Assignment 8
- 7 Questions
QUESTION 1 Evaluating a special order (LO – 7-5)
Miyamoto
Jewelers is considering a special order for 10 handcrafted gold bracelets to be
given as gifts to members of a wedding party. The normal selling price of
a gold bracelet is $389.95 and its unit product cost is $264 as shown below.
Direct
Materials ……………………………………..$143.00
Direct
Labor……………………………………………. 86.00
Manufacturing
Overhead……………………….. 35.00
Unit Product
Cost……………………………………$264.00
Most of the
manufacturing overhead is fixed and unaffected by variations in how much
jewelry is produced in any given period. However, $7 of the overhead is
variable with respect to the number of bracelets produced. The customer
who is interested in the special bracelet order would like special filigree
applied to the bracelets. This filigree would require additional material
costing $6 per bracelet and would also require acquisition of a special tool
costing $465 that would have no other use once the special order is completed.
This order would have no effect on the company’s regular sales and the
order could be fulfilled using the company’s existing capacity without
affecting any other order.
Required:
What effect
would accepting this order have on the company’s net operating income if a
special price of $349.95 is offered per bracelet for this order? Should
the special order be accepted at this price?
QUESTION 2 Uncertain Future Cash Flows (LO – 8-3)
Union Bay
Plastics is investigating the purchase of automated equipment that would save
$100,000 each year in direct labor and inventory carrying costs. This
equipment costs $750,000 and is expected to have a 10-year useful lift with no
salvage value. The company’s required rate of return is 15% on all
equipment purchases. This equipment would provide intangible benefits
such as greater flexibility and higher-quality output that are difficult to
estimate and yet are quite significant.
Required:
(Ignore
income taxes)
What dollar
value per year would the intangible benefits have to have in order to make the
equipment an acceptable investment?
QUESTION 3 Production Budget (LO -9-3)
Chrystal
Telecom has budgeted the sales of its innovative mobile phone over the next
four months as follows:
Sales in
Units
July………………………………………………………………………30,000
August………………………………………………………………….45,000
September…………………………………………………………..60,000
October……………………………………………………………….50,000
The company
is now in the process of preparing a production budget for the third quarter.
Past experience has shown that end-of-month finished goods inventories
must equal 10% of the next month’s sales. The inventory at the end of Jun
was 3,000 units.
Required:
Prepare a
production budget for the third quarter showing the number of units to be
produced each month and for the quarter in total.
QUESTION 4 Manufacturing Overhead Budget (LO – 9-6)
The direct
labor budget of Krispin Corporation for the upcoming fiscal year includes the
following budgeted direct labor-hours.
1st quarter 2nd quarter 3rd quarter 4th quarter
Budgeted
direct labor-hours……….
5,000 4,800
5,200 5,400
The
company’s variable manufacturing overhead rate is $1.75 per direct labor-hour
and the company’s fixed manufacturing overhead is $35,000 per quarter. The only
noncash item included in fixed manufacturing overhead is depreciation, which is
$15,000 per quarter.
Required:
Construct
the company’s manufacturing overhead budget for the upcoming fiscal
year.Compute the company’s manufacturing overhead rate (including both variable
and fixed manufacturing overhead) for the upcoming fiscal year. Round off
to the nearest whole cent.
QUESTION 5 Prepare a Report Showing Activity Variances
(L0 – 10-2)
Air Meals is
a company that prepares in-flight meals for airlines in its kitchen located
next to the local airport. The company’s planning budget for December
appears below:
Air Meals
Planning
Budget
For the
Month Ended December 31
Budgeted
meals (q) ……………………………………………………..
20,000
Revenue
($3.80 q) ……………………………………………………….
$76,000
Expenses:
Raw
Materials (2.30q) ………………………………………………..
46,000
Wages and
Salaries ($6,400 + $0.25q) ………………………..
11,400
Utilities
(2,100 + $0.05q) …………………………………………….
3,100
Facility
Rent ($3,800) ………………………………………………….
3,800
Insurance
($2,600) ………………………………………………………
2,600
Miscellaneous
($700 + $0.10q) ……………………………………
2,700
Total
expenses ……………………………………………………………….
69,600
Net
operating income ……………………………………………………. $
6,400
In December,
21,000 meals were actually served. The company’s flexible budget for this
level of activity follows:
Air Meals
Flexible
Budget
For the
Month Ended December 31
Budgeted
meals (q) ……………………………………………………..
21,000
Revenue
($3.80 q) ……………………………………………………….
$79,800
Expenses:
Raw
Materials (2.30q) ………………………………………………..
48,300
Wages and
Salaries ($6,400 + $0.25q) ………………………..
11,650
Utilities
($2,100 + $0.50q) ………………………………………….
3,150
Facility
Rent ($3,800) …………………………………………………
3,800
Insurance
($2,600) ………………………………………………………
2,600
Miscellaneous
($700 + $0.10q) ……………………………………
2,800
Total
expenses ……………………………………………………………….
72,300
Net
operating income ……………………………………………………. $
7,500
Required:
Prepare a
report showing the company’s activity variances for December.
Which of the
activity variances should be of concern to management? Explain
QUESTION 6 Residual Income (LO – 12-2)
Midlands
Design Ltd. Of Manchester, England, is a company specializing in providing
design services to residential developers. Last year the company had net
operating income of £400,000 on sales of £2,000,000. The company’s
average operating assets for the year were £2,200,000 and its minimum required
rate of return was 16%. (The currency in the United Kingdom is the pound,
denoted by £)
Required:
Compute the
company’s residual income for the year.
QUESTION 7 Effects of Changes in Sales, Expenses, and
Assets on ROI (LO – 12-1)
BusServ.com
Corporation provides business-to-business services on the Internet. Data
concerning the most recent year appear below:
Sales
…………………………………………………. $8,000,000
Net
operating income ………………………. $800,000
Average
operating assets …………………. $3,200,000
Required:
Consider
each question below independently. Carry out all computations to two
decimal places.
Compute the
company’s return on investment (ROI).
The
entrepreneur who founded the company is convinced that sales will increase next
year by 150% and that net operating income will increase by 400%, with no
increase in average operating assets. What would the company’s ROI?
The Chief
Financial Officer of the company believes a more realistic scenario would be a
$2 million increase in sales, requiring an $800,000 increase in average
operating assets, with a resulting $250,000 increase in net operating income.
What would be the company’s ROI in this scenario?
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