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6DQWould the use of standards be appropriate in a nonmanufacturing setting such as a fast-food restaurant?a. Describe the two variances between the actual costs and the standard costs for factory overhead. b. What is a factory overhead cost variance report?If variances are recorded in the accounts at the time the manufacturing costs are incurred, what does a debit balance in Direct Materials Price Variance represent?Briefly explain why firms might use nonfinancial performance measures.23.1APEDirect materials variances Dvorak Company produces a product that requires 5 standard pounds per unit. The standard price is 2.50 per pound. If 1,000 units required 4,500 pounds, which were purchased at 3.00 per pound, what is the direct materials (a) price variance, (b) quantity variance, and (c) total direct materials cost variance?23.2APEDirect labor variances Dvorak Company produces a product that requires 3 standard hours per unit at a standard hourly rate of 17 per hour. If 1,000 units required 2,800 hours at an hourly rate of 16.50 per hour, what is the direct labor (a) rate variance, (b) time variance, and (c) total direct labor cost variance?23.3APEFactory overhead controllable variance Dvorak Company produced 1,000 units of product that required 3 standard hours per unit. The standard variable overhead cast per unit is 1.40 per hour. The actual variable factory overhead was 4,000. Determine the variable factory overhead controllable variance.23.4APEFactory overhead volume variance Dvorak Company produced 1,000 units of product that required 3 standard hours per unit. The standard fixed overhead cost per unit is 0.60 per hour at 3,500 hours, which is 100% of normal capacity. Determine the fixed factory overhead volume variance.23.5APEStandard cost journal entries Dvorak Company produced 1,000 units that require 5 standard pounds per unit at 2.50 standard price per pound. The company actually used 4,500 pounds in production. Journalize the entry to record the standard direct materials used in production.23.6APEIncome statement with variances Prepare an income statement through gross profit for Dvorak Company for the month ended July 31 using the variance data in Practice Exercises 25-1B through 23-4B. Assume that Dvorak sold 1,000 units at 90 per unit.23.7APE23.7BPE23.1EX23.2EXBudget performance report Genie in a Botile Company (GBC) manufactures plastic two-liter bottles for the beverage industry. The cost standards per 100 two-liter bottles are as follows: Cost Category Standard Cost per 100 Two-Liter Bottles Direct labor 2.00 Direct materials 9.10 Factory overhead 0.55 Total 11.65 At the beginning of July, GBC management planned to produce 400,000 hollies. The actual number of bottles produced for July was 406,000 bottles. The actual costs for July of the current year were as follows: Cost Category Actual Cost for the Month Ended July 31 Direct labor 7,540 Direct materials 35,750 Factory overhead 2,680 Total 45,970 a.Prepare the July manufacturing .standard cost budget (direct labor, direct materials, and factory overhead) for GBC, assuming planned production. b.Prepare a budget performance report for manufacturing costs, showing the total cost variances for direct materials, direct labor, and factory overhead for July. c.Interpret the budget performance report.Direct materials variances The following data relate to the direct materials cost for the production of 4,000 automobile tires: Actual: 72,500 lbs. at 3.30 Standard: 75,160 lbs. at 3.15 a. Determine the direct materials price variance, direct materials quantity variance, and total direct materials cost variance. b. To whom should the variances be reported for analysis and control?Direct materials variances Silicone Engine Inc. produces wrist-worn tablet computers. The company uses Thin Film Crystal (TFC) LCD displays for its products. Each tablet uses one display. The company produced 580 tablets during December. However, due to LCD defects, the company actually used 600 LCD displays during December. Each display has a standard cost of 15.00. Six hundred LCD displays were purchased for December production at a cost of 8,550. Determine the price variance, quantity variance, and total direct materials cost variance for December.Standard direct materials cost per unit from variance data The following data relating to direct materials cost for October of the current year are taken from the records of Good Clean Fun Inc., a manufacturer of organic toys: Quantity of direct materials used 3,000 lb. Actual unit price of direct materials 5.50 per lb. Units of finished product manufactured 1,400 units Standard direct materials per unit of finished product 2 lb. Direct materials quantity varianceunfavorable 1,000 Direct materials price variance unfavorable 1,500 Determine the standard direct materials cost per unit of finished product, assuming that there was no inventory of work in process at either the beginning or end of the month.Standard product cost, direct materials variance HJ. Heinz Company uses standards to control its materials costs. Assume that a batch of ketchup (3,128 pounds) has the following standards; Standard Quantity Standard Price Whole tomatoes 4.000 lb. 0.60 per lb. Vinegar 260 gal. 2.25 per gal. Corn syrup 25 gal. 28.00 per gal. Salt 100 lb. 2.25 per lb. The actual materials in a batch may vary from the standard due to tomato characteristics. Assume that the actual quantities of materials for batch K-111 were as follows: 4,250 lb. of tomatoes 275 gal. of vinegar 22 gal. of corn syrup 90 lb. of salt a.Determine the standard unit materials cost per pound for a standard batch. b.Determine the direct materials quantity variance for batch K-111, Round your answer to the nearest cent.Direct labor variances The following data relate to labor cost for production of 20,000 cellular telephones: Actual: 8 450 hrs. at 22.50 Standard: 8 400 hrs. at 23.00 a. Determine the direct labor rate variance, direct labor time variance, and total direct labor cost variance. b. Discuss what might have caused these variances.Direct labor variances Reincarnation Bicycle Company manufactures commuter bicycles from recycled materials. The following data for April of the current year are available: Quantity of direct labor used 1,530 hrs. Actual rate for direct labor 17.00 per hr. Bicycles completed in April 500 Standard direct labor per bicycle 3 hrs. Standard rate for direct labor 17.50 per hr. a. Determine the direct labor rate variance, time variance, and total direct labor cost variance. b. How much direct labor should be debited to Work in Process?Direct tabor variances Greeson Clothes Company produced 25,000 units during June of the current year. The Cutting Department used 6,380 direct labor hours at an actual rate of 10.90 per hour. The Sewing Department used 9,875 direct labor hours at an actual rate of 11.12 per hour. Assume that there were no work in process inventories in either department at the beginning or end of the month. The standard labor rate is 11.00. The standard labor time for the Cutting and Sewing departments is 0.25 hour and 0.40 hour per unit, respectively. a. Determine the direct labor rate, direct labor time, and total direct labor cost variance for the (1) Cutting Department and (2) Sewing Department. b. Interpret your results.Direct labor standards for nonmanufacturing expenses Englert Hospital began using standards to evaluate its Admissions Department. The standard was broken into two types of admissions as follows: Type of Admission Standard Time to Complete Admission Record Unscheduled admission 30 min. Scheduled admission 15 min. The unscheduled admission took longer because name, address, and insurance information needed to be determined and verified at the time of admission. Information was collected on scheduled admissions prior to the admissions, which was less time-consuming. The Admissions Department employs four full-time people (40 productive hours per week, with no overtime) at 15 per hour. For the most recent week, the department handled 140 unscheduled and 350 scheduled admissions. a.How much was actually spent on labor for the week? b.What are the standard hours for the actual volume for the week? c.Calculate a time variance and report how well the department performed for the week.Direct labor standards for a service company One of the operations in the United States Postal Service is a mechanical mail sorting operation. In this operation, letter mail is sorted at a rate of 1.5 letters per second. The letter is mechanically sorted from a three-digit code input by an operator sitting at a keyboard. The manager of the mechanical sorting operation wants to determine the number of temporary employees to hire for December. The manager estimates that there will be an additional 24,192,000 pieces of mail in December, due to the upcoming holiday season. Assume that the sorting operators are temporary employees. The union contract requires that temporary employees be hired for one month at a time. Each temporary employee is hired to work 160 hours in the month. a. How many temporary employees should the manager hire for December? b. If each temporary employee earns a standard 16.40 per hour, what would be the labor time variance if the actual number of additional letters sorted in December was 23,895,000?Direct labor variances for a service company Hit-n-Run Food Trucks, Inc. owns and operates food trucks (mobile kitchens) throughout the West Coast. The companys employees have varying wage levels depending on their experience and length of time with the company. Employees work eight-hour shifts and are assigned to a truck each day based on labor needs to support the daily menu. One of the trucks, Jose OBriens Mobile Fiesta, specializes in Irish-Mexican fusion cuisine. The truck offers a single menu item that changes daily. On November 11, the truck prepared 200 of its most popular item, the Irish Breakfast Enchilada. The following data are available for that day: Quantity of direct labor used (3 employees, working 8-hour shifts) 24 hrs. Actual rate for direct labor 15.00 per hr. Standard direct labor per meal 0.1 hr. Standard rate for direct labor 15.50 per hr. a.Determine the direct labor rate variance, the direct labor time variance, and the total direct labor cost variance. b.Discuss what might have caused these variances.Direct materials and direct labor variances At the beginning of June, Bezco Toy Company budgeted 5,000 toy action figures to be manufactured in June at standard direct materials and direct labor costs as follows: Direct materials 50,000 Direct labor 36,000 Total 86,000 The standard materials price is 4.00 per pound. The standard direct labor rate is 18.00 per hour. At the end of June, the actual direct materials and direct labor costs were as follows: Actual direct materials 49,600 Actual direct labor 34,020 Total 83,620 There were no direct materials price or direct labor rate variances for June. In addition, assume no changes in the direct materials inventory balances in June. Bezco Toy Company actually produced 4,850 units during June. Determine the direct materials quantity and direct labor time variances.Flexible overhead budget Leno Manufacturing Company prepared the following factory overhead cost budget for the Press Department for October of the current year, during which it expected to require 20,000 hours of productive capacity in the department: Variable overhead cost: Indirect factory labor 160,000 Power and light 12,000 Indirect materials 64,000 Total variable overhead cost 256,000 Fixed overhead cost: Supervisory salaries 80,000 Depreciation of plant and equipment 50,000 Insurance and property taxes 32,000 Total fixed overhead cost 162,000 Total factory overhead cost 418,000 Assuming that the estimated costs for November are the same as for October, prepare a flexible factory overhead cost budget for the Press Department for November for 18,000, 20,000, and 22,000 hours of production.Flexible overhead budget Wiki Wiki Company has determined that the variable overhead rate is 4.50 per direct labor hour in the Fabrication Department. The normal production capacity for the Fabrication Department is 10,000 hours for the month. Fixed costs are budgeted at 60,000 for the month. a.Prepare a monthly factory overhead flexible budget for 9,000, 10,000, and 11,000 hours of production. b.How much overhead would be applied to production if 9,000 hours were used in the department during the month?Factory overhead cost variances The following data relate to factory overhead cost for the production of 10,000 computers: If productive capacity of 100% was 15, 000 hours and the total factory overhead cost budgeted a t the level of 14, 000 standard hours was 356,000, determine the variable factory overhead controllable variance, fixed factory overhead volume variance, and total factory overhead cost variance. The fixed factory overhead rate was 6.00 per hour.Factory overhead cost variances Blumen Textiles Corporation began April with a budget for 90,000 hours of production in the Weaving Department. The department has a full capacity of 100,000 hours under normal business conditions. The budgeted overhead at the planned volumes at the beginning of April was as follows: Variable overhead 5540,000 Fixed overhead 240,000 Total 780,000 The actual factory overhead was 782,000 for April. The actual fixed factory overhead was as budgeted. During April, the Weaving Department had standard hours at actual production volume of 92,500 hours. a.Determine the variable factory overhead controllable variance. b.Determine the fixed factory overhead volume variance.Factory overhead variance corrections The data related to Shunda Enterprises Inc.s factory overhead cost for the production of 100,000 units of product are as follows: Actual: Variable factory overhead 458,000 Fixed factory overhead 494,000 Standard: 132,000 hrs. at 7.30 (3.50 for variable factory overhead) 963,600 Productive capacity at 100% of normal was 130,000 hours, and the factory overhead cost budgeted at the level of 132,000 standard hours was 956,000. Based on these data, the chief cost accountant prepared the following variance analysis: Variable factory overhead controllable variance: Actual variable factory overhead cost incurred 458,000 Budgeted variable factory overhead for 132,000 hours 462,000 Variancefavorable (4,000) Fixed factory overhead volume variance: Normal productive capacity at 100% 130.000 hrs. Standard for amount produced 132,000 Productive capacity not used 2.000 hrs. Standard variable factory overhead rate 7.30 Varianceunfavorable 14,600 Total factory overhead cost varianceunfavorable 10,600 Identify the errors in the factory overhead cost variance analysis.Factory overhead cost variance report Tannin Products Inc. prepared the following factory overhead cost budget for the Trim Department for July of the current year, during which it expected to use 20,000 hours for production: Variable overhead cost Indirect factory labor 46,000 Power and light 12,000 Indirect materials 20,000 Total variable overhead cost 78,000 Fixed overhead cost: Supervisory salaries 54,500 Depreciation of plant and equipment 40,000 Insurance and property taxes 35,500 Total fixed overhead cost 130,000 Total factory overhead cost 208,000 Tannin has available 25,000 hours of monthly productive