cafe 4 problems final exam

Problem  1  –  Café  Xaragua’s  Second  Year  

Rob  Lehnert  and  his  partners  decided  to  proceed  with  their  plans  and  opened  Café  Xaragua.    During  the   first  year,  the  business  performed  almost  exactly  as  they  expected.    During  the  second  year  of   operations,  their  newly  hired  manager  made  some  changes,  which  resulted  in  a  revenue  increase  of  a   little  over  21%,  but  a  decrease  in  gross  margin.    The  partners  hired  a  consultant  who  prepared  the   schedule  that  appears  on  the  following  page.    After  preparing  the  schedule,  the  consultant  disappeared,   so  the  partners  have  hired  you  to  help  them  interpret  the  schedule.    Here  are  their  questions:  

1. Wow!    Total  revenues  increased  a  lot!    Are  we  selling  more  of  each  product  than  we  thought  we   would?    How  has  each  product  affected  total  revenues?  

2. When  the  new  manager  came  on  board,  he  messed  around  with  selling  prices.    What  was  the   effect  of  the  price  changes  on  the  increase  in  revenues  for  each  product?  

3. It  looks  like  our  customers  purchased  a  different  mix  of  product  than  we  expected.    Which   product  was  the  most  different  from  what  we  expected?  

4. We’re  really  happy  about  the  big  increase  in  revenues,  but  why  is  the  gross  margin  percentage   less  than  last  year?    Tell  me  how  each  product  contributed  to  the  overall  decline  in  our  expected   gross  margin.  

5. What  do  you  think  we  should  do  differently  next  year  to  increase  our  total  gross  margin?    I’m   counting  on  you  to  give  me  very  specific  guidance.  

6. Do  your  findings  suggest  that  customers  like  our  strategy  of  providing  a  unique  blend  of   sustainable  coffee  produced  in  Haiti  or  do  they  regard  us  as  just  another  coffee  shop?  

 

 

 

 

Budgeting  and  Management  Control  -­‐  LON   Module  D  -­‐  May  2015  

FINAL  EXAM    

 

Café  Xaragua  -­‐  Year  2  

  Actual  

  Expected  

  Difference  

Regular  Coffee   $229,950    

$150,563    

$79,388   Spec  Coffee   $123,188  

  $200,750  

  -­‐$77,563  

Baked  Goods   $38,325    

$125,469    

-­‐$87,144   Beans   $388,725  

  $165,619  

  $223,106  

           Total  Revenue   $780,188    

$642,400      

                       Regular  Coffee   $42,158  

  $30,113  

  $12,045  

Spec  Coffee   $39,420    

$40,150    

-­‐$730   Baked  Goods   $35,040  

  $62,734  

  -­‐$27,694  

Beans   $175,200    

$66,248    

$108,953  

           Total  CGS   $291,818    

$199,244      

           Gross  Profit   $488,370    

$443,156      

           Gross  Profit  %   63%    

69%        

  Quantity     Price  

  Variance  Analysis  

Revenue   Expected   Actual  

 

Expected   Actual  

 

Actual  Q  x   Actual  P  

Price   Variance  

Actual  Q  x   Expected  P  

Usage   Variance  

Expected  Q  x   Expected  P  

Regular  Coffee   50,188   76,650    

$3.00   $3.00     $229,950   $0     $229,950   $79,388     $150,563  Spec  Coffee   50,188   32,850    

$4.00   $3.75    

$123,188   ($8,213)   $131,400   ($69,350)   $200,750   Baked  Goods   50,188   21,900  

  $2.50   $1.75  

  $38,325   ($16,425)   $54,750   ($70,719)   $125,469  

Beans   10,038   21,900    

$16.50   $17.75    

$388,725   $27,375     $361,350   $195,731     $165,619  

                                                 

Quantity    

Cost    

Variance  Analysis  

Expenses   Expected   Actual     Expected   Actual  

 

Actual  Q  x   Actual  P  

Price   Variance  

Actual  Q  x   Expected  P  

Usage   Variance  

Expected  Q  x   Expected  P  

Regular  Coffee   50,188   76,650    

$0.60   $0.55    

$42,158   $3,833     $45,990   ($15,878)   $30,113   Spec  Coffee   50,188   32,850  

