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Exam 3B Acct 5311 LS 2015 | Complete Solution
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 Exam 3B Acct 5311 LS 2015

Instructions (Read the instructions carefully before you start. Follow them carefully so you do not lose points for carelessness.):
1.    You may use your book, any content on the course site in Blackboard, and your solutions to the assigned homework to help you complete the exam. You may not use any other written source. Nor may you get help from any person except Dr. Martindale.
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Please include the following statement on your exam:

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I'll be praying for you as you work.


I. Cost identification
Sid Freeman has developed a new electronic device that he has decided to produce and market. The production facility will be in a nearby industrial park. He will use his personal computer, which he purchased for $3,000 last year, to monitor the production process. The computer will become obsolete before it wears out from use.  The computer will be depreciated at the rate of $100 per month. Sid's other monthly costs will be:
        Facility rent                $4,000
        Utilities                         500
        Production Equipment rent          8,000
        Materials cost                  2,550
        Labor cost                15,000
        Advertising                  2,000
In order to enter this new business, Sid will quit his current job, which pays him $4,500 per month.

Copy and complete the chart below by placing an "X" under each heading that identifies the cost involved.  An "X" may be placed under more than one heading for a single cost; e.g., a cost might be a variable cost and a direct materials cost.

Opportunity cost    Sunk cost    Cost Behavior    Product Cost    Period cost
            Variable cost    Fixed cost    Direct materials    Direct labor    Factory overhead    
Present salary                                
2.   Contribution Margin

Premier Train Travel presents the following information for one month:

Sales price is $100 per passenger

Fixed costs:
Marketing and admin        $2,000
Overhead            $1,000

Variable costs:    
Marketing and admin        $  5 per passenger
Overhead            $10 per passenger
Direct labor            $15 per passenger
Direct materials        $20 per passenger

Estimated number of passengers - 150

Required: Treat each question as independent of the others, starting with the original information each time.

a.   Prepare a complete income statement for internal reporting using the contribution margin method.  (No heading required.)

b.  If the number of passengers doubles, what would be the effect on contribution margin?

c.  If direct labor costs decreased by 10%, what would be the effect on contribution margin?

d.  What impact would a 10% decrease in direct labor costs have on the number of passengers needed to retain the current profit?

3.    CVP Analysis

Teddy's Toy Company expects its sales and variable costs during the next two months to be:

 March       April   
        Projected sales    5,000 toys    4,200 toys
Sales            $25,000    $21,000
Variable Costs        $15,000    $12,600
Fixed costs will be $10,000 each month.

Required: Answer the following independent questions (i.e., for each question, start with the original information.)

a. What is the expected breakeven point during each of these months?

b.  If the current selling price of $5 is increased by 20% in May, what will the contribution margin ratio be for May, the next month?

c.  If the selling price of $5 is increased by 15% in May, what will the breakeven point need to be?

d.  If fixed costs decreased by 10% and the variable cost per unit increased by 20%, what will be the new breakeven point in units?  (Assume the sales price remains at $5.)

e.  If fixed costs increased by $5,000, what would sales price per unit need to be to keep the same breakeven point the company had in March?
4.  Decision Analysis - Make or Buy:

Refrigerators, Inc. manufacturer refrigerators.  Freeze-It Company, which manufactures the icemakers that are a part of most refrigerator freezers, has proposed to make all the icemakers for Refrigerators, Inc. for $50 a unit.  Refrigerators, Inc. currently manufactures 10,000 icemakers at its facility.  The per unit cost to manufacture 10,000 ice makers is as follows:

Direct materials            $30.00
Direct labor                  10.00
Variable manufacturing overhead        5.00
Fixed manufacturing overhead      20.00
    Total                $75.00

It appears that purchasing the icemakers is to the company’s benefit. Management asked you, the accountant, for a more in depth schedule.
a.    Prepare a schedule that shows the relevant costs and determine whether Refrigerators, Inc. should buy the ice makers from Freeze-It, Inc. or continue to make them, if 25% of the fixed cost is directly related to the production of the ice makers.
b.    Give quantitative and qualitative reasons on why to accept or reject Freeze-Its proposal.