capacity in the Trim Department under normal business conditions. During July, the Trim Department actually used 22,000 hours for production. The actual Fixed costs were as budgeted. The actual variable overhead for July was as follows: Actual variable factory overhead cost: Indirect factory labor 49,700 Power and light 13,000 Indirect materials 24,000 Total variable cost 86,700 Construct a factory overhead cost variance report for the Trim Department for July.Recording standards in accounts Cioffi Manufacturing Company incorporates standards in its accounts and identifies variances at the time the manufacturing costs are incurred. Journalize the entries to record the following transactions: a.Purchased 2,450 units of copper tubing on account at 52.00 per unit. The standard price is 48.50 per unit. b.Used 1,900 units of copper tubing in the process of manufacturing 200 air conditioners. Ten units of copper tubing are required, at standard, to produce one air conditioner.Recording standards in accounts The Assembly Department produced 5,000 units of product during March. Each unit required 2.20 standard direct labor hours. There were 11,500 actual hours used in the Assembly Department during March at an actual rate of 17.60 per hour. The standard direct labor rate is 18.00 per hour. Assuming that direct labor for a month is paid on the fifth day of the following month, journalize the direct labor in the Assembly Department on March 31.Income statement indicating standard cost variances The following data were taken from the records of Griggs Company for December 2016: Administrative expenses 100,800 Cost of goods sold (at standard) 550,000 Direct materials price variance-unfavorable 1,680 Direct materials quantity variance-favorable 560 Direct labor rate variance-favorable 1,120 Direct labor time variance-unfavorable 490 Variable factory overhead controllable variance-favorable 210 Fixed factory overhead volume variance-unfavorable 3,080 Interest expense 2,940 Sales 868,000 Selling expenses 125,000 Prepare an income statement for presentation to management.23.24EXNonfinancial performance measures Alpha University wants to monitor the efficiency and quality of its course registration process. a.Identify three input and three output measures for this process. b.Why would Alpha University use min financial measures for monitoring this process?Direct materials and direct labor variance analysis Fancy Fixture Company manufactures faucets in a small manufacturing facility. The faucets are made from brass. Manufacturing has 100 employees. Each employee presently provides 40 hours of labor per week. Information about a production week is as follows: Standard wage per hr. 21.00 Standard labor time per faucet 20min. Standard number of lbs. of brass 5 lbs. Standard price per lb. of brass 2.80 Actual price per lb. of brass 2.72 Actual lbs. of brass used during the week 59,875 lbs. Number of faucets produced during the week 11,820 Actual wage per hr. 21.40 Actual hrs. for the week 4,000 hrs. Instructions Determine (a) the standard cost per unit for direct materials and direct labor; (b) the direct materials price variance, direct materials quantity variance, and total direct materials cost variance; and (c) the direct labor rate variance, direct labor time variance, and total direct labor cost variance.Flexible budgeting and variance analysis I Love My Chocolate Company makes dark chocolate and light chocolate. Both products require cocoa and sugar. The following planning information has been made available: Standard Amount per Case Dark Chocolate Light Chocolate Standard Price per Pound Cocoa 12lb. 8lb. 7.25 Sugar 10lb. 14lb. 1.40 Standard labor time 0.50 hr. 0.60 hr. Planned production 4,700 cases 11,000 cases Standard labor rate 15.50 per hr. 15.50 per hr. I Love My Chocolate Company does not expect there to be any beginning or ending inventories of cocoa or sugar. At the end of the budget year, I Love My Chocolate Company had the following actual results: Dark Chocolate Light Chocolate Actual production (cases) 5,000 10,000 Actual Price per Pound Actual Pounds Purchased and Used Cocoa 7.33 140,300 Sugar 1.35 188,000 Actual Labor Rate Actual Labor Hours Used Dark chocolate 15.25 per hr. 2,360 Light chocolate 15.80 per hr. 6,120 Instructions 1.Prepare the following variance analyses for both chocolates and the total, based on the actual results and production levels at the end of the budget year: a.Direct materials price, quantity, and total variance b.Direct labor rate, time, and total variance 2.Why are the standard amounts in part (1) based on the actual production for the year instead of the planned production for the year?Direct materials, direct labor, and factory overhead cost variance analysis Adamantane Inc. processes a base chemical into plastic. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 15,000 units of product were as follows: Each unit requires 0.2 hour of direct labor. Instructions Determine (a) the direct materials price variance, direct materials quantity variance, and total direct materials cost variance; (b) the direct labor rate variance, direct labor time variance, and total direct labor cost variance; and (c) the variable factory overhead controllable variance, fixed factory overhead volume variance, and total factory overhead cost variance.Factory overhead cost variance report Tiger Equipment Inc., a manufacturer of construction equipment, prepared the following factory overhead cost budget for the Welding Department for May of the current year. The company expected to operate the department at 100% of normal capacity of 8,400 hours. Variable costs: Indirect factory wages 30,240 Power and light 20,160 Indirect materials 16,800 Total variable cost 67,200 Fixed costs: Supervisory salaries 20,000 Depreciation of plant and equipment 36,200 Insurance and property taxes 15,200 Total fixed cost 71,400 Total factory overhead cost 138,600 During May, the department operated at 8,860 standard hours. The factory overhead Costs incurred were indirect factory wages, 32,400; power and light, 21,000; indirect materials, 18,250; supervisory salaries, 20,000; depreciation of plant and equipment, 36,200; and insurance and property taxes, 15,200. Instructions Prepare a factory overhead cost variance report for May. To be useful for cost control, the budgeted amounts should be based on 8,860 hours.Standards for nonmanufacturing expanses Code Head Software Inc. is a software development company. One important activity in software development is writing software code. The manager of the WordPro Development Team determined that the average software programmer could write 25 lines of code in an hour. The plan for the first week in May called for 4,650 lines of code to be written on the WordPro product. The WordPro Team has five programmers. Each programmer is hired from an employment firm that requires temporary employees to be hired for a minimum of a 40-hour week. Programmers are paid 32.00 per hour. The manager offered a bonus if the team could generate mere lines for the week, without overtime. Due to a project emergency, the programmers wrote more code in the first week of May than planned. The actual amount of code written in the first week of May was 5,650 lines, without overtime. As a result, the bonus caused the average programmers hourly rate to increase to 40.00 per hour during the first week in May. Instructions 1.If the team had generated 4,650 lines of code according to the original plan, what would have been the labor time variance? 2.What was the actual labor time variance as a result of generating 5,650 lines of code? 3. What was the labor rate variance as a result of the bonus? 4.Are there any performance-related issues that the labor time and rate variances fail to consider? Explain. 5.The manager is trying to determine if a belter decision would have been to hire a temporary programmer to meet the higher programming demand in the first week of May, rather than paying out the bonus. If another employee had been hired from the employment firm, what would have been the labor time variance in the first week? 6.Which decision is belter, paying the bonus or hiring another programmer?Direct materials and direct labor variance analysis Lenni Clothing Co. manufactures clothing in a small manufacturing facility. Manufacturing has 25 employees. Each employee presently provides 40 hours of productive labor per week. Information about a production week is as follows: Standard wags per hr. 12.00 Standard labor time per unit 12 min. Standard number of yds. of fabric per unit 5.0 yds. Standard price per yd. of fabric 5.00 Actual price per yd. of fabric 5.10 Actual yds. of fabric used during the week 26,200 yds. Number of units produced during the week 5,220 Actual wage per hr. 11.80 Actual hrs. for the week 1,000 hrs. Instructions Determiner (a) the standard cost per unit for direct materials and direct labor; (b) the price variance, quantity variance, and total direct materials cost variance; and (c) the rate variance, time variance, and total direct labor cost variance.Flexible budgeting and variance analysis Im Really Cold Coat Company makes womens and mens coals. Both products require filler and lining material. The following planning information has been made available: Standard Amount per Unit Womens Coats Mens Coats Standard Price per Unit Filler 4.0 lb. 5.2 lb. 2.00 per lb. Liner 7.0 yds. 9.4 yds. 8.00 per yd. Standard labor time 0.40 hr. 0.50 hr. Women s Coats Mens Coats Planned production 5.000 units 6,200 units Standard labor rate S14.00 per hr. 13.00 per hr. Im Really Cold Coal Company does not expect there to be any beginning or ending inventories of filler and lining material. At the end of the budget year. Im Really Cold Coal Company experienced the following actual results: Womens Coats Mens Coats Actual production 4.400 5,800 Actual Price per Unit Actual Quantity Purchased and Used Filler 1.90 per lb. 48,000 Liner 8.20 per yd. 85,100 Actual Labor Rate Actual Labor Hours Used Womens coats 14.10 per hr. 1.825 Mens coats 13.30 per hr. 2,800 The expected beginning inventory and desired ending inventory were realized. Instructions 1.Prepare the following variance analyses for both coats and the total, based on the actual results and production levels at the end of the budget year: a.Direct materials price, quantity, and total variance b.Direct labor rate, time, and total variance 2.Why are the standard amounts in part (1) based on the actual production at the end of the year instead of the planned production at the beginning of the year?Direct materials, direct labor, and factory overhead cost variance analysis Road Gripper Tire Co. manufactures automobile tires. Standard costs and actual costs for direct materials, direct labor, and factory overhead incurred for the manufacture of 4,160 tires were as follows: Standard Costs Actual Costs Direct materials 100,000 lb. at 6.40 101,000 lb. at 6.50 Direct labor 2,080 hrs. at 15.75 2,000 hrs. at 15.40 Factory overhead Rates per direct labor hr., based on 100% of normal capacity of 2,000 direct labor hrs.: Variable cost, 4.00 8,200 variable cost Fixed cost, 6.00 12,000 fixed cost Each tire requires 0.5 hour of direct labor. Instructions Determine (a) the direct materials price variance, direct materials quantity variance, and total direct materials cost variance; (b) the direct labor rate variance, direct labor time variance, and total direct labor cost variance; and (c) the variable factory overhead controllable variance, fixed factory overhead volume variance, and total factory overhead cost variance.Factory overhead cost variance report Feeling Belter Medical Inc., a manufacturer of disposable medical .supplies, prepared the following factory overhead cost budget for the Assembly Department for October of the current year, The company expected to operate the department at 100% of normal capacity of 30,000 hours. Variable costs: Indirect factory wages 247,500 Power and light 189.000 Indirect materials 52,500 Total variable cost 489,000 Fixed costs: Supervisory salaries 126,000 Depreciation of plant and equipment 70,000 Insurance and property taxes 44.000 Total fixed cost 240,000 Total factory overhead cost 729,000 During October, the department operated at 28,500 hours. The factory overhead costs incurred were indirect factory wages, 254,000; power and light, 178,500; indirect materials, 50,600; supervisory salaries, 126,000; depreciation of plant and equipment, 70,000; and insurance and property taxes, 44,000. Instructions Prepare a factory overhead cost variance report for October. To be useful for cost control, the budgeted amounts should be based on 28,500 hours.23.5BPRGenuine Spice Inc. began operations on January 1 of the current year. The company produces eight-ounce bottles of hand and body lotion called Eternal Beauty. The lotion is sold wholesale in 12-bottle cases for 100 per case. There is a selling commission of 20 per case. The January direct materials, direct labor, and factory overhead costs are as follows: DIRECT MATERIALS Cost Behavior Units per Case Cost per Unit Direct Materials Cost per Case Cream base Variable 100 oz. 0.02 2.00 Natural oils Variable 30 oz. 0.30 9.00 Bottle [8 oz.) Variable 12 bottles 0.50 6.00 17.00 DIRECT LABOR Department Cost Behavior Time per Case Labor Rate per Hour Direct Labor Cost per Case Mixing Variable 20 min. 18,00 6.00 Filling Variable 5 14.40 1.20 25 min. 7.20 FACTORY OVERHEAD Cost Behavior Total Cost Utilities Mixed 600 Facility lease Fixed 14,000 Equipment depreciation Fixed 4,300 Supplies Fixed 660 19,560 Part ABreak-Even Analysis The management of Genuine Spice Inc. wants to determine the number of cases required to break even per month. The utilities cost, which is part of factory overhead, is a mixed cost. The following information was gathered from the first six months of operation regarding this cost: Case Production Utility Total Cost January 500 5600 February 800 660 March 1,200 740 April 1,100 720 May 950 690 June 1,025 705 Instructions 1. Determine the fixed and variable portion of the utility cost using the high-low method. 2. Determine the contribution margin per case. 3. Determine the fixed costs per month, including the utility fixed cost from part (1). 4. Determine the break-even number of cases per month. Part BAugust Budgets During July of the current year, the management of Genuine Spice Inc. asked the controller to prepare August manufacturing and income statement budgets. Demand was expected to be 1,500 cases at 100 per case for August. Inventory planning information is provided as follows: Finished Goods Inventory: Cases Cost Estimated finished goods inventory. August 1 300 12,000 Desired finished goods inventory, August 31 175 7,000 Materials Inventory: Cream Base (oz.) Oils [oz.] Bottles [bottles] Estimated materials inventory, August 1 250 290 600 Desired materials inventory, August 31 1,000 360 240 There was negligible work in process inventory assumed for either the beginning or end of the month; thus, none was assumed In addition, there was no change in the cost per unit or estimated units per case operating data from January. Instructions 5. Prepare the August production budget. 6. Prepare the August direct materials purchases budget. 7. Prepare the August direct labor cost budget. Round the hours required for production to the nearest hour. 8. Prepare the August factory overhead cost budget. 