  $0.80   $1.20  

  $39,420   ($13,140)   $26,280   $13,870     $40,150  

Baked  Goods   50,188   21,900    

$1.25   $1.60    

$35,040   ($7,665)   $27,375   $35,359     $62,734   Beans   10,038   21,900  

  $6.60   $8.00  

  $175,200   ($30,660)   $144,540   ($78,293)   $66,248  

 

  Gross  Profit  

  Expected   Actual  

Regular  Coffee   $120,450   $187,793   Spec  Coffee   $160,600   $83,768   Baked  Goods   $62,734   $3,285   Beans   $99,371   $213,525  

 

   

 

Problem  2  –  Activity-­‐Based  Costing  

Using  the  information  below,  answer  the  questions  that  follow.     Plumbing  Supply  Company  manufactures  three  products:    Valves,  Pumps  and  “Flowtrollers”  (which  is   patented  and  only  manufactured  by  Plumbing  Supply).    The  most  recent  monthly  statement  of  pre-­‐tax   operating  income  appears  below:  

Plumbing  Supply  Company   Pre-­‐tax  Operating  Income  -­‐  April  2013  

     Sales   $1,847,500   100%   Direct  Labor  Expense   $351,000  

 Direct  Materials  Expense   $458,000    Contribution  Margin   $1,038,500   56%  

Manufacturing  Overhead   $654,600   35%   Gross  Margin   $383,900   21%   Admin.  Expenses   $350,000   19%   Operating  Income  (pre-­‐tax)   $33,900   1.8%  

  Until  recently,  Plumbing  Supply  allocated  manufacturing  overhead  to  each  product  using  185%  of  direct   labor  costs:  

Overhead  Allocated  as  185%  *  Direct  Labor  Cost   Valves Pumps Flowtrollers Selling  price   $79.00   $70.00   $95.00  

       Direct  material  cost  (DM)   $16.00   $20.00   $22.00   Direct  labor  cost  (DL)   $12.35   $16.25   $13.00   Manuf.  OH  (@185%  *  DL)   $22.85   $30.06   $24.05   Unit  costs   $51.20   $66.31   $59.05  

       Gross  margin   $27.80   $3.69   $35.95   Gross  margin  (%)   35%   5%   38%  

  The  Company  recently  hired  a  Hult  graduate  who  determined  that  an  activity-­‐based  method  for   allocating  overhead  would  provide  a  better  estimate  of  each  product’s  costs  and  computed  the   following  estimates:    

Activity-­‐Based  Costing   Valves Pumps Flowtrollers

       Selling  price   $79.00   $70.00   $95.00  

       Direct  material  cost  (DM)   $16.00   $20.00   $22.00   Direct  labor  cost  (DL)   $12.35   $16.25   $13.00   Manuf.  OH  (ABC)   $16.87   $19.95   $63.42   Unit  cost   $45.22   $56.20   $98.42  

       Gross  margin   $33.78   $13.80   -­‐$3.42   Gross  margin  (%)   43%   20%   -­‐4%  

1. Under  the  previous  method  for  allocating  overhead  (i.e.,  185%  of  Direct  Labor  Costs),  which   product  was  most  profitable?    What  is  the  basis  for  your  answer?  

2. Under  activity-­‐based  costing,  is  the  same  product  you  identified  above  still  the  most  profitable?     If  not,  what  has  changed?    Explain.  

3. Based  on  the  revised  amounts  of  overhead  charged  to  each  product  using  activity-­‐based  costing,   what  conclusion(s)  can  you  draw  about  the  relative  resources  required  to  manufacture  each   product?    (That  is,  compare  the  amount  of  resources  necessary  for  each  product.)  

4. Does  the  method  of  allocating  overhead  affect  the  company’s  operating  profit?    Explain.   5. What  suggestions  would  you  make  to  management  to  improve  their  overall  profitability?  

