Accounting question

ACC 601 Managerial Accounting

Group Case 3 (160 points)

Instructions:

1. As a group, complete the following activities in good form. Read the instructions for each question carefully. Provide all supporting calculations to show how you arrived at your numbers and to demonstrate your understanding of the concepts in each question.

2. Add only the names of group members who participated in the completion of this assignment.

3. Submit only one copy of your completed work via Moodle. Do not send it to me by email.

4. Due: No later than the last day of Module 7. Please note that your professor has the right to change the due date of this assignment.

Part A: Capital Budgeting Decisions

Chee Company has gathered the following data on a proposed investment project:

	Investment required in equipment	$320,000
	Annual cash inflows
	Year 1: $50,000 Year 2: 50,000 Year 3: 60,000 Year 4: 40,000 Year 5: 65,000 Year 6: 50,000 Year 7: 70,000 Year 8: 65,000 Salvage value	$60,000
	Life of the investment	8 years
	Required rate of return	10%
	Assets will be depreciated using straight line depreciation method

Required:

1. Show all calculations in good form. Answers without supporting calculations will earn zero marks.

2. Calculate the annual incremental net income for all the eight (8) years.

3. Using the net present value and the internal rate of return methods, is this a good investment?

Part B: Master Budget

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.

 

The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

 

January (actual)	30,000	June (budget)	45,000
February (actual)	20,000	July (budget)	40,000
March (actual)	50,000	August (budget)	30,000
April (budget)	70,000	September (budget)	20,000
May (budget)	95,000

 

Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.

 

Suppliers are paid $3 for a pair of earrings. 40% of a month’s purchases is paid for in the month of purchase; the other 60% is paid for in the following month. All sales are on credit. Only 30% of a month’s sales are collected in the month of sale. An additional 60% is collected in the following month, and the remaining 10% is collected in the second month following sale.

 

Monthly operating expenses for the company are given below:

 

Variable:
Sales commissions			5% of sales
Fixed:
Advertising	$	190,000
Rent	$	20,000
Salaries	$	100,000
Utilities	$	8,000
Insurance	$	3,000
Depreciation	$	14,000

 

Insurance is paid on an annual basis, in November of each year.

At the end of June, the company received $4,000 deposit for July sales. Sales in advance is a liability.

 

The company plans to purchase $20,000 in new equipment during May and $60,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.

 

The company’s balance sheet as of March 31 is given below:

 

Assets
Cash	$	74,000
Accounts receivable ($20,000 February sales; $350,000 March sales)		370,000
Inventory		80,000
Prepaid insurance		21,000
Property and equipment (net)		950,000
Total assets	$	1,495,000
Liabilities and Stockholders’ Equity
Accounts payable	$	100,000
Dividends payable		15,000
Common stock		800,000
Retained earnings		580,000
Total liabilities and stockholders’ equity	$	1,495,000

 

The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.

 

The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.

Required:

Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules: Use the formats/tables below. Any other format is unacceptable. Below each table, show how you arrived at the numbers in your tables. Lack of detailed calculations will reduce your marks even if the answers are correct.

 

1. a. A sales budget, by month and in total.

Sales Budget April May June Quarter Budgeted unit sales 70,000 95,000 45,000 210,000 Selling price per unit 10 10 10 10 Total sales 700,000 950,000 450,000 2,100,000

   

b. A schedule of expected cash collections, by month and in total.

Earrings Unlimited Schedule of Expected Cash Collections April May June Quarter February sales (10% of sales) 20,000 20,000 March sales (60% of sales) 300,000 (10% of sales) 50,000 350,000 April sales (30% of sales) 210,000 (60% of sales) 420,000 (10% of sales) 65,000 695,000 May sales (30% of sales) 285,000 (60% of sales) 570,000 855,000 June sales (30% of sales) 135,000 135,000 Total cash collections 530,000 755,000 770,000 2,055,000

    c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.