9. Prepare the August budgeted income statement, including selling expenses. Part CAugust Variance Analysis During September of the current year, the controller was asked to perform variance analyses for August. The January operating data provided the standard prices, rates, times, and quantities per case. There were 1,500 actual cases produced during August, which was 250 more cases than planned at the beginning of the month. Actual data for August were as follows: Actual Direct Materials Price per Unit Actual Direct Materials Quantity per Case Cream base 0.016 per oz. 102 oz. Natural oils 0.32 per oz. 31 oz. Bottle (8 oz) 0.42 per bottle 12.5 bottles Actual Direct Labor Rate Actual Direct Labor Time per Case Mixing 18.20 19.50 min. Filling 14.00 5.60 min. Actual variable overhead 305.00 Normal volume 1,600 cases The prices of the materials were different from standard due to fluctuations in market prices. The standard quantity of' materials used per case was an ideal standard. The Mixing Department used a higher grade labor classification during the month, thus causing the actual labor rate to exceed standard. The Filling Department used a lower grade labor classification during the month, thus causing the actual labor rate to be less than standard. Instructions 1. Determine and interpret the direct materials price and quantity variances for the three materials. 2. Determine and interpret the direct labor rate and time variances for the two departments. Round hours to the nearest hour. 3. Determine and interpret the factory overhead controllable variance. 4. Determine and interpret the factory overhead volume variance. 5. Why are the standard direct labor and direct materials costs in the calculations for parts (10) and (11) based on the actual 1,500-case production volume rather than the planned 1,375 cases of production used in the budgets for parts (6) and (7)?Ethics in Action Dash Riprock is a cost analyst with Safe Insurance Company. Safe is applying standards to its claims payment operation. Claims payment is a repetitive operation dial could be evaluated with standards. Dash used time and motion studies to identify an ideal standard of 36 claims processed per hour. The Claims Processing Department manager, Henry Tudor, has rejected this standard and has argued that the standard should be 30 claims processed per hour. Henry and Dash were unable to agree, so they decided to discuss this matter openly at a joint meeting with the vice president of operations, who would arbitrate a final decision. Prior to the meeting, Dash wrote the following memo to the VP: To: Anne Boleyn, Vice President of Operator From: Dash Riprock Re: Standards in the Claims Processing Department As you know, Henry and I are scheduled to meet with you to discuss our disagreement with respect to the appropriate standards for the Claims Processing Department. I have conducted time and motion studies and have determined that the deal standards is 36 claims processed per hour. Henry argues that 30 claims processed per hour would be more appropriate. I believe he is trying to pad the budget with some slack. Im not sure what he is trying to get away with, put I believe a tight standard will drive up efficiency in his area. I hope you will agree when we meet with you next week. Discuss the ethical and professional issues in this situation.23.2CPVariance interpretation You have been asked to investigate some cost problems in the Assembly Department of Ruthenium Electronics Co., a consumer electronics company. To begin your investigation, you have obtained the following budget performance report for the department for the last quarter. Ruthenium Electronics Co.Assembly Department Quarterly Budget Performance Report Standard Quantity at Standard Rates Actual Quantity at Standard Rates Quantity Variances Direct labor 157,500 227,500 70,000 U Direct materials 297,500 385,000 87,500 U Total 455,000 612,500 157,500 U You also obtained the following reports: Ruthenium Electronics Co.Purchasing Department Quarterly Budget Performance Report Actual Quantity at Standard Rates Actual Quantity at Actual Rates Price Variance Direct materials 437,500 385,000 (52,500) F Ruthenium Electronics Co.Fabrication Department Quarterly Budget Performance Report Standard Quantity at Standard Rates Actual Quantity at Standard Rates Quantity Variances Direct labor 245,000 203,000 (42,000) F Direct materials 140,000 140,000 0 Total 385,000 343,000 (42,000) F You also interviewed the Assembly Department supervisor. Excerpts from the interview follow: Q: What explains the poor performance in your department? A: Listen, youve got to understand what its been like in this department recently. Lately, it seems no matter how hard we try, we cant seem to make the standards. Im not sure what is going on, but weve been having a lot of problems lately. Q: What kind of problems? A: Well, for instance, all this Quarter weve been requisitioning purchased parts from the material storeroom, and the parts just didnt fit together very well. Im not sure what is going on, but during most of this quarter, weve had to scrap and sort purchased partsjust to get our assemblies put together. Naturally, all this takes time and material. And thats not all. Q: Go on. A: All this Quarter the work we've been receiving from the Fabrication Department has been shoddy. I mean, maybe around 20% of the stuff that comes in from Fabrication just cant be assembled. The fabrication is all wrong. As a result we've had to scrap and rework a lot of the stuff. Naturally, this has just shot our quantity variances. Interpret the variance reports in light of the comments by the Assembly Department supervisor.Variance interpretation Vanadium Audio Inc. is a small manufacturer of electronic musical instruments. The plant manager received the following variable factory overhead report for the period: Actual Budgeted Variable Factory Overhead at Actual Production Controllable Variance Supplies 42,000 39,780 S 2,220 U Power and light 52,500 50,900 1,600 U Indirect factory wages 39,100 30,600 8,500 U Total 133,600 121,280 12,320 U Actual units produced: 15.000 (90% of practical capacity) The plant manager is not pleased with the 12,320 unfavorable variable factory overhead controllable variance and has come to discuss the matter with the controller. The following discussion occurred: Plant Manager: I just received this factory report for the latest month of operation. Im not very pleased with these figures. Before these numbers go to headquarters, you and I need to reach an understanding. Controller: Go ahead. Whats the problem? Plant Manager: What's the problem? Well, everything. Look at the variance. Its too large. If I understand the accounting approach being used here, you are assuming that my costs are variable to the units produced. Thus, as the production volume declines, so should these costs. Well. I dont believe these costs are variable at all. I think they are fixed costs. As a result when we operate below capacity, the costs really dont go down. Im being penalized for costs I have no control over. I need this report to be redone to reflect this fact. If anything, the difference between actual and budget is essentially a volume variance. Listen. I know that youre a team player. You really need to reconsider your assumptions on this one. If you were in the controllers position, how would you respond to the plant manager?Differentiate between centralized and decentralized operations.Differentiate between a profit center and an investment center.3DQWhat is the major shortcoming of using income from operations as a performance measure for investment centers?In a decentralized company in which the divisions are organized as investment centers, how could a division be considered the least profitable even though it earned the largest amount of income from operations?How does using the return on investment facilitate comparability between divisions of decentralized companies?Why would a firm use a balanced scorecard in evaluating divisional performance?What is the objective of transfer pricing?When is the negotiated price approach preferred over the market price approach in setting transfer prices?When using the negotiated price approach to transfer pricing, within what range should the transfer price be established?Budgetary performance for cost center Caroline Companys coals were over budget by 319,000. The company is divided into West and East regions. The Hast Regions costs were under budget by 47,500. Determine the amount that the West Regions costs were over or under budget.Budgetary performance for cost center Conley Companys costs were under budget by 198,000. The company is divided into North and South regions. The North Region's costs were over budget by 52,000. Determine the amount that the South Regions costs were over or under budget.24.2APE24.2BPE24.3APE24.3BPEProfit margin, investment turnover, and ROI Cash Company has income from operations of 112,500, invested assets of 750,000, and sales of 1,875,000. Use the DuPont formula to compute the return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment.Profit margin, investment turnover and ROI Briggs Company has income from operations of 36,000, invested assets of 180,000, and sales of 720,000. Use the DuPont formula to compute the return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the return on investment.24.5APEResidual income The Commercial Division of Herring Company has income from operations of 420,000 and assets of 910,000. The minimum acceptable return on assets is 8%. What is the residual income for the division?Transfer pricing The materials used by the North Division of Horton Company are currently purchased from outside suppliers at 60 per unit. These same materials are produced by Hortons South Division. The South Division can produce The materials needed by the North Division at a variable cost of 42 per unit. The division is currently producing 200,000 units and has capacity of 250,000 units. The two divisions have recently negotiated a transfer price of 52 per unit for 30,000 units. By how much will each division's income increase as a result of this transfer?Transfer pricing The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at 90 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the Multinomah Division at a variable cost of 75 per unit. The division is currently producing 120,000 units and has capacity of 150,000 units. The two divisions have recently negotiated a transfer price of 82 per unit for 15,000 units. By how much will each divisions income increase as a result of this transfer?Budget performance reports for cost centers Partially completed budget performance reports for Saskatoon Company, a manufacturer of light duty motors, follow: a. Complete the budget performance reports by determining the correct amounts for the lettered spaces. b. Compose a memo to Robin Mooney, vice president of production for Saskatoon Company, explaining the performance of the production division for May.24.2EX24.3EX24.4EXService department charges In divisional income statements prepared for LeFevre Company, the Payroll Department costs are charged back to user divisions on the basis of the number of payroll distributions, and the Purchasing Department costs are charged back on the basis of the number of purchase requisitions. The Payroll Department had expenses of 75,400, and the Purchasing Department had expenses of 42,000 for the year. The following annual data for Residential, Commercial, and Government Contract divisions were obtained from corporate records: a. Determine the total amount of payroll checks and purchase requisitions processed per year by the company and each division. b. Using the activity base information in (a), determine the annual amount of payroll and purchasing costs charged back to the Residential, Commercial, and Government Contract divisions from payroll and purchasing services. c. Why does the Residential Division have a larger service department charge than the other two divisions, even though its sales are lower?Service department charges and activity bases Middler Corporation, a manufacturer of electronics and communications systems, uses a service department charge system to charge profit centers with Computing and Communications Services (CCS) service department costs. The following table identifies an abbreviated list of service categories and activity bases used by the CCS department. The table also includes some assumed cost and activity base quantity information for each service for October. One of the profit centers for Middler Corporation is the Communication Systems (COMM) sector. Assume the following information for the COMM sector: The sector has 5,200 employees, of whom 25% are office employees. All the office employees have been issued a smart phone, and 96% of them have a computer on the network. One hundred percent of the employees with a computer also have an e-mail account. The average number of help desk calls for October was 1.5 calls per individual with a computer. There are 600 additional printers, servers, and peripherals on the network beyond the personal computers. a. Determine the service charge rate for the four CCS service categories for October. b. Determine the charges to the COMM sector for the four CCS service categories for October.Divisional income statements with service department charges Yozamba Technology has two divisions, Consumer and Commercial, and two corporate service departments, Tech Support and Purchasing. The corporate expenses for the year ended December 31, 2016, are as follows: Tech Support Department 516,000 Purchasing Department 89,600 Other corporate administrative expenses 560,000 Total corporate expense 1,165,600 The other corporate administrative expenses include officers' salaries and other expenses required by the corporation. The Tech Support Department charges the divisions for services rendered, based on the number of computers in the department, and the Purchasing Department charges divisions for services, based on the number of purchase orders for each department. The usage of service by the two divisions is as follows: Tech Support Purchasing Consumer Division 375 computers 1,960 purchase orders Commercial Division 225 3,640 Total 600 computers 5,600 purchase orders The service department charges of the Tech Support Department and the Purchasing Department are considered controllable by the divisions. Corporate administrative expenses are not considered controllable by the divisions. The revenues, cost of goods sold, and operating expenses for the two divisions are as follows: Consumer Commercial Revenues 7,430,000 6,184,000 Cost of goods sold 4,123,000 3,125,000 Operating expenses 1,465,000 1,546,000 Prepare the divisional income statements for the two divisions.24.8EXProfit center responsibility reporting XSport Sporting Goods Co. operates two divisions-the Winter Sports Division and the Summer Sports Division. The following income and expense accounts were provided from the trial balance as of December 31, 2016, the end of the fiscal year, after all adjustments, including those for inventories, were recorded and posted: The bases to be used in allocating expenses, together with other essential information, are as follows: a. Advertising expense-incurred at headquarters, charged back to divisions on the basis of usage: Winter Sports Division, 216,900; Summer Sports Division, 265,100. b. Transportation expense-charged back to divisions at a charge rate of 8.00 per bill of lading: Winter Sports Division, 14,400 bills of lading; Summer Sports Division, 15,600 bills of lading. c. Accounts receivable collection expense-incurred at headquarters, charged back to divisions at a charge rate of 5.00 per invoice: Winter Sports Division, 9,640 sales invoices; Summer Sports Division, 14,460 sales invoices. d. Warehouse expense-charged back to divisions on the basis of floor space used in storing division products: Winter Sports Division, 94,000 square feet; Summer Sports Division, 106,000 square feet. Prepare a divisional income statement with two column headings: Winter Sports Division and Summer Sports Division. Provide supporting calculations for service department charges.Rate of return on investment The income from operations and the amount of invested assets in each division of Magentic Zero Industries are as follows: Income from Operations Invested Assets Retail Division 343,200 1,320,000 Commercial Division 320,000 1,600,000 Internet Division 76,000 800,000 a. Compute the rate of return on investment for each division. b. Which division is the most profitable per dollar invested?24.11EXDetermining missing items in return computation One item is omitted from each of the following computations of the return on investment: Return on Investment = Profit Margin Investment Turnover 13.2% = 6% (a) (b) = 10% 1.80 10.5% = (c) 1.50 15.0% = 5% (d) (e) = 12% 1.10 Determine the missing items, identifying each by the appropriate letter.Profit margin, investment turnover, and rate of return on investment The condensed income statement for the Consumer Products Division of Bantastic Industries Inc. is as follows (assuming no service department charges): Sales 16,000,000 Cost of goods sold 11,660,000 Gross profit 4,340,000 Administrative expenses 2,100,000 Income from operations 2,240,000 The manager of the Consumer Products Division is considering ways to increase the rate of return on investment. a. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment of the Consumer Products Division, assuming that 8,000,000 of assets have been invested in the Consumer Products Division. b. If expenses could be reduced by 320,000 without decreasing sales, what would be the impact on the profit margin, investment turnover, and rate of return on investment for the Consumer Products Division?24.14EXDetermining missing items in return and residual income computations Data for Uberto Company are presented in the following table of returns on investment and residual incomes: Invested Assets Income from Operations Return on Investment Minimum Return Minimum Acceptable Income from Operations Residual Income 925,000 185,000 (a) 15% (b) (c) 775,000 (d) (e) (f) 93,000 23,250 450,000 (g) 18% (h) 58,500 (i) 610,000 97,600 (j) 12% (k) (1) Determine the missing items, identifying each item by the appropriate letter.Determining missing items from computations Data for the North, South, Last, and West divisions of Free Bird Company are as follows: Sales Income from Operations Invested Assets Return on Investment Profit Margin Investment Turnover North 860,000 (a) (b) 17.5% 7.0% (c) South (d) 51,300 (e) (f) 4.5% 3.8 East 1,020,000 (g) 680,000 15.0% (h) (i) West 1,120,000 89,600 560,000 (j) (k) (1) a. Determine the missing items, identifying each by the letters (a) through (l). Round percents and investment turnover to one decimal place. b. Determine the residual income for each division, assuming that the minimum acceptable return established by management is 12%. c. Which division is the most profitable in terms of (1) return on investment and (2) residual income?24.17EXBalanced scorecard for a service company American Express Company is a major financial services company, noted for its American Express card. Some of the performance measures used by the company in its balanced scorecard follow: Average card member spending Number of Internet features Cards in force Number of merchant signings Earnings growth Number of new card launches Hours of credit consultant training Return on equity Investment in information technology Revenue growth Number of card choices For each measure, identify whether the measure best fits the innovation, customer, internal process, or financial dimension of the balanced scorecard.Building a balanced scorecard Hit-n-Kun Inc. owns and operates 10 food trucks (mobile kitchens) throughout metropolitan Los Angeles. Each food truck has a different food theme, such as Irish-Mexican fusion, traditional Mexican street food, Ethiopian cuisine, and Lebanese-Italian fusion. The company was founded three years ago by Juanita OBrien when she opened a single food truck with a unique menu. As her business has grown, she has become concerned about her ability to manage and control the business. OBrien describes how the company was built, its key success factors, and its recent growth. I built the company from the ground up. In the beginning it was just me. I drove the truck, set the menu, bought the ingredients, prepared the meals, served the meals, cleaned the kitchen, and maintained the equipment I made unique meals from quality ingredients and didnt serve anything that wasnt perfect. I changed my location daily and notified customers of my location via Twitter. As my customer base grew, I hired employees to help me in the truck Then one day I realized that I had a formula that could be expanded to multiple trucks. Before I knew it I had 10 trucks and was hiring people to do everything that I used to do by myself. Now I work with my team to build the menu, set daily locations for the trucks, and manage the operations of the business. My business model is based on providing the highest quality street food and charging more for it than other trucks do. You wont get the cheapest meal at one of my trucks, but you will get the best. The superior quality allows me to price my meals a little bit higher than the other trucks do. My employees are critical to my success. I pay them a better wage than they could make on other food trucks, and I expect more from them. I rely on them to maintain the quality that I established when I opened my first truck. Things are going great, but Im feeling overwhelmed. So far, the growth in sales has led to a growth in profitability but tm getting nervous. If quality starts to fall off, my brand value erodes, and that could affect the prices that I charge for my meals and the success of my business Create balanced scorecard measures for Hit-n-Run Food Trucks. Identify whether these measures best fit the innovation, customer, internal process, or financial dimension of the balanced scorecard.Decision on transfer pricing Materials used by the Instrument Division of XPort Industries are currently purchased from outside suppliers at a cost of 210 per unit. However, the same materials are available from the Components Division. The Components Division h as unused capacity and can produce the materials needed by the Instrument Division at a variable cost of 160 per unit. a. If a transfer price of 180 per unit is established and 60,000 units of materials are transferred, with no reduction in the Components Division's current sales, how much would XPort Industries' total income from operations increase? b. How much would the Instrument Division's income from operations increase? c. How much would the Components Division's income from operations increase?24.21EXBudget performance report for a cost center Valotic Tech Inc. sells electronics over the Internet. The Consumer Products Division is organized as a cost center. The budget for the (Consumer Products Division for the month ended January 31 is as follows (in thousands): Customer service salaries 546.840 Insurance and property taxes 114,660 Distribution salaries 872340 Marketing salaries 1,028370 Engineer salaries 836.850 Warehouse wages 586,110 Equipment depreciation 183,792 Total 4,168,962 During January, the costs incurred in the (Consumer Products Division were as follows: Customer service salaries 602,350 Insurance and property taxes 110,240 Distribution salaries 861,200 Marketing salaries 1,085,230 Engineer salaries 820,008 Warehouse wages 562.632 Equipment depreciation 183,610 Total 4,225,270 Instructions 1. Prepare a budget performance report for the director of the Consumer Products Division for the month of January. 2. For which costs might the director be expected to request supplemental reports?24.2APR24.3APREffect of proposals on divisional performance A condensed income statement for the Commercial Division of Maxell Manufacturing Inc. for the year ended December 31 is as follows: Sales 3,500,000 Cost of goods sold 2,480,000 Gross profit 1,020,000 Operating expenses 600,000 Income from operations 420,000 Invested assets 2,500,000 Assume that the Commercial Division received no charges from service departments. The president of Maxell Manufacturing has indicated that the divisions return on a 2,500,000 investment must be increased to at least 21% by the end of the next year if operations are to continue. The division manager is considering tin- following three proposals: Proposal 1: Transfer equipment with a hook value of 312,500 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would exceed the amount of depreciation expense on the old equipment by 105,000. This increase in expense would be- included as part of the cost of goods sold. Sales would remain unchanged. Proposal 2: Purchase new and more efficient machining equipment and thereby reduce the cost of goods sold by 560,000 after considering the effects of depreciation expense on the new equipment. Sales would remain unchanged, and the old equipment, which has no remaining book value, would be scrapped at no gain or loss. The new equipment would increase invested assets by an additional 1,875,000 for the year. Proposal 3: Reduce invested assets by discontinuing a product line. This action would eliminate sales of 595,000, reduce cost of goods sold by 406,700, and reduce operating expenses by 175,000. Assets of 1,338,000 would the transferred to other divisions at no gain or loss. Instructions 1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Commercial Division for the past year. 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round percentages and the investment turnover to one decimal place. 4. Which of the three proposals would meet the required 21% return on investment? 5. If the Commercial Division were in an industry where the profit margin could not be increases, how much would the investment turnover have to increase to meet the president's required 21% return on investment? Round to one decimal place.Divisional performance analysis and evaluation The vice president of operations of Pavone Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Business Division Consumer Division Sales 2,500,000 2,550,000 Cost of goods sold 1,320,000 1,350,000 Operating expenses 930,000 843.000 Invested assets 1,250,000 2,125,000 Instructions 1. Prepare condensed divisional income statements for the year ended December 31, assuming that there were no service department charges. 2. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each division. Round percentages and the investment turnover to one decimal place. 3. If management wants a minimum acceptable return of 17%, determine the residual income for each division. 4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).24.6APRBudget performance report for a cost center The Eastern District of Adelson Inc. is organized as a cost center. The budget for the Eastern District of Adelson Inc. for the month ended December 31 is as follows (in thousands): Sales salaries 819,840 System administration salaries 448,152 Customer service salaries 152,600 Billing salaries 98,760 Maintenance 271,104 Depreciation of plant and equipment 92,232 Insurance and property taxes 41,280 Total 1,923,968 During December, the costs incurred in the Eastern District were as follows: Sales salaries 818,880 System administration salaries 447,720 Customer service salaries 183,120 Billing salaries 98,100 Maintenance 273,000 Depreciation of plant and equipment 92,232 Insurance and property taxes 41,400 Total 1,954,452 Instructions 1. Prepare a budget performance report for the manager of the Eastern District of Adelson for the month of December. 2. For which costs might the supervisor be expected to request supplemental reports?24.2BPR24.3BPREffect of proposals on divisional performance A condensed income statement for the Electronics Division of Gihbli Industries Inc. for live year ended December 31 is as follows: Sales 1.575,000 Cost of goods sold 891,000 Gross profit 684,000 Operating expenses 558,000 Income from operations 126,000 Invested assets 1,050,000 Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the divisions return on a 1,050,000 investment must be increased to at least 20% by the end of tin- next year if operations are to continue. The division manager is considering the following three proposals: Proposal 1: Transfer equipment with a book value of 300,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would be less than the amount of depreciation expense on the old equipment by 31,400. This decrease in expense would be included as part of the cost of goods sold. Sales would remain unchanged. Proposal 2: Reduce invested assets by discontinuing a product line. This action would eliminate sales of 180,000, reduce cost of goods sold by 119,550, and reduce operating expenses by 60,000. Assets of 112,500 would be transferred to other divisions at no gain or loss. Proposal 3: Purchase new and more efficient machinery and thereby reduce the cost of goods sold by 189,000 after considering the effects of depreciation expense on the new equipment. Sales would remain unchanged, and the old machinery, which has no remaining book value, would be scrapped at no gain or loss. The new machinery would increase invested assets by 918,750 for the year. Instructions 1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Electronics Division for the past year. Round percentages and the investment turnover to one decimal place. 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round percentages and the investment turnover to one decimal place. 4. Which of the three proposals would meet the required 20% return on investment? 5. If the Electronics Division were in an industry where the profit margin could not be increased, how much would the investment turnover have to increase to meet the president's required 20% return on investment? Round to one decimal place.Divisional performance analysis and evaluation The vice president of operations of Free Ride Hike Company is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows: Road Bike Division Mountain Bike Division Sales 1,728,000 1,760,000 Cost of goods sold 1,380,000 1,400,000 Operating expenses 175,200 236,800 Invested assets 1,440,000 800,000 Instructions 1. Prepare condensed divisional income statements for the year ended December 31, 20Y7, assuming that there were no service department charges. 2. Using the DuPont formula forreturn on investment, determine the profit margin, investment turnover, and return on investment for each division. Round percentages and the investment turnover to one decimal place. 