Sleepy Time is a retailer of luxury bed frames located in Los Angeles, California. Due to a recent industry-wide financial crisis, the CFO of Sleepy Time fears a significant drop in the firm's upcoming income stream. The CFO asked you to use the company financial information provided below.
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Sleepy Time is a retailer of luxury bed frames located in Los Angeles, California. Due to a recent industry-wide financial crisis, the CFO of Sleepy Time fears a significant drop in the firm's upcoming income stream. The CFO asked you to use the company financial information provided below.
Sales price per unit | $ 3,250.00 |
---|---|
Per-unit variable costs: | |
Invoice cost | 2,468.80 |
Sales commissions | 331.20 |
Total per-unit variable costs | $ 2,800.00 |
Total annual fixed costs: | |
Advertising | $ 236,500 |
Rent | 178,500 |
Salaries | 386,500 |
Total annual fixed costs | $ 801,500 |
If 4,250 bed frames were sold, Sleepy Time's operating income (πB) would be: (Do not round intermediate calculations.)
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- Kimball Company has developed the following cost formulas: Materialusage:Ym=80X;r=0.95Laborusage(direct):Yl=20X;r=0.96Overheadactivity:Yo=350,000+100X;r=0.75Sellingactivity:Ys=50,000+10X;r=0.93 where X=Directlaborhours The company has a policy of producing on demand and keeps very little, if any, finished goods inventory (thus, units produced equals units sold). Each unit uses one direct labor hour for production. The president of Kimball Company has recently implemented a policy that any special orders will be accepted if they cover the costs that the orders cause. This policy was implemented because Kimballs industry is in a recession and the company is producing well below capacity (and expects to continue doing so for the coming year). The president is willing to accept orders that minimally cover their variable costs so that the company can keep its employees and avoid layoffs. Also, any orders above variable costs will increase overall profitability of the company. Required: 1. Compute the total unit variable cost. Suppose that Kimball has an opportunity to accept an order for 20,000 units at 220 per unit. Should Kimball accept the order? (The order would not displace any of Kimballs regular orders.) 2. Explain the significance of the coefficient of correlation measures for the cost formulas. Did these measures have a bearing on your answer in Requirement 1? Should they have a bearing? Why or why not? 3. Suppose that a multiple regression equation is developed for overhead costs: Y = 100,000 + 100X1 + 5,000X2 + 300X3, where X1 = direct labor hours, X2 = number of setups, and X3 = engineering hours. The coefficient of determination for the equation is 0.94. Assume that the order of 20,000 units requires 12 setups and 600 engineering hours. Given this new information, should the company accept the special order referred to in Requirement 1? Is there any other information about cost behavior that you would like to have? Explain.Shannon, Inc., has two divisions. One produces and sells paper party supplies (napkins, paper plates, invitations); the other produces and sells cookware. A segmented income statement for the most recent quarter is given below: On seeing the quarterly statement, Madge Shannon, president of Shannon, Inc., was distressed and discussed her disappointment with Bob Ferguson, the companys vice president of finance. MADGE: The Party Supplies Division is killing us. Its not even covering its own fixed costs. Im beginning to believe that we should shut down that division. This is the seventh consecutive quarter it has failed to provide a positive segment margin. I was certain that Paula Kelly could turn it around. But this is her third quarter, and she hasnt done much better than the previous divisional manager. BOB: Well, before you get too excited about the situation, perhaps you should evaluate Paulas most recent proposals. She wants to spend 10,000 per quarter for the right to use familiar cartoon figures on a new series of invitations, plates, and napkins and at the same time increase the advertising budget by 25,000 per quarter to let the public know about them. According to her marketing people, sales should increase by 10 percent if the right advertising is doneand done quickly. In addition, Paula wants to lease some new production machinery that will increase the rate of production, lower labor costs, and result in less waste of materials. Paula claims that variable costs will be reduced by 30 percent. The cost of the lease is 95,000 per quarter. Upon hearing this news, Madge calmed considerably and, in fact, was somewhat pleased. After all, she was the one who had selected Paula and had a great deal of confidence in Paulas judgment and abilities. Required: 1. Assuming that Paulas proposals are sound, should Madge Shannon be pleased with the prospects for the Party Supplies Division? Prepare a segmented income statement for the next quarter that reflects the implementation of Paulas proposals. Assume that the Cookware Divisions sales increase by 5 percent for the next quarter and that the same cost relationships hold. 2. Suppose that everything materializes as Paula projected except for the 10 percent increase in salesno change in sales revenues takes place. Are the proposals still sound? What if the variable costs are reduced by 40 percent instead of 30 percent with no change in sales?Variety Artisans has a bottleneck in their production that occurs within the engraving department. Arjun Naipul, the COO, is considering hiring an extra worker, whose salary will be $45,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,500 more units per year. Currently, the selling price per unit is $18 and the cost per unit is $5.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.
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