5. Decision Analysis – Special Order:

Larissa’s Copy Center makes copies and performs a variety of other services for local businesses and walk-in’s.  James Johnson is running for councilman and his campaign manager asked if Larissa’s Copy Center can put together 50,000 flyers on colored paper by the next day for $.50 a flyer.  Larissa’s manager at first thought absolutely not because it would interfere with their regular workload and with the walk-in business and they wouldn’t make any money at that price.  But Larissa decided to look at the numbers before turning the job down.  She felt that the job could be done after hours and she thinks that James Johnson will make a good councilman for their district.  

At 15,000 copies per day, the cost per unit is as follows:

    Direct material           $ .10
    Direct labor             .05
    Variable overhead         .10
    Fixed overhead         .25
        Total           $.50

a.)    Prepare a schedule that shows the relevant costs and determine whether Larissa’s Copy Center should accept or reject this special order.  (Direct labor should be calculated at time and a half since the work will be done after hours.)
b.)    Are there any qualitative characteristics that should be taken into account?


6.    Budgeting

The treasurer of Logos Co. has accumulated the following budget information for the first two months of the coming year:

                            January    February
        Sales                    $450,000    $520,000
        Manufacturing costs          290,000      350,000
        Selling & Admin. Expenses        41,400        46,400
        Capital additions               250,000      -----------

The company expects to sell about 35% of its merchandise for cash.  The remaining sales will be on account. Of sales on account, 80% are expected to be collected in full in the month of the sale and the remainder in the month following the sale. Of the manufacturing costs, one-fourth are expected to be paid in the month in which they are incurred. The other three-fourths will be paid in the following month. Depreciation and insurance represent $6,400 of the probable monthly selling & administrative expenses. Insurance is paid in March. Of the remainder of the selling and administrative expenses, one-half are expected to be paid in the month in which they are incurred and the other half in the month following. A $40,000 installment on income taxes needs to be paid in February. Capital additions of $250,000 are to be paid in January.

Current assets as of January 1 are composed of cash of $45,000 and accounts receivable of $51,000. Current liabilities as of January 1 are composed of accounts payable of $121,500, which is made up of $102,000 for materials purchases and $19,500 for operating expenses.  Management desires to maintain a minimum cash balance of $20,000.
Required: Using this information, prepare a monthly cash budget for Logos Co. for January and February.  


7.    Budgeting

Air Ducts, Inc. has prepared the following budgets for the second quarter of the year.

Air Ducts, Inc.
Selling and Administrative Expense Budget
For the Quarter Ended June 30
    April    May    June    Total
Salaries and wages     $      7,000      $         8,000      $         9,000      $       24,000
Rent             1,000                 1,000                 1,000                 3,000
Depreciation             2,000                 2,000                 2,000                 6,000
Advertising                500                    550                    600                 1,650
Other             3,000                 3,500                 4,000               10,500
Budgeted S & A Expense     $   13,500     $       15,050      $       16,600      $       45,150

Air Ducts, Inc.
Purchases Budget
For the Quarter Ended June 30
    April    May    June    Total
Unit Sales                500                    600                    700                 1,800
Desired ending inventory             180                   210                  225                    615
Total units needed                680                    810                    925                 2,415
Beginning Inventory              100                  180                 210                    490
Total units to be purchased              580                  630                  715     1,925
Cost per unit    $75     $75     $80     
Cost of purchases    $43,500     $47,250     $57,200     $147,950

Selling and administrative expenses are paid in the month incurred and purchases are paid in the month following the purchase. Purchases for March were $40,000.  

Prepare a cash payment schedule for the second quarter.

8.     Net Present Value

Sharon Bullock, the owner of Sandwich Emporium, wants to purchase a sandwich machine to make grilled sandwiches to sell to her customers at $5.00 each.  The following estimates are available:
    Initial outlay                    $17,000
    Annual cash flow                    $  5,245
    Cost of capital                          8%
    Estimated life of the sandwich machine    4 years
    Estimated residual value of the machine      $-0-


1.    Create a schedule of the relevant cash flows and then compute the net present value of the sandwich machine purchase. You may use the Tables in the text, a financial calculator, or Excel to calculate the PV amounts.
2.    In a few sentences, providing your advice on whether to go ahead with the purchase.


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Exam 3B Acct 5311 LS 2015 | Complete Solution
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  • Submitted On 07 Aug, 2015 11:02:20
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Relevant Cash flow Initial Outflow in year 0 -17000 Cash in flow 1-4 year 5245 PV of Cash inflows at 8% $17,372.11 NPV $372.11 b As the NPV is positive therefor...
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