3. If managements minimum acceptable return is 10%, determine the residual income for each division. 4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3).24.6BPR24.1CP24.2CPEvaluating divisional performance The three divisions of Yummy Foods are Snack Goods, Cereal, and Frozen Foods. The divisions are structured as investment centers. The following responsibility reports were prepared for the three divisions for tile prior year: Snack Goods Cereal Frozen Foods Revenues 2,200,000 2,520,000 2,100,000 Operating expenses 1,366,600 1,122,000 976,800 Income from operations before service department charges 833,400 1,398,000 1,123,200 Service department charges: Promotion 300,000 600,000 468,000 Legal 137,400 243,600 235,200 Total service department charges 437,400 843.600 703,200 Income from operations 396,000 554,400 420,000 Invested assets 2,000,000 1,680,000 1,750,000 1.Which division is making the best use of invested assets and should be given priority for future capital investments? 2.Assuming that the minimum acceptable return on new projects is 19%, would all investments that produce a return in excess of 19% be accepted by the divisions? Explain. 3.Identify opportunities for improving the companys financial performance24.4CPEvaluating division performance Last Resort Industries Inc. is a privately held diversified company with live separate divisions organized as investment centers. A condensed income statement for the Specialty Products Division for the past year, assuming no service department charges, is as follows: Last Resort Industries Inc.Specialty Products Division Income Statement For the Year Ended December 31,20Y5 Sales 32,400,000 Cost of goods sold 24,300,000 Gross profit 8,100,000 Operating expenses 3,240,000 Income from operations 4,860,000 Invested assets 27,000,000 The manager of the Specialty Products Division was recently presented with the opportunity to add an additional product line, which would require invested assets of 14,400,000. A projected income statement for the new product line is as follows: New Product Line Projected Income Statement For the Year Ended December 31,20Y6 Sales 12,960,000 Cost of goods sold 7,500,000 Gross profit 5,460,000 Operating expenses 3,127,200 Income from operations 2,332,800 The Specialty Products Division currently has 27,000,000 in invested assets, and Last Resort Industries Inc.s overall return on investment, including all divisions, is 10%. Each division manager is evaluated on the basis of divisional return on investment. A bonus is paid, in 58,000 increments, for each whole percentage point that the divisions return on investment exceeds the company average. The president is concerned that the manager of the Specialty Products Division rejected the addition of the new product line, even though all estimates indicated that the product line would be profitable and would increase overall company income. You have been asked to analyze the possible reasons the Specialty Products Division manager rejected the new product line. 1. Determine the return on investment for the Specialty Products Division for the past year. 2. Determine the Specialty Products Division managers bonus for the past year. 3. Determine the estimated return on investment for the new product line. Round whole percents to one decimal place and investment turnover to two decimal places. 4. Why might the manager of the Specialty Products Division decide to reject the new product line? Support your answer by determining the projected return on investment for 20Y6, assuming that the new product line was launched in the Specialty Products Division, and 20Y6 actual operating results were similar to those of 20Y5. 5. Suggest an alternative performance measure for motivating division managers to accept new investment opportunities that would increase the overall company income and return on investment.Explain the meaning of (a) differential revenue, (b) differential cost, and (c) differential income.A company could sell a building for 250,000 or lease it for 2,500 per month. What would need to be considered in determining if the lease option would be preferred?A chemical company has commodity-grade and premium-grade products. Why might the company elect toprocessthe commodity-grade product further to the premium-grade product?A company accepts incremental business at a special price that exceeds the variable cost. What other issues must the company consider in deciding whether to accept the business?A company fabricates a component at a cost of 6.00. A supplier offers to supply the same component for 5.50. Under what circumstances is it reasonable to purchase from the supplier?6DQIn the long run, the normal selling price must be set high enough to cover what factors?Although the cost-plus approach to product pricing may be used by management as a general guideline, what are examples of other factors that managers should consider in setting product prices?How does the target cost concept differ from cost-plus approaches?10DQUnder what conditions might a company use activity-based costing to allocate factory overhead to products?25.1APELease or sell Timberlake Company owns equipment with a cost of 165,000 and accumulated depreciation of 60,000 that can be sold for 82,000 less a 6% sales commission. Alternatively, Timberlake Company can lease the equipment to another company for five years for a total of 84,600, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Timberlake Company on the equipment would total 7,950 over the five years. Prepare a differential analysis on March 23 as to whether Timberlake Company should lease (Alternative 1) or sell (Alternative 2) the equipment.25.2APEDiscontinue a segment Product B has revenue of 39,500, variable cost of goods sold of 25,500, variable selling expenses of 16,500, and fixed costs of 15,000, creating a loss from operations of 17,500. Prepare a differential analysis as of May 9 to determine whether Product B should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision.25.3APEMake or buy A company manufactures various sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is 67 per unit (100 bottles), including fixed costs of 22 per unit. A proposal is offered to purchase small bottles from an outside source for 35 per unit, plus 5 per unit for freight. Prepare a differential analysis dated March 30 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming that fixed costs are unaffected by the decision.25.4APEReplace equipment A machine with a book value of 80,000 has an estimated five-year life. A proposal is offered to sell the old machine for 50,500 and replace it with a new machine at a cost of 75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from 11,200 to 7,400. Prepare a differential analysis dated April 11 on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).25.5APEProcess or sell Product D is produced for 24 per gallon. Product D can be sold without additional processing for 36 per gallon or processed further into Product E at an additional cost of 9 per gallon. Product E can be sold for 43 per gallon. Prepare a differential analysis dated February 26 on whether to sell Product D (Alternative 1) or process further into Product E (Alternative 2).25.6APE25.6BPEProduct cost markup percentage Magna Lighting Inc. produces and sells lighting fixtures. An entry light has a total cost of 125 per unit, of which 80 is product cost and 45 is selling and administrative expenses. In addition, the total cost of 125 is made up of 90 variable cost and 35 fixed cost. The desired profit is 55 per unit. Determine the markup percentage on product cost.Product cost markup percentage Green Thumb Garden Tools Inc. produces and sells home and garden tools and equipment. A lawn mower has a total cost of 230 per unit, of which 160 is product cost and 70 is selling and administrative expenses. In addition, the total cost of 230 is nude up of 120 variable cost and 110 fixed cost. The desired profit is 58 per unit. Determine the markup percentage on product cost.Bottleneck profit Product A has a unit contribution margin of 21. Product B has a unit contribution margin of 30. Product A requires four testing hours, while Product B requires six testing hours. Determine the most profitable product, assuming that the testing is a production bottleneck.25.8BPEActivity-based costing Mainline Marine Company has total estimated factory overhead for the year of 2,090,000, divided into four activities: fabrication, 750,000; assembly, 240,000; setup, 600,000; and inspection, 500,000. Mainline manufactures two types of boats: a speedboat and a bass boat. The activity-base usage quantities for each product by each activity are as follows: Fabrication Assembly Setup Inspection Speedboat 1,200 dlh 1,800 dlh 60 setups 600 inspections Bassboat 1,800 1,200 100 200 3,000 dlh 3,000 dlh 160 setups 800 inspections Each product is budgeted for 200 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.Activity-based costing Casual Cuts Inc. has total estimated factory overhead for the year of 225,000, divided into four activities: cutting, 90,000; sewing, 22,500; setup, 80,000; and inspection, 32,500. Casual Cuts manufactures two types of mens pants: jeans and khakis. The activity-base usage quantities for each product by each activity are as follows: Cutting Sewing Setup Inspection Jeans 500 dlh 1,000 dlh 250 setups 100 inspections Khakis 1,000 500 750 400 1,500 dlh 1,500 dlh 1,000 setups 500 inspections Each product is budgeted for 10,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.Differential analysis for a lease or sell decision Eclipse Construction Company is considering selling excess machinery with a book value of 280,000 (original cost of 400,000 less accumulated depreciation of 120,000) for 221,000, less a 5% brokerage commission. Alternatively, the machinery can be leased for a total of 216,000 for five years, after which it is expected to have no residual value. During the period of the lease, Eclipse Construction Company's costs of repairs, insurance, and property tax expenses are expected to be 14,200. a. Prepare a differential analysis, dated April 16 to determine whether Eclipse should lease (Alternative 1) or sell (Alternative 2) the machinery. b. On the basis of the data presented, would it be advisable to lease or sell the machinery? Explain.25.2EXDifferential analysis for a discontinued product A condensed income statement by product line for Celestial Beverage Inc. indicated the following for Star Cola for the past year: Sales 390,000 Cost of goods sold 184,000 Gross profit 206,000 Operating expenses 255,000 Loss from operations (49,000) It is estimated that 20% of the cost of goods sold represents fixed factory overhead costs and that 30% of the operating expenses are fixed. Because Star Cola is only one of many products, the fixed costs will not be materially affected if the product is discontinued. a. Prepare a differential analysis, dated January 21 to determine whether Star Cola should be continued (Alternative 1) or discontinued (Alternative 2). b. Should Star Cola be retained? Explain.Differential analysis for a discontinued product The condensed product-line income statement for Dish N Dat Company for the month of March is as follows: Fixed costs are 15% of the cost of goods sold and 40% of the selling and administrative expenses. Dish N' Dat assumes that fixed costs would not be materially affected if the Cups line were discontinued. a. Prepare a differential analysis dated March 31, 2016, to determine if Cups should be continued (Alternative 1) or discontinued (Alternative 2). b. Should the Cups line be retained? Explain.Segment analysis for a service company Charles Schwab Corporation is one of the more innovative brokerage and financial service companies in the United States. The company recently provided information about its major business segments as follows (in millions): Investor Services Institutional Services Revenues 3,228 1,583 Income from operations 865 514 Depreciation 148 48 a. How does a brokerage company like Schwab define the "Investor Services" and "Institutional Services" segments? Use the Internet to develop your answer. b. Provide a specific example of a variable and fixed cost in the "Investor Services" segment. c. Estimate the contribution margin for each segment, assuming depreciation represents the majority of fixed costs. d. If Schwab decided to sell its "Institutional Services" accounts to another company, estimate how much operating income would decline.25.6EXMake-or -buy decision Jupiter Computer Company has been purchasing carrying cases for its portable computers at a purchase price of 70 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 40% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials 45 Direct labor 20 Factory overhead (40 % of direct labor) 8 Total cost per unit 73 If Jupiter Computer Company manufactures the carrying cases, fixed factory overhead costs will not increase and variable factory overhead costs associated with the cases are expected to be 15% of the direct labor costs. a. Prepare a differential analysis, dated July 19 to determine whether the company should make (Alternative 1) or buy (Alternative 2) the carrying case. b. On the basis of the data presented, would it be advisable to make the carrying cases or to continue buying them? Explain.Make-or-buy decision for a service company The Theater Arts Guild of Dailus (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service is quoting a price of 513 per layout page. The budget for the Publication Department for the current year is as follows: Salaries 224,000 Benefits 36,000 Supplies 21,000 Office expenses 39,000 Office depreciation 28,000 Computer depreciation 24,000 Total 372,000 The department expects to lay out 24,000 pages for the current year. The Publication Department office space and equipment would be used for future administrative needs if the department's function were purchased from the outside. a. Prepare a differential analysis dated February 22 to determine whether TAG-D should lay out pages internally (Alternative D or purchase layout services from the outside (Alternative 2). b. On the basis of your analysis in part (a), should the page layout work be purchased from an outside company? Explain. c. What additional considerations might factor into the decision making?Machine replacement decision A company is considering replacing an old piece of machinery, which cost 600,000 and has 350,000 of accumulated depreciation to date, with a new machine that has a purchase price of 545,000. The old machine could be sold for 231,000. The annual variable production costs associated with the old machine are estimated to be 61,000 per year for eight years. The annual variable production costs for the new machine are estimated to be 19,000 per year for eight years. a. Prepare a differential analysis dated September 13 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. b. What is the sunk cost in this situation?Differential analysis for machine replacement Kim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is 60,000, the accumulated depreciation is 24,000, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of 180,000. