BA 510 WEEK 8 PROBLEMS

Week  8 Problem Solutions

Problem 1. Evaluating 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 price of a gold bracelets is $389.95 and its unit product 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 . This filigree would require additional material costing $6 per bracelet and would also require acquisition of special tool costing $465 that would have no other once the special order is completed. This order would have no effect on the company’s regular sales and the order could fulfill using the company’s existing capacity without affecting any other order.

Required:

1.       What effect would accepting this order have on the company’s net operating income if a special price $349.95 is offered per bracelet for this order? Should the special order be accepted at this price?

Problem 2   Uncertain Future Cash Flows (LO- 8-3)

Union Bay Plastics is investigating the purchase of automated equipment that would save $1000,000 each year in direct labor and inventory carrying costs. The equipment cost $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?

PROBLEM 3  Production Budget (LO – 9-3)

Chrystal Telecom has budgeted the sales of its innovative mobile phone over the next four months as follows:

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-the-month finished goods inventories must equal 10% of the next  months’ 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 end total.

PROBLEM 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.

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                                                                                     1^st Quarter       2^nd Quarter     3^rd Quarter     4^th Quarter

The company’s variable manufacturing overhead rate is $1.75 per direct labor –hour and the company’s fixed manufacturing overhead is depreciation, what is $15,000 per quarter.

REQUIRED:

1.       Construct the company’s manufacturing overhead budget for the upcoming fiscal year.

2.       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.

PROBLEM 5 Prepare a report Showing  Activity Variances (Lo – 10-7)

Air Meals is company that prepare a flight meals for airlines in its kitchen located next to the local airport. The company’s planning budget for December appears below:

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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

In December, 21,000 meals were actually served. The company’s flexible budget for this level of activity follows:

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Air Meals

Flexible Budget

Budgeted meals (q)……………………………………………………………………      21,000

Revenue ($3.80 q)……………………………………………………………………..  $ 79,800

Expenses:

     Raw Materials (2.30 q)………………………………………………………….      48,300

     Wages and salaries ($6,400 + $0.25 q)………………………………….      11,650

     Utilities ($2,100 + $0.50 q)……………………………………………………        3,150

     Facility Rent  ($3,800)……………………………………………………………        3,800

     Insurance ($2,600)………………………………………………………………..        2,600

     Miscellaneous ($700 + $0.10 q)…………………………………………….        2,800

Total expenses………………………………………………………………………….    $72,300

Net operating Income………………………………………………………………     $  7,500

REQUIRED:

1.       Prepare a report showing the company’s activity variances for December.

2.       Which of the activity variances should be of concern to management?  Explain.

PROBLEM 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 (English pound) on sales of 2,000,000 (English pounds) . The company’s average operating assets for the year were 2,200,000 –English pound and its minimum required rate of return was 16%. (The currency in the United Kingdom   is the POUND).

REQUIRED:

Compute the company’s residual income for the year.

PROBLEM 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. Date concerning the most recent year appear below:

Sales…………………………………………………………………. $8,000,000

Net Operating Income……………………………………..       800,000

REQUIRED:

Consider each question below independently. Carry out all computations to two decimal places.

1.       Compute the company’s return on investment (ROI).

2.       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?

3.       The Chief Financial Officer of the company believed a more realistic scenario would be a $2 million increase in net operating income. What would be the company’s ROI in this scenario?