Saturday, October 1, 2016

Connect - Managerial Accounting Exam (Ch 10-12)

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.

  Direct materials$896,500  
  Direct labor676,450  
  Overhead953,000  
  Selling expenses554,000  
  Administrative expenses463,000  


  Total costs and expenses$3,542,950  






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.)
CALLA COMPANY
COMPARATIVE INCOME STATEMENTS
Normal VolumeAdditional VolumeCombined Total
$5,134,500$493,000$5,627,500
Costs and expenses:
896,50093,500990,000
676,45070,550747,000
953,00059,6361,012,636
554,00061,695615,695
463,000860463,860
Total costs and expenses3,542,950286,2413,829,191
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.
  
   
  Direct materials$5.00  
  Direct labor9.00  
  Overhead10.00  


  Total costs per unit$24.00  





    
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.
  
Required:
1.
Calculate the per unit incremental costs of making and buying component RX5.
Total incremental costs of:Making the unitsBuying the units
$260,000
468,000
156,000
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?

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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.
Alternative 1 Sell as isAlternative 2 Disassemble and sell to a recyclerAlternative 3 Rework and turn into good jackets
Incremental revenue$35,770$56,210$128,480
Incremental costs031,900101,500
Incremental income$35,770$24,310$26,980
The company should choose:

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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 GProduct B
  Selling price per unit$230$260
  Variable costs per unit100156
  



  Contribution margin per unit$130$104
  







  Machine hours to produce 1 unit0.4 hours1 hours
  Maximum unit sales per month650 units250 units

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.)

1. Determine the contribution margin per machine hour that each product generates.
Product GProduct B
Contribution margin per unit$130.00$104.00
0.41.0
Contribution margin per machine hour$325.00$104.00
Product GProduct BTotal
Maximum number of units to be sold650250
Hours required to produce maximum units260250510
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 GProduct BTotal
Hours dedicated to the production of each product176176
Units produced for most profitable sales mix440
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 GProduct BTotal
Hours dedicated to the production of each product26092352
Units produced for most profitable sales mix65092
Contribution margin per unit$130.00$104.00
Total contribution margin - two shifts$84,500$9,568$94,068
Total contribution margin - one shift57,200
Change in contribution margin36,868
Change in fixed costs13,000
Change in operating income$23,868
Should the company add another shift?
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 GProduct BTotal
Hours dedicated to the production of each product28072352
Units produced for most profitable sales mix70072
Contribution margin per unit$130.00$104.00
Total contribution margin - two shifts and marketing campaign$91,000$7,488$98,488
Contribution margin - two shifts without marketing campaign94,068
Change in contribution margin4,420
Additional marketing costs12,000
Change in fixed costs13,000
Change in operating income$(20,580)
Should the company pursue the marketing campaign?

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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. 100Dept. 200Combined
  Sales$438,000$309,539$747,539
  Cost of goods sold265,000214,000479,000
  






  Gross profit173,00095,539268,539
  Operating expenses
    Direct expenses
       Advertising15,00012,00027,000
       Store supplies used6,0005,50011,500
       Depreciation—Store equipment5,0003,8008,800
  






       Total direct expenses26,00021,30047,300
    Allocated expenses
       Sales salaries78,00046,800124,800
       Rent expense9,4404,74014,180
       Bad debts expense10,1008,10018,200
       Office salary18,72012,48031,200
       Insurance expense1,9001,1003,000
       Miscellaneous office expenses2,7002,1004,800
  






       Total allocated expenses120,86075,320196,180
  






  Total expenses146,86096,620243,480
  






  Net income (loss)$26,140$(1,081)$25,059
  














   
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.
ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
Total Expenses Eliminated Expenses Continuing Expenses
$479,000$214,000$265,000
Direct expenses
27,00012,00015,000
11,5005,5006,000
8,8008,800
Allocated expenses
124,80046,80078,000
14,18014,180
18,2008,10010,100
31,20015,60015,600
3,0007482,252
4,8004414,359
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 $1FV of $1PVA of $1, and FVA of $1(Use appropriate factor(s) from the tables provided.)
  
  Expected annual sales of new product$1,870,000
  Expected annual costs of new product
      Direct materials495,000
      Direct labor675,000
      Overhead excluding straight-line depreciation on new machine339,000
      Selling and administrative expenses163,000
      Income taxes30%

Required:
1.
Compute straight-line depreciation for each year of this new machine’s life.
Straight-line depreciation$117,250

  Annual straight-line depreciation=$495,000 − $26,000=  $117,250


4 years

2.
Determine expected net income and net cash flow for each year of this machine’s life.
Expected net income
Revenues
$1,870,000
Expenses
$495,000
675,000
339,000
117,250
163,000
Total expenses1,789,250
80,750
24,225
$56,525
Expected net cash flow
Net income$56,525
117,250
$173,775

3.
Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year.
Payback period
Choose Numerator:/Choose Denominator:=Payback period
/=Payback period
$495,000/$173,775=2.85years

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
/=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 flowSelect chartAmountxTable factor=Present Value
Annual cash flow$173,775x3.3872=$588,611
Salvage value$26,000x0.7629=19,835
$608,446
(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 $1PVA of $1, and FVA of $1(Use appropriate factor(s) from the table provided.)
  