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: Present Operations Proposed Operations Sales 205,000 205,000 Direct materials 72,000 72,000 Direct labor 51,000 Power and maintenance 5,000 18.000 Taxes, insurance, etc. 1,500 4,000 Selling and administrative expenses 45,000 45,000 Total expenses 174,500 139,000 a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. b. Based only on the data presented, should the proposal be accepted? c. What other factors should be considered before a final decision is made?25.11EX25.12EXDecision on accepting additional business Homestead Jeans Co. has an annual plant capacity of 65.000 units, and current production is 45,000 units. Monthly fixed costs are 54,000, and variable costs are 29 per unit. The present selling price is 42 per unit. On November 12 of the current year, the company received an offer from Dawkins Company for 18,000 units of the product at 32 each. Dawkins Company will market the units in a foreign country under its own brand name. The additional business is not expected to affect the domestic selling price or quantity of sales of Homestead Jeans Co. a. Prepare a differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Dawkins order. b. Briefly explain why accepting this additional business will increase operating income. c. What is the minimum price per unit that would produce a positive contribution margin?Accepting business at a special price Portable Power Company expects to operate at 80% of productive capacity during July. The total manufacturing costs for July for the production of 25,000 batteries are budgeted as follows: Direct materials 162,500 Direct labor 70,000 Variable factory overhead 30,000 Fixed factory overhead 112,500 Total manufacturing costs 375,000 The company has an opportunity to submit a bid for 2,500 batteries to be delivered by July 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during July or increase the selling or administrative expenses. What is the unit cost below which Portable Power Company should not go in bidding on the government contract?25.15EXAccepting business at a special price for a service company Cityscape Hotels has 200 rooms available in a major metropolitan city. The hotel is able to attract business customers during the weekdays and leisure customers during the weekend. However, the leisure customers on weekends occupy fewer rooms than do business customers on weekdays. Thus, Cityscape plans to provide special weekend pricing to attract additional leisure customers. A hotel room is priced at 180 per room night. The cost of a hotel room night includes the following: Cost per Room Night (at normal occupancy) Housekeeping service 23 Utilities 7 Amenities 3 Hotel depreciation 55 Hotel staff (excluding housekeeping) 42 Total 130 a. What is the contribution margin for a room night if only the hotel depreciation and hotel staff are assumed fixed for all occupancy levels? b. What should be considered in setting a discount price for the weekends?Product cost concept of product pricing La Femme Accessories Inc. produces women's handbags. The cost of producing 800 handbags is as follows: Direct materials 18,000 Direct labor 8,500 Factory overhead 5,500 Total manufacturing cost 32,000 The selling and administrative expenses are 17,000. The management wants a profit equal to 22% of invested assets of 250,000. a. Determine the amount of desired profit from the production and sale of 800 handbags. b. Determine the product cost per unit for the production of 800 handbags. c. Determine the product cost markup percentage for handbags. d. Determine the selling price of handbags.Product cost concept of product costing Smart Stream Inc. uses the product cost concept of applying the cost-plus approach to product pricing. The costs of producing and selling 10,000 cellular phones are as follows: Variable costs per unit Fixed costs: Direct materials 150 Factory overhead 350,000 Direct labor 25 Selling and administrative expenses 140,000 Factory overhead 40 Selling and administrative expenses 25 Total 240 Smart Stream wants a profit equal to a 30% rate of return on invested assets of 1,200,000. a. Determine the amount of desired profit from the production and sale of 10,000 cellular phones. b. Determine the product cost and the cost amount per unit for the production of 10,000 cellular phones. c. Determine the product cost markup percentage for cellular phones. d. Determine the selling price of cellular phones.Target costing Toyota Motor Corporation uses target costing. Assume that Toyota marketing personnel estimate that the competitive selling price for the Camry in the upcoming model year will need to be 27,000. Assume further that the Camry's total unit cost for the upcoming model year is estimated to be 22,500 and that Toyota requires a 20% profit margin on selling price (which is equivalent to a 25% markup on total cost). a. What price will Toyota establish for the Camry for the upcoming model year? b. What impact will target costing have on Toyota, given the assumed information?Target costing Instant Image Inc. manufactures color laser printers. Model J20 presently sells for 460 and has a product cost of 230, as follows: Direct materials 175 Direct labor 40 Factory overhead 15 Total 230 It is estimated that the competitive selling price for color laser printers of this type will drop to 400 next year. Instant Image has established a target cost to maintain its historical markup percentage on product cost. Engineers have provided the following cost-reduction ideas: 1. Purchase a plastic printer cover with snap-on assembly rather than with screws. This will reduce the amount of direct labor by 15 minutes per unit. 2. Add an inspection step that will add six minutes per unit of direct labor but reduce the materials cost by 20 per unit. 3. Decrease the cycle time of the injection molding machine from four minutes to three minutes per part. Forty percent of the direct labor and 48% of the factory overhead are related to running injection molding machines. The direct labor rate is 30 per hour. 1. Determine the target cost for Model J20, assuming that the historical markup on product cost and selling price is maintained. 2. Determine the required cost reduction. 3. Evaluate the three engineering improvements together to determine whether the required cost reduction (drift) can be achieved.Product decisions under bottlenecked operations Mill Metals Inc. has three grades of metal product. Type 5, Type 10, and Type 20. Financial data for the three grades are as follows: Type 5 Type 10 Type 20 Revenues 43,000 49,000 56,500 Variable cost 34,000 28,000 26,500 Fixed cost 8,000 8,000 8,000 Total cost 42,000 36,000 34,500 Income from operations 1,000 13,000 22,000 Number of units 5,000 5,000 5,000 Income from operations per unit 0.20 2.60 4.40 Mill's operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production bottleneck. The furnace hours required per unit of each product are as follows: Type 5: 6 hours Type 10: 6 hours Type 20: 12 hours The Marketing Department is considering a new marketing and sales campaign. Which product should be emphasized in the marketing and sales campaign in order to maximize profitability?Product decisions under bottlenecked operations Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are 85,000 for the company as a whole. In addition, the following information is available about the three products: Large Medium Small Unit selling price 184 160 100 Unit variable cost 130 120 76 Unit contribution margin 54 40 24 Autoclave hours per unit 3 2 1 Total process hours per unit 5 4 2 Budgeted units of production 3,000 3,000 3,000 a. Determine the contribution margin by glass type and the total company income from operations for the budgeted units of production. b. Prepare an analysis showing which product is tile most profitable per bottleneck hour.Activity-based costing CardioTrainer Equipment Company manufactures stationary bicycles and treadmills. The products are produced in the Fabrication and Assembly production departments. In addition to production activities, several other activities are required to produce the two products. These activities and their associated activity rates are as follows: Activity Activity Rate Fabrication 22 per machine hour (mh) Assembly 12 per direct labor hour (dlh) Setup 40 per setup Inspecting 18 per inspection Production scheduling 8 per production order Purchasing 5 per purchase order The activity-base usage quantities and units produced for each product were as follows: Stationary Bicycle Treadmill Machine hours 1,680 1,070 Direct labor hours 243 131 Setups 45 20 Inspections 158 94 Production orders 60 32 Purchase orders 240 98 Units produced 500 350 Use the activity rate and usage information to compute the total activity costs and the activity costs per unit for each product.Activity-based costing Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activitiesproduction setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity hases for these activities: Activity Activity Cost Activity Base Production setup 44,000 Number of setups Procurement 13,500 Number of purchase orders {PO) Quality control 97,500 Number of inspections Materials management 84,000 Number of components Total 5239,000 The activity-base usage quantities for each product are as follows: Setups Purchase Orders Inspections Components Unit Volume Custom 290 760 1.200 500 2.000 Standard 110 140 300 200 2,000 Total 400 900 1.500 700 4,000 a. Determine an activity rate for each activity. b. Assign activity costs to each product and determine the unit activity cost, using the activity rates from part (a). c. Assume that each product required one direct labor hour per unit. Determine the per-unit cost if factory overhead is allocated on the basis of direct labor hours. d. Explain why the answers in parts (b) and (c) are different.Activity rates and product costs using activity-based costing BriteLite Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated activity costs and activity bases are as follows: Activity Activity Costs (Budgeted) Activity Base Casting 42,000 Machine hours Assembly 13,500 Direct labor hours Inspecting 5,800 Number of inspections Setup 16,800 Number of setups Materials handling 3,600 Number of loads Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced for each product and in total are provided in the following table: Activity Base Entry Dining Total Machine hours 800 600 1,400 Direct labor hours 500 400 900 Number of inspections 140 150 290 Number of setups 80 60 140 Number of loads 50 40 90 Units produced 1,200 500 1,700 a. Determine the activity rate for each activity. b. Use the activity rates in (a) to determine the total and per-unit activity costs associated with each product.Total cost concept of product pricing Based on the data presented in Exercise 25-18, assume that Smart Stream Inc. uses the total cost concept of applying the cost-plus approach to product pricing. a. Determine the total costs and the total cost amount per unit for the production and sale of 10,000 cellular phones. b. Determine the total cost markup percentage (rounded to two decimal places) for cellular phones. c. Determine the selling price of cellular phones. Round to the nearest dollar.Variable cost concept of product pricing Based on the data presented in Exercise 25-18, assume that Smart Stream Inc. uses the variable cost concept of applying the cost-plus approach to product pricing. a. Determine the variable costs and the variable cost amount per unit for the production and sale of 10,000 cellular phones. b. Determine the variable cost markup percentage (rounded to two decimal places) for cellular phones. c. Determine the selling price of cellular phones. Round to the nearest dollar.Differential analysis involving opportunity costs On October 1, White Way Stores Inc. is considering leasing a building and purchasing the necessary equipment to operate a retail store. Alternatively, the company could use the funds to invest in 180,000 of 6% U.S. Treasury bonds that mature in 16 years. The bonds could be purchased at face value. The following data have been assembled: Cost of store equipment 180,000 Life of store equipment 16 years Estimated residual value of store equipment 15,000 Yearly costs to operate the store, excluding depreciation of store equipment 58,000 Yearly expected revenuesyears 1-8 85,000 Yearly expected revenuesyears 9-16 73,000 Instructions 1.Prepare a differential analysis as of October 1 presenting the proposed operation of the store for the 16 years (Alternative 1) as compared with investing in U.S. Treasury bonds (Alternative 2). 2.Based on the results disclosed by the differential analysis, should the proposal be accepted? 3.If the proposal is accepted, what would be the total estimated income from operations of the store for the 16 years?Differential analysis for machine replacement proposal Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine. Old Machine Cost of machine, 10-year life 89,000 Annual depreciation (straight-line) 8,900 Annual manufacturing costs, excluding depreciation 23,600 Annual nonmanufacturing operating expenses 6,100 Annual revenue 74,200 Current estimated selling price of machine 29,700 New Machine Purchase price of machine, six-year life 119,700 Annual depreciation (straight-line) 19,950 Estimated annual manufacturing costs, excluding depreciation 6,900 Instructions 1.Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income that would result over the six-year period if the new machine is acquired. 2.List other factors that should be considered before a final decision is reached.Differential analysis for sales promotion proposal Parisian Cosmetics Company is planning a one-month campaign for September to promote sales of one of its two cosmetics products. A total of 140,000 has been budgeted for advertising, contests, redeemable coupons, and other promotional activities. The following data have been assembled for their possible usefulness in deciding which of the products to select for the campaign: Moisturizer Perfume Unit selling price 55 60 Unit production costs: Direct materials 9 14 Direct labor 3 5 Variable factory overhead 3 5 Fixed factory overhead 6 4 Total unit production costs 21 28 Unit variable selling expenses 16 15 Unit fixed selling expenses 12 6 Total unit costs 49 49 Operating income per unit 6 11 No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 22,000 additional units of moisturizer or 20,000 additional units of perfume could be sold from the campaign without changing the unit selling price of either product. Instructions 1.Prepare a differential analysis as of August 21 to determine whether to promote moisturizer (Alternative 1) or perfume (Alternative 2). 2.The sales manager had tentatively decided to promote perfume, estimating that operating income would be increased by 80,000 (11 operating income per unit for 20,000 units less promotion expenses of 140,000). The manager also believed that the selection of moisturizer would reduce operating income by 8,000 (6 operating income per unit for 22,000 units less promotion expenses of 140,000). State briefly your reasons for supporting or opposing the tentative decision.25.4APR25.5APR25.6APRActivity-based costing Pure Cane Sugar Company manufactures three products (while sugar, brown sugar, and powdered sugar) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows: Activity Activity Costs Production 247,500 Setup 48,000 Inspection 12,500 Shipping 69,300 Customer service 27,600 Total 404,900 The activity bases identified for each activity are as follows: Activity Activity Base Production Machine hours Setup Number of setups Inspection Number of inspections Shipping Number of customer orders Customer service Number of customer service requests The activity-base usage quantities and units produced for the three products were determined from corporate records as follows: Machine Hours Number of Setups Number of Inspections Number of Customer Orders Customer Service Requests Units White sugar 2,000 50 100 410 25 8,000 Brown sugar 1,250 70 160 1,100 200 5,000 Powdered sugar 1,250 80 240 800 120 5,000 Total 4,500 200 500 2,310 345 18.000 Each product requires 0.25 machine hour per unit. Instructions 1. Determine the activity rate for each activity. 