Homework 3 – Topics 15 to 18 – Spring 2015
1. Santorini Corporation has experienced a number of out-of-stock situations with respect to its finished-goods inventories. Inventory at the end of May, for example, was only 50 units—an all-time low.
Management desires to implement a policy whereby finished-goods inventory is 70% of the following month’s sales. Budgeted sales for June, July, and August are expected to be 5,000 units, 5,600 units, and 5,500 units, respectively.
Determine the number of units that Santorini must produce in June and July.
2. Turbon Manufacturing plans to produce 20,000 units, 24,000 units, and 30,000 units, respectively, in October, November, and December. Each of these units requires four units of part no. 879, which the company can purchase for $7 each. Turbon has 35,000 units of part no. 879 in stock on September 30.
Prepare a direct-material purchases budget for October and November in units and dollars. Management desires to maintain an ending raw-material inventory equal to 40% of the following month’s production usage.
3. Tiara Company has the following historical collection pattern for its credit sales:
70% collected in month of sale
15% collected in the first month after sale
10% collected in the second month after sale
4% collected in the third month after sale
Budgeted credit sales for the last six months of the year follow.
A. Calculate the estimated total cash collections during October.
B. Calculate the estimated total cash collections during the year’s fourth quarter.
4. Millage Manufacturing has a cash balance of $8,000 on August 1 of the current year. The company’s controller forecast the following cash receipts and cash disbursements for the upcoming two months of activity:
Management desires to maintain a minimum cash balance of $8,000 at all times. If necessary, additional financing can be obtained in $1,000 multiples at a 12% interest rate. All borrowings are made at the beginning of the month; debt retirement, on the other hand, occurs at the end of the month. Interest is paid at the time of repaying loan principal and is computed on the portion of debt repaid.
A. Determine the ending cash balance in August both before and after any necessary financing or debt retirement.
B. Repeat part “A” for September.
5. Quicksilver Company has set the following standards for one unit of product:
Quantity: 6.2 pounds per unit
Price per pound: $11 per pound
Quantity: 6 hours per unit
Rate per hour: $23 per hour
Actual costs incurred in the production of 2,800 units were as follows:
Direct material: $194,350 ($11.50 per pound)
Direct labor: $393,750 ($22.50 per hour)
All materials purchased were consumed during the period.
Calculate the direct-material price and quantity variances, and the direct-labor rate and efficiency variances. Indicate whether each variance is favorable or unfavorable.
6. The Houston Chamber Orchestra presents a series of concerts throughout the year. Budgeted fixed costs total $300,000 for the concert season; variable costs are expected to average $5 per patron. The orchestra uses flexible budgeting.
A. Prepare a flexible budget that shows the expected costs of 8,000, 8,500, and 9,000 patrons.
B. Construct the orchestra’s flexible budget formula.
C. Assume that 8,700 patrons attended concerts during the year just ended, and actual costs were: variable, $42,000; fixed, $307,500. Evaluate the orchestra’s financial performance by computing variances for variable costs and fixed costs.
7. Cornwall Corporation manufactures faucets. Several weeks ago, the company received a special-order inquiry from Yates, Inc. Yates desires to market a faucet similar to Cornwall’s model no. 55 and has offered to purchase 3,000 units. The following data are available:
• Cost data for Cornwall’s model no. 55 faucet: direct materials, $45; direct labor, $30 (2 hours at $15 per hour); and manufacturing overhead, $70 (2 hours at $35 per hour).
• The normal selling price of model no. 55 is $180; however, Yates has offered Cornwall only $115 because of the large quantity it is willing to purchase.
• Yates requires a design modification that will allow a $4 reduction in direct-material cost.
• Cornwall’s production supervisor notes that the company will incur $8,700 in additional set-up costs and will have to purchase a $3,300 special device to manufacture these units. The device will be discarded once the special order is completed.
• Total manufacturing overhead costs are applied to production at the rate of $35 per labor hour. This figure is based, in part, on budgeted yearly fixed overhead of $624,000 and planned production activity of 24,000 labor hours.
• Cornwall will allocate $5,000 of existing fixed administrative costs to the order as “¼part of the cost of doing business.”
A. One of Cornwall’s staff accountants wants to reject the special order because “financially, it’s a loser.” Do you agree with this conclusion if Cornwall currently has excess capacity? Show calculations to support your answer.
B. If Cornwall currently has no excess capacity, should the order be rejected from a financial perspective? Briefly explain.
C. Assume that Cornwall currently has no excess capacity. Would outsourcing be an option that Cornwall could consider if management truly wanted to do business with Yates? Briefly discuss, citing several key considerations for Cornwall in your answer.
8. Sophisticates’ Corner sells clothing, shoes, and accessories at a suburban location near Boston. Information for the just concluded calendar year follows.
Management is considering closing the shoe operation because of the loss and expanding the space that is currently devoted to accessories sales. A salaried salesperson in the shoe department who earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be incurred. Sophisticates’ Corner will spend $16,000 on remodeling costs and anticipates that accessories sales will increase by $70,000. This additional sales revenue is expected to generate a 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and feel strongly about “one-stop shopping,” clothing sales are expected to fall by 15% if the shoe department is closed.
Determine whether the shoe department should be closed.
9. Harrison Township is studying a 700-acre site for a new landfill. The new site will save $70,000 in annual operating costs for 10 years, as Harrison currently uses the landfill of a neighboring municipality. Other data are:
Purchase price per acre: $550
Site preparation costs: $110,000
Hurdle rate: 6%
Ignore income taxes.
A. Use the net-present-value method and determine whether the landfill should be acquired.
B. Determine the landfill’s approximate internal rate of return.
10. Ivory Corporation is reviewing an investment proposal that has an initial cost of $52,500. An estimate of the investment’s end-of-year book value, the yearly after-tax net cash inflows, and the yearly net income are presented in the schedule below. Yearly after-tax net cash inflows include savings from the depreciation tax shield. The investment’s salvage value at the end of each year is equal to book value, and there will be no salvage value at the end of the investment’s life.
Ivory uses a 14% after-tax target rate of return for new investment proposals.
A. Calculate the project’s payback period.
B. Calculate the accounting rate of return on the initial investment.
C. Calculate the proposal’s net present value. Round to the nearest dollar.