Earrings Unlimited Merchandise Purchases Budget April May June Quarter Budgeted unit sales 70,000 95,000 45,000 210,000 Add: Desired ending merchandise inventory (40% of following month) 38,000 (40% of following month) 18,000 (40% of following month) 16,000 16,000 Total needs 108,000 113,000 61,000 226,000 Less: Beginning merchandise inventory 28,000 38,000 18,000 28,000 Required purchases 80,000 75,000 43,000 198,000 Unit cost 3 3 3 3 Required dollar purchases 240,000 225,000 129,000 594,000

   

d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

Earrings Unlimited
Budgeted Cash Disbursements for Merchandise Purchases
	April	May	June	Quarter
Accounts payable	100,000			100,000
April purchases	160,000	160,000		320,000
May purchases		150,000	150,000	300,000
June purchases			86,000	86,000
Total cash payments	260,000	310,000	236,000	806,000

2. A cash budgets. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.

Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Quarter Beginning cash balance $74,000 Add collections from customers 1,996,000 Total cash available 2,070,000 Less cash disbursements: Merchandise purchases 820,000 Advertising 600,000 Rent 54,000 Salaries 318,000 Commissions 86,000 Utilities 21,000 Equipment purchases 56,000 Dividends paid 15,000 Total cash disbursements 1,970,000 Excess (deficiency) of cash available over disbursements 100,000 Financing: Borrowings 180,000 Repayments (180,000) Interest (5,300) Total financing (5,300) Ending cash balance $94,700

· Required 1D

3. A budgeted income statement for the three-month period ending June 30. Use the contribution approach.

Earrings Unlimited Budgeted Income Statement For the Three Months Ended June 30 Sales Variable expenses: Cost of goods sold Commissions Contribution margin Fixed expenses: Advertising Rent Salaries Utilities Insurance Depreciation Net operating income Interest expense Net income

4. A budgeted balance sheet as of June 30.

Earrings Unlimited Budgeted Balance Sheet June 30 Assets Cash Accounts receivable Inventory Prepaid insurance Property and equipment, net Total assets Liabilities and Stockholders’ Equity Accounts payable Dividends payable Common stock Retained earnings Total liabilities and stockholders’ equity

Required 3

Part C: Variance Analysis for Decision Making

Bronfenbrenner Co. uses a standard cost system for its single product in which variable overhead is applied on the basis of direct labor hours. The following information is given:

	Standard costs per unit:
	Raw materials (2 grams at $16 per gram)
	Direct labor (1 hour at $10 per hour)
	Variable overhead (1 hours at $2.5 per hour)
	Actual experience for current year:
	Units produced	30,000 units
	Purchases of raw materials (20,000 grams at $19 per gram)
	Raw materials used	35,000 grams
	Direct labor (18,000 hours at $10 per hour)
	Variable overhead cost incurred	$50,000

Required:

1. Show all calculations in good form. Answers without supporting calculations will earn zero marks.

2. Compute the following variances for raw materials, direct labor, and variable overhead, assuming that the price variance for materials is recognized at point of purchase:

a. Direct materials price variance.

b. Direct materials quantity variance.

c. Direct labor rate variance.

d. Direct labor efficiency variance.

e. Variable overhead spending variance.

f. Variable overhead efficiency variance.

g. As a manager, why is variance analysis important?

Part D: Evaluation of Decentralized Organizations

The Clipper Corporation had net operating income of $340,000 and average operating assets of $1,700,000. The corporation requires a return on investment of 20%.

Required:

Show all calculations in good form. Answers without supporting calculations will earn zero marks.

a. Calculate the company's return on investment (ROI) and residual income (RI).

b. Clipper Corporation is considering an investment of $80,000 in a project that will generate annual net operating income of $15,000. Would it be in the best interests of the company to make this investment?

c. Clipper Corporation is considering an investment of $80,000 in a project that will generate annual net operating income of $15,000. If the division planning to make the investment currently has a return on investment of 18% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?

d. Clipper Corporation is considering an investment of $80,000 in a project that will generate annual net operating income of $15,000. If the division planning to make the investment currently has a residual income of $40,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?