2. Determine the total and per-unit activity costs for all three products. 3. Why arent the activity unit costs equal across all three products since they require the same machine time per unit?25.1BPRDifferential analysis for machine replacement proposal Flint Tooling Company is considering replacing a machine that has been used in its factory for two years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows: Old Machine Cost of machine, eight-year life 38,000 Annual depreciation (straight-line) 4,750 Annual manufacturing costs, excluding depreciation 12,400 Annual nonmanufacturing operating expenses 2,700 Annual revenue 32,400 Current estimated selling price of the machine 12,900 New Machine Cost of machine, six-year life 57,000 Annual depreciation (straight-line) 9,500 Estimated annual manufacturing costs, exclusive of depreciation 3,400 Annual nonmanufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine. Instructions 1.Prepare a differential analysis as of November 8 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the differential income that would result over the six-year period if the new machine is acquired. 2.List other factors that should be considered before a final decision is reached.Differential analysis for sales promotion proposal Sole Mates Inc. is planning a one-month campaign for July to promote sales of one of its two shoe products. A total of 100,000 has been budgeted for advertising, contests, redeemable coupons, and oilier promotional activities. The following data have been assembled for their possible usefulness in deciding which of the products to select for the campaign: Tennis Shoe Walking Shoe Unit selling price 85 100 Unit production costs; Direct materials 19 32 Direct labor 8 12 Variable factory overhead 7 5 Fixed factory overhead 16 11 Total unit production costs 50 60 Unit variable selling expenses 6 10 Unit fixed selling expenses 20 15 Total unit costs 76 85 Operating income per unit 9 15 No increase in facilities would be necessary to produce and sell the increased output. It is anticipated that 7,000 additional units of tennis shoes or 7,000 additional units of walking shoes could be sold without changing the unit selling price of either product. Instructions 1.Prepare a differential analysis as of June 19 to determine whether to promote tennis shoes (Alternative 1) or walking shoes (Alternative 2). 2.The sales manager had tentatively decided to promote walking shoes, estimating that operating income would be increased by 5,000 (15 operating income per unit for 7,000 units less promotion expenses of 100,000). The manager also believed that the selection of tennis shoes would reduce operating income by 37,000 (9 operating income per unit for 7,000 units less promotion expenses of 100,000). State briefly your reasons for supporting or opposing the tentative decision.Differential analysis for further processing The management of International Aluminum Co. is considering whether to process aluminum ingot further into rolled aluminum. Rolled aluminum can be sold for 2,200 per ton, and ingot can be sold without further processing for 1,100 per ton. Ingot is produced in batches of 80 tons by smelting 500 tons of bauxite, which costs 105 per ton of bauxite. Rolled aluminum will require additional processing costs of 620 per ton of ingot, and 1.25 tons of ingot will produce 1 ton of rolled aluminum (due to trim losses). Instructions 1.Prepare a differential analysis as of February 5 to determine whether to sell aluminum ingot (Alternative 1) or process further into rolled aluminum (Alternative 2). 2.Briefly report your recommendations.25.5BPRProduct pricing and profit analysis with bottleneck operations Wilmington Chemical Company produces three products: ethylene, butane, and ester. Each of these products has high demand in the market, and Wilmington Chemical is able to sell as much as it can produce of all three. The reaction operation is a bottleneck in the process and is running at 100% of capacity. Wilmington wants to improve chemical operation profitability. The variable conversion cost is 510 per process hour. The fixed cost is 400,000. In addition, the cost analyst was able to determine the following information about the three products: Ethylene Butane Ester Budgeted units produced 9,000 9,000 9,000 Total process hours per unit 4.0 4.0 3.0 Reactor hours per unit 15 1.0 0.5 Unit selling price 170 155 130 Direct materials cost per unit S115 88 85 The reaction operation is part of the total process for each of these three products. Thus, for example, 1.5 of the 4.0 hours required to process ethylene is associated with the reactor. Instructions 1. Determine the unit contribution margin for each product. 2. Provide an analysis to determine the relative product profitabilities, assuming that the reactor is a bottleneck.Activity-based costing Southeastern Paper Company manufactures three products (computer paper, newsprint, and specialty paper) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows: Activity Activity Costs Production 220,000 Setup 117,000 Moving 21,000 Shipping 105,000 Product engineering 102,000 Total 565,000 The activity bases identified for each activity are as follows: Activity Activity Base Production Machine hours Setup Number of setups Moving Number of moves Shipping Number of customer orders Product engineering Number oftest runs Tle activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows: Machine Hours Number of Setups Number of Moves Number of Customer Orders Number of Test Runs Units Computer paper 400 80 230 310 50 1,000 Newsprint 500 30 70 140 15 1,250 Specialty paper 200 150 300 550 105 500 Total 1,100 260 600 1,000 170 2,750 Each product requires 0.4 machine hour per unit. Instructions 1. Determine the activity rate for each activity. 2. Determine the total and per-unit activity cost for all three products. 3. Why arent the activity unit costs equal across all three products, since they require the same machine time per unit?Ethics in Action Aaron McKinney is a cost accountant for Majik Systems Inc. Martin Dodd, vice president of marketing, has asked Aaron to meet with representatives of Majik Systems major competitor to discuss product cost data. Martin indicates that the sharing of these data will enable Majik Systems to determine a fair and equitable price for its products. Would it be ethical for Aaron to attend the meeting and share the relevant cost data? Why or why not?Decision on accepting additional business A manager of Varden Sporting Goods Company is considering accepting an order from an overseas customer. This customer has requested an order for 20,000 dozen golf halls at a price of 22 per dozen. The variable cost to manufacture a dozen golf balls is 18 per dozen. The full cost is 25 per dozen. Varden has a normal selling price of 35 per dozen. Vardens plant has just enough excess capacity on the second shift to make the overseas order. What are some considerations in accepting or rejecting this order?Accept business at a special price for a service company If you are not familiar with Priceline.com Inc., go to its Web site. Assume that an individual "names a price" of 85 on Priceline.com for a room in Nashville, Tennessee, on August 22. Assume that August 22 is a Saturday, with low expected room demand in Nashville at a Marriott International, Inc., hotel, so there is excess room capacity. The fully allocated cost per room per day is assumed from hotel records as follows: Housekeeping labor cost 38 Hotel depreciation expense 43 Cost of room supplies (soap, paper, etc.) 8 Laundry labor and material cost 10 Cost of desk staff 6 Utility cost (mostly air conditioning) 5 Total cost per room per day 110 Both housekeeping and laundry staff include many part-time workers, so that the workload is variable to demand. Should Marriott accept the customer bid for a night in Nashville on August 22 at a price of 85?Communication The following conversation took place between Juanita Jackson, vice president of marketing, and Les Miles, controller of Diamond Computer Company: Juanita: I am really excited about our new computer coming out. I think it will be a real market success. Les. Im really glad you think so. I know that our success will be determined by our price. If our price is too high, our competitors will be the ones with the market success. Juanita: Don't worry about it. We'll just mark our product cost up by 25%, and it will all work out. I know we'll make money at those markups By the way, what does the estimated product cost look like? Les. Well, there's the rub. The product cost looks as if it's going to come in at around 1,200. With a 25% markup, that will give us a selling price of 1,500. Juanita: I see your concern. That's a little high. Our research indicates that computer prices are dropping and that this type of computer should be selling for around 1,250 when we release it to the market. Les. I'm not sure what to do. Juanita: Let me see if I can help. How much of the 1,200 is fixed cost? Les. About 200. Juanita: There you go. The fixed cost is sunk. We don't need to consider it in our pricing decision. If we reduce the product cost by 200, the new price with a 25% markup would be right at 1,250. Boy, I was really worried for a minute there. I knew something wasn't right. Write a1 brief memo from Les Miles to Juanita Jackson (1) responding to her solution to the pricing problem and (2) explaining how target costing could be used to solve the problem.Identifying product cost distortion Peachtree Beverage Company manufactures soft drinks. Information about two products is as follows: It is known that both products have the same direct materials and direct labor costs per Case. Peachtree Beverage allocates factory overhead to products by using a single plant-wide factory overhead rate, based on direct labor cost. Additional information about the two products is as follows: Jamaican Punch: Requires extensive process preparation and sterilization prior to processing. The ingredients are from Jamaica, requiring complex import controls. The formulation is complex, and it is thus difficult to maintain quality. Finally, the product is produced in small production run sizes. King Kola: Requires minor process preparation and sterilization prior to processing. The ingredients are acquired locally. The formulation is simple, and it is easy to maintain quality. Finally, the product Ls produced in large production run sizes. Explain the weakness in the per-case product profitability report in light of the additional data.What are the principal objections to the use of the average rate of return method in evaluating capital investment proposals?Discuss the principal limitations of the cash payback method for evaluating capital investment proposals.3DQYour boss has suggested that a one-year payback period is the same as a 100% average rate of return. Do you agree? Explain.5DQ6DQA net present value analysis used to evaluate a proposed equipment acquisition indicated a 7,900 net present value. What is tile meaning of the 7,900 as it relates to the desirability of the proposal?Two projects haw an identical net present value of 9,000. Are both projects equal in desirability? Explain.9DQWhat are the major disadvantages of the use of the internal rate of return method of analyzing capital investment proposals?11DQGive an example of a qualitative factor that should be considered in a capital investment analysis related to acquiring automated factory equipment.26.1APEAverage rate of return Determine the average rate of return for a project that is estimated to yield total income of 56,000 over three years, has a cost of 70,000, and has a 10,000 residual value.26.2APECash payback period A project has estimated annual net cash flows of 9,300. It is estimated to cost 41,850. Determine the cash payback period. Round to one decimal place.26.3APENet present value A project has estimated annual net cash flows of 96,200 for four years and is estimated to cost 315,500. Assume a minimum acceptable rate of return of 10%. Using Exhibit 5, determine (1) the net present value of the project and (2) the present value index, rounded to two decimal places.Internal rate of return A project is estimated to cost 104,328 and provide annual net cash flows of 21,000 for eight years. Determine the internal rate of return for this project, using Exhibit 5.Internal rate of return A project is estimated to cost 362,672 and provide annual net cash flows of 76,000 for nine years. Determine the internal rate of return for this project, using Exhibit 5.26.5APE26.5BPEAverage rate of return The following data are accumulated by ChemLab Inc. in evaluating two competing capital investment proposals: Testing Equipment Vehicle Amount of investment 86,000 30,000 Useful life 6 years 8 years Estimated residual value 0 0 Estimated total income over the useful life 18,060 12,000 Determine the expected average rate of return for each proposal.Average rate of returncost savings Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. The equipment has a cost of 132,000 with a 16,000 residual value and a 10-year life. The equipment will replace one employee who has an average wage of 34,000 per year. In addition, the equipment will have operating and energy costs of 5,380 per year. Determine the average rate of return on the equipment, giving effect to straight-line depreciation on the investment.Average rate of return-new product Galactic Inc. is considering an investment in new equipment that will be used to manufacture a smartphone. The phone is expected to generate additional annual sales of 6,000 units at 250 per unit. The equipment has a cost of 850,000, residual value of 50,000, and an eight-year life. The equipment can only be used to manufacture the phone. The cost to manufacture the phone follows: Cost per unit: Direct labor 15.00 Direct materials 134.00 Factory overhead (including depreciation) 33.50 Total cost per unit 182.5026.4EX26.5EXCash payback method Lily Products Company is considering an investment in one of two new product lines. The investment required for either product line is 540,000. The net cash flows associated with each product are as follows: Year Liquid Soap Body Lotion 1 170,000 90,000 2 150, 000 90,000 3 120,000 90,000 4 100,000 90,000 5 70,000 90,000 6 40,000 90,000 7 40,000 90,000 8 30,000 90,000 Total 720,000 720,000 a.Recommend a product offering to Lily Products Company, based on the cash payback period for each product line. b.Why is one product line preferred over the oilier even though they both have the same total net cash flows through eight