PeriodCash Flow
1$ 47,000  
253,900  
375,600  
494,700  
5125,400  

  
Required:
1.
Determine the payback period for this investment. (Enter cash outflows with a minus sign. Round your answer to 1 decimal place.)
YearCash inflow (outflow)Cumulative Net Cash Inflow (outflow)
0$(257,000)$(257,000)
147,000(210,000)
253,900(156,100)
375,600(80,500)
494,70014,200
5125,400139,600
$139,600
Calculate the payback period:
Payback occurs between year:3and year:4
Calculate the portion of the year:
Numerator for partial year$80,5000.9years
Denominator for partial year$94,700
Payback period =3.9years

2.
Determine the break-even time for this investment. (Enter cash outflows with a minus sign. Round your answer to 1 decimal place.)
YearCash inflow (outflow)Table factorPresent Value of Cash FlowsCumulative Present Value of Cash Flows
0$(257,000)1.0000$(257,000)$(257,000)
147,0000.9174$43,118(213,882)
253,9000.8417$45,368(168,514)
375,6000.7722$58,378(110,136)
494,7000.7084$67,085(43,051)
5125,4000.6499$81,49738,446
$139,600
Calculate the break even time:
Break-even time occurs between year:4and year:5
Calculate the portion of the year:
Numerator for partial year$43,0510.5years
Denominator for partial year$81,497
Break-even time =4.5years

3.
Determine the net present value for this investment.
Net present value
$38,446

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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
20132012
  Assets
  Cash$50,404   $68,000   
  Accounts receivable73,525   57,125   
  Merchandise inventory265,906   238,800   
  Prepaid expenses1,440   1,900   
  Equipment154,300   112,000   
  Accum. depreciation—Equipment(45,400)  (52,000)  
  



  Total assets$500,175   $425,825   
  







  Liabilities and Equity
  Accounts payable$58,875   $110,000   
  Short-term notes payable8,400   5,200   
  Long-term notes payable33,575   39,000   
  Common stock, $5 par value161,500   148,000   
  Paid-in capital in excess of par, common stock40,500   0   
  Retained earnings197,325   123,625   
  



  Total liabilities and equity$500,175   $425,825   
  








  
FORTEN COMPANY
Income Statement
For Year Ended December 31, 2013
  Sales$615,000  
  Cost of goods sold298,000  
  

  Gross profit317,000  
  Operating expenses
       Depreciation expense$19,200  
       Other expenses141,000  160,200  
  

  Other gains (losses)
       Loss on sale of equipment(4,300) 
  

  Income before taxes152,500  
  Income taxes expense29,000  
  

  Net income$123,500  
  




  
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.)
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:
19,200
(16,400)
(27,106)
460
(51,125)
4,300
$52,829
Cash flows from investing activities
(50,000)
14,700
(35,300)
Cash flows from financing activities:
3,200
(42,525)
54,000
(49,800)
(35,125)
Net increase (decrease) in cash$(17,596)
Cash balance at beginning of year68,000
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
20132012
  Assets
  Cash$229,000$159,000
  Accounts receivable95,00079,000
  Merchandise inventory631,000541,000
  Equipment373,000329,000
  Accum. depreciation—Equipment(183,000)(119,000)






  Total assets$1,145,000$989,000












  Liabilities and Equity
  Accounts payable$97,000$86,000
  Income taxes payable46,00040,000
  Common stock, $2 par value626,000598,000
  Paid-in capital in excess of par value, common stock217,000175,000
  Retained earnings159,00090,000






  Total liabilities and equity$1,145,000$989,000













  
GOLDEN CORPORATION
Income Statement
For Year Ended December 31, 2013
  Sales$1,867,000  
  Cost of goods sold1,101,000  


  Gross profit766,000  
  Operating expenses
       Depreciation expense$64,000  
       Other expenses509,000  573,000  




  Income before taxes193,000  
  Income taxes expense25,000  


  Net income$168,000  





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.)
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:
(16,000)
(90,000)
11,000
6,000
64,000
$143,000
Cash flows from investing activities:
(44,000)
(44,000)
Cash flows from financing activities:
70,000
(99,000)
(29,000)
Net increase (decrease) in cash$70,000
Cash balance at beginning of year159,000
Cash balance at end of year$229,000