | |
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Contribution margin per unit | | | $ | 130 | | | | | $ | 104 | | |
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Machine hours to produce 1 unit | | 0.4 | hours | | | | 1 | hours | | |
Maximum unit sales per month | | 650 | units | | | | 250 | units | | |
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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.) |
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| 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 | |
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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 | |
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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 | |
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Total allocated expenses | | | 120,860 | | | | | 75,320 | | | | | 196,180 | |
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Total expenses | | | 146,860 | | | | | 96,620 | | | | | 243,480 | |
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Net income (loss) | | $ | 26,140 | | | | $ | (1,081 | ) | | | $ | 25,059 | |
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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. |
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| 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.) |
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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. |
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| Straight-line depreciation | $117,250 |
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Annual straight-line depreciation | = | $495,000 − $26,000 | = | $117,250 |
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4 years |
2. | Determine expected net income and net cash flow for each year of this machine’s life. |
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| 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 |
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3. | Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year. |
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| Payback period | Choose Numerator: | / | Choose Denominator: | = | Payback period | Cost of investment | / | Annual net cash flow | = | Payback period | $495,000 | / | $173,775 | = | 2.85 | years |
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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 |
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Required: |
1. | Determine the payback period for this investment. (Enter cash outflows with a minus sign. Round your answer to 1 decimal place.) |
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| 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 |
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2. | Determine the break-even time for this investment. (Enter cash outflows with a minus sign. Round your answer to 1 decimal place.) |
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| 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 |
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3. | Determine the net present value for this investment. |
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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) |
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Total assets | $ | 500,175 | | $ | 425,825 |
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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 |
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Total liabilities and equity | $ | 500,175 | | $ | 425,825 |
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FORTEN COMPANY Income Statement For Year Ended December 31, 2013 |
Sales | | | | $ | 615,000 |
Cost of goods sold | | | | | 298,000 |
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Gross profit | | | | | 317,000 |
Operating expenses | | | | | |
Depreciation expense | $ | 19,200 | | | |
Other expenses | | 141,000 | | | 160,200 |
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Other gains (losses) | | | | | |
Loss on sale of equipment | | | | | (4,300) |
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Income before taxes | | | | | 152,500 |
Income taxes expense | | | | | 29,000 |
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Net income | | | | $ | 123,500 |
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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.) |
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| 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 | ) |
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Total assets | $ | 1,145,000 | | $ | 989,000 | |
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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 | |
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Total liabilities and equity | $ | 1,145,000 | | $ | 989,000 | |
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GOLDEN CORPORATION Income Statement For Year Ended December 31, 2013 |
Sales | | | | $ | 1,867,000 |
Cost of goods sold | | | | | 1,101,000 |
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Gross profit | | | | | 766,000 |
Operating expenses | | | | | |
Depreciation expense | $ | 64,000 | | | |
Other expenses | | 509,000 | | | 573,000 |
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Income before taxes | | | | | 193,000 |
Income taxes expense | | | | | 25,000 |
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Net income | | | | $ | 168,000 |
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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.) |
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| 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 |
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