periods?26.7EX26.8EX26.9EX26.10EX26.11EX26.12EXNet present value method and present value index Diamond Turf Inc. is considering an investment in one of two machines. The sewing machine will increase productivity from sewing 150 baseballs per hour to sewing 290 per hour. The contribution margin per unit is 0.32 per baseball. Assume that any increased production of baseballs can be sold. The second machine is an automatic packing machine for the golf ball line. The packing machine will reduce packing labor cost. The labor cost saved is equivalent to 21 per hour. The sewing machine will cost 260,000, will have an eight-year life, and will operate for 1,800 hours per year. The packing machine will cost 85,000, will have an eight-year life, and will operate for 1,400 hours per year. Diamond Turf seeks a minimum rate of return of 15% on its investments. a. Determine the net present value for the two machines. Use the present value of an annuity of 1 table in the chapter (Exhibit 5). Round to the nearest dollar. b. Determine the present value index for the two machines. Round to two decimal places. c. If Diamond fit Turf has sufficient funds for only one of the machines and qualitative factors are equal between the two machines, in which machine should it invest? Explain.26.14EXCash payback period, net present value analysis, and qualitative considerations The plant manager of Shenzhen Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost 1,400,000. The manager believes that the new investment will result in direct labor savings of 350,000 per year for 10 years. a. What is the payback period on this project? b. What is the net present value, assuming a 10% rate of return? Use the present value of an annuity of 1 table in Exhibit 5. c. What else .should the manager consider in the analysis?Internal rate of return method The internal rate of return method is used by Testerman Construction Co. in analyzing a capital expenditure proposal that involves an investment of 113,550 and annual net cash flows of 30,000 for each of the six years of its useful life. a. Determine a present value factor for an annuity of 1, which can be used in determining the internal rate of return. b. Using the factor determined in part (a) and the present value of an annuity of 1 table appearing in this chapter (Exhibit 5), determine the internal rate of return for the proposal.26.17EXInternal rate of return methodtwo projects Munch N Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost 43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of 0.45. The delivery truck operating expenses, excluding depreciation, are 1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be 61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is 18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have seven-year lives. The minimum rate of return is 13%. However, Munch N Crunch has funds to invest in only one of the projects. a. Compute the internal rate of return for each investment. Use the present value of an annuity of 1 table appearing in this chapter (Exhibit 5). b. Provide a recommendation to management in a memo.26.19EX26.20EX26.21EX26.22EXAverage rate of return method, net present value method, and analysis for a service company The capital Investment committee of Touch of Eden Landscaping Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows: Each project requires an investment of 60,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. Instructions 1. Compute the following: a. The average rate of return for each investment. Round to one decimal place. b. The net present value for each investment. Use the present value of 1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar. 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments .Cash payback period, net present value method, and analysis Elite Apparel Inc. is considering two investment projects. The estimated net cash flows from each project are as follows: Year Plant Expansion Retail Store Expansion 1 450,000 500,000 2 450,000 400,000 3 340,000 350,000 4 280,000 250,000 5 180,000 200,000 Total 1,700,000 1,700,000 Each project requires an investment of 900,000. A rate of 15% has been selected for the net present value analysis. Instructions 1. Compute the following for each product: a. Cash payback period. b. The net present value. Use the present value of 1 table appearing in this chapter (Exhibit 2). 2. Prepare a brief report advising management on the relative merits of each project.Net present value method, present value index, and analysis Continental Railroad Company is evaluating three capital investment proposals using the net present value method. Relevant data related to the proposals are summarized as follows: Maintenance Equipment Ramp Facilities Computer Network Amount to be invested 8,000,000 20,000,000 9,000,000 Annual net cash flows: Year 1 4,000,000 12,000,000 6,000,000 Year 2 3,500,000 10,000,000 5,000,000 Year 3 2,500,000 9,000,000 4,000,000 Instructions 1. Assuming that the desired rate of return is 20%, prepare a net present value analysis for each proposal. Use the present value of 1 table appearing in this chapter (Exhibit 2). 2. Determine a present value index for each proposal. Round to two decimal places. 3. Which proposal offers the largest amount of present value per dollar of investment? Explain.26.4APRAlternative capital investments The investment committee of Sentry Insurance Co. is evaluating two projects, office expansion and upgrade to computer servers. The projects have different useful lives, but each requires an investment of 490,000. The estimated net cash flows from each project are as follows: Net Cash Flows Year Office Expansion Servers 1 125,000 165,000 2 125,000 165,000 3 125,000 165,000 4 125,000 165,000 5 125,000 6 125,000 The committee has selected a rate of 12% for purposes of net present value analysis.It also estimates that the residual value at the end of each projects useful life is0, but at the end of the fourth year, the office expansions residual valuewould be 180,000. Instructions 1.For each project, compute the net present value. Use the present value of an annuity of 1 table appearing in this chapter (Exhibit 5). (Ignore the unequal lives of the projects.) 2.For each project, compute the net present value, assuming that the office expansion is adjusted to a four-year life for purposes of analysis. Use the present value of 1 table appearing in this chapter (Exhibit 2). 3.Prepare a report to the investment committee,givingyour adviceontherelative merits of the two projects.Capital rationing decision for a service company involving four proposals Renaissance Capital Group is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows: The company's capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to one decimal place. 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the calculated a mounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 15% and the present value of 1 table appearing in this chapter (Exhibit 2). 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).Average rate of return method, net present value method, and analysis The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows: Year Warehouse Tracking Technology Income from Operations Net Cash Flow Income from Operations Net Cash Flow 1 61,400 135,000 34,400 106,000 2 51,400 125,000 34,400 108,000 3 36,400 110,000 34,400 108,000 4 26,400 100,000 34,400 108,000 5 (3,600) 70,000 34,400 108,000 Total 172,000 540,000 172,000 540,000 Each project requires an investment of 368,000. Straight-line depreciation will he used and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis. Instructions 1. Compute the following: a. The average rate of return for each investment. Round to one decimal place. b. The net present value for each investment. Use the present value of 1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar. 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two projects.26.2BPR26.3BPRNet present value method, internal rate of return method, and analysis The management of Style Networks Inc. is considering two TV show projects. The estimated net cash flows from each project are as follows: Year After Hours Sun Fun 1 320,000 290,000 2 320,000 290,000 3 320,000 290,000 4 320,000 290,000 After Hours requires an investment of 913,600, while Sun Fun requires an investment of 880,730. No residual value is expected from either project. Instructions 1.Compute the following for each project: a.The net present value. Use a rate of 10% and the present value of an annuity of 1 table appearing in this chapter (Exhibit 5). b.A present value index. Round to two decimal places. 2.Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of 1 and (b) using the present value of an annuity of 1 table appearing in this chapter (Exhibit 5). 3.What advantage does the internal rate of return method have over the netpresent value method in comparing projects?26.5BPRCapital rationing decision for a service company involving Clearcast Communications Inc. is considering allocating a limited amount of capital investment funds among four proposals. The amount of proposed investment, estimated income from operations, and net cash flow for each proposal are as follows: The company's capital rationing policy requires a maximum cash payback period of three years. In addition, a minimum average rate of return of 12% is required on all projects. If the preceding standards are met, the net present value method and present value indexes are used to rank the remaining proposals. Instructions 1. Compute the cash payback period for each of the four proposals. 2. Giving effect to straight-line depreciation on the investments and assuming no estimated residual value, compute the average rate of return for each of the four proposals. Round to one decimal place. 3. Using the following format, summarize the results of your computations in parts (1) and (2). By placing the calculated amounts in the first two columns on the left and by placing a check mark in the appropriate column to the right, indicate which proposals should be accepted for further analysis and which should be rejected. 4. For the proposals accepted for further analysis in part (3), compute the net present value. Use a rate of 12% and the present value of 1 table appearing in this chapter (Exhibit 2). 5. Compute the present value index for each of the proposals in part (4). Round to two decimal places. 6. Rank the proposals from most attractive to least attractive, based on the present values of net cash flows computed in part (4). 7. Rank the proposals from most attractive to least attractive, based on the present value indexes computed in part (5). Round to two decimal places. 8. Based on the analyses, comment on the relative attractiveness of the proposals ranked in parts (6) and (7).Ethics in Action Danielle Hastings was recently hired as a cost analyst by CareNet Medical Supplies Inc. One of Danielles first assignments was to perform a net present value analysis for a new warehouse. Danielle performed the analysis and calculated a present value index of 0.75. The plant manager, Jerrod Moore, is intent on purchasing the warehouse because he believes that more storage space is needed. Jerrod asks Danielle to come to his office, where the following conversation takes place: Jerrod: Danielle, youre new here, arent you? Danielle: Yes, I am. Jerrod: Well, Danielle, Im not at all pleased with the capital investment analysis that you performed on this new warehouse. I need that warehouse for my production. If I dont get it, where am I going to place our output? Danielle: Well, we need to get product into our customers hands. Jerrod: I agree, and we need a warehouse to do that. Danielle: My analysis does not support constructing a new warehouse. The numbers dont lie; the warehouse does not meet our investment return targets. In fact, it seems to me that purchasing a warehouse does not add much value to the business. We need to be producing product to satisfy customer orders, not to fill a warehouse. Jerrod: The headquarters people will not allow me to build the warehouse if the numbers dont add up. You know as well as I that many assumptions go into your net present value analysis. Why dont you relax some of your assumptions so that the financial savings will offset the cost? Danielle: Im willing to discuss my assumptions with you. Maybe I overlooked something. Jerrod: Good. Heres what I want you to do. I see in your analysis that you dont project greater sales as a result of the warehouse. It seems to me that if we can store more goods, we will have more to sell. Thus, logically, a larger warehouse translates into more sales. If you incorporate this into your analysis, I think youll see that the numbers will work out. Why dont you work it through and come back with a new analysis. Im really counting on you on this one. Lets get off to a good start together and see if we can get this project accepted. What is your advice to Danielle?26.2CPGlobal Electronics Inc. invested 1,000,000 to build a plant in a foreign country. The labor and materials used in production are purchased locally. The plant expansion was estimated to produce an internal rate of return of 20% in U.S. dollar terms. Due to a currency crisis, the currency exchange rate between the local currency and the U.S. dollar doubled from two local units per U.S. dollar to four local units per U.S. dollar. a .Assume that the plant produced and sold product in the local economy. Explain what impact this change in the currency exchange rate would have on the project's internal rate of return. b. Assume that the plant produced product in the local economy but exported the product back to the United States for sale. Explain what impact the change in the currency exchange rate would have on the project's internal rate of return under this assumption.Qualitative issues in investment analysis The following are some selected quotes from senior executives: CEO, Worthington Industries (a high-technology steel company): We try to find the best technology, stay ahead of the competition, and serve the customer.... Well make any investment that will pay bock quickly but if it is something that we really see as a must down the road, payback is not going to be that important. Chairman of Amgen Inc. (a biotech company). You cannot really run the numbers, do net present value calculations, because the uncertainties are really gigantic ... You decide on a project you want to run, and then you run the numbers [as a reality check on your assumptions]. Success in a business like this is much more dependent on tracking rather than on predicting, much more dependent on seeing results over time, tracking and adjusting and readjusting, much more dynamic much more flexible. Chief financial officer of Merck Co., Inc.(a pharmaceutical company):... at the individual product levelthe development of a successful new product requires on the order of 230 million in RD, spread over more than a decadediscounted cash flow style analysis does not become a factor until development is near the point of manufacturing scale-up effort. Prior to that point, given the uncertainties associated with new product development, it would be lunacy in our business to decide that we know exactly whats going to happen to a product once it gets our. Explain the role of capital investment analysis for these companies.26.5CP