   

Problem  3  –  Cost  Behavior  and  Break-­‐even  Analysis  

Following  the  success  of  the  Norgan  Theatre  in  Minto,  Ontario,  owners  of  another  troubled  theatre   located  in  Texas  decided  to  renovate  and  re-­‐open,  hoping  the  enjoy  the  same  success  as  Norgan.    The   owners  of  the  Texas  theatre  put  together  the  following  information  related  to  their  expected  costs  of   running  the  theatre:  

Revenue        

  Theatre  admission      

   

Concession  revenue       61.5%  of  theatre  admission  revenue  

         

           Total  Revenue      

       Expenses   Film  royalties       30%  of  theatre  admission  revenue  

  Concession  booth  supplies       45%  of  concession  revenue  

  Booking  service  fees       5%  of  theatre  admission  revenue  

  Salary  &  wages   11,850  

   

Benefits   1,200    

  Insurance   3,150  

   

Hydro  &  water   2,950    

  Depreciation   1,750  

   

Air  conditioning   2,385    

  Advertising  &  promotion   800  

   

Maintenance   1,750    

  Telephone   750  

 The  owners  are  unsure  about  the  single  admission  price  they  should  charge  (there  is  only  one  ticket   price).    One  of  the  owners  recalled  having  learned  something  about  break-­‐even  analysis  in  graduate   school,  but  didn’t  remember  the  details.    Please  help  out  by  answering  the  questions  below.  

1. All  the  expenses  with  numbers  above,  which  total  $26,585,  are  fixed  costs.    What  does  that   mean?  

2. Why  is  it  necessary  to  know  fixed  costs  in  order  to  determine  a  break-­‐even  point?   3. Contribution  margin  is  defined  as  sales  revenue  less  variable  costs.    Using  the  information  

above,  write  an  equation  for  the  theatre’s  contribution  margin  where  X=the  revenue  required   for  theatre  admission.  

4. Solve  for  the  break-­‐even  level  of  theatre  admission  revenue.   5. The  theatre  owners  are  expecting  2,975  people  to  buy  tickets.    If  the  theatre  owners  want  to  

charge  a  price  that  results  in  a  profit  of  $5,000,  how  much  should  they  charge  for  each  ticket?  

   

Problem  4  –  Short  Answer  Questions  

 

1. Please  answer  the  following  questions:   a. If  a  manufactured  item  has  a  cost  of  $75,  and  if  the  seller  determines  the  price  by  

applying  a  25%  markup  over  cost,  what  is  the  selling  price.    Show  your  work!   b. What  is  the  gross  margin  percentage  at  the  price  you  computed  above?    Show  your  

work!   c. If  the  seller  wishes  to  earn  a  gross  margin  percentage  of  30%,  what  price  should  be  

charged  for  the  same  item?    Show  your  work!   2. Why  do  companies  use  predetermined  overhead  rates  to  apply  overhead  to  jobs  instead  of  

assigning  actual  overhead  to  each  job?   3. We  have  seen  examples  of  companies  using  direct  labor  hours,  direct  labor  dollars  or  machine  

hours  as  drivers  for  assigning  overhead.    What  factors  should  be  considered  when  choosing  a   driver  for  applying  overhead?  

4. Suppose  a  company  purchases  a  raw  material  with  a  cost  of  $100.    During  week  one,  the   material  remains  in  the  storeroom  where  it  was  placed  after  purchase.    In  week  two,  the   material  is  used  in  the  manufacture  of  a  widget.    The  widget  is  incomplete  at  the  end  of  week   two.    The  widget  is  completed  in  week  three  and  placed  on  a  showroom  shelf.    A  customer   purchases  the  widget  in  week  four.    Explain  where,  in  the  financial  statements,  the  $100   associated  with  that  raw  material  would  appear  in  the  income  statement  and/or  balance  sheet   in  weeks  one,  two  three  and  four,  if  financial  statements  were  prepared  at  the  end  of  each   week.  

5. Suppose  you  were  the  project  manager  for  advertising  for  a  major  international  concert  in  a   remote  city.    When  the  project  stated,  you  projected  total  advertising  revenue  of  $800  million   from  sponsors.    When  you  priced  the  advertising,  you  expected  the  cost  of  providing  the   advertising  to  be  $775  million;  however,  you  have  recently  learned  that  the  cost  of  broadcasting   from  a  remote  city  will  be  more  than  you  anticipated.    If  your  pay  was  based  on  advertising   profitability,  what  would  you  do  about  this  new  information?