Project 1 requires an original investment of $55,000. The project will yield cash flows of $15,000 per year for seven years

Project 1 requires an original investment of $55,000. The project will yield cash flows of $15,000 per year for seven years. Project 2 has a calculated net present value of $5,000 over a four-year life. Project 1 could be sold at the end of four years for a price of $38,000. (a) Determine the net present value of Project 1 over a four-year life, with residual value, assuming a minimum rate of return of 20%. (b) Which project provides the greatest net present value?

Answer:

a. Present value of $15,000 per year at 20% for 4 years*…………………………  $38,835 

Present value of $38,000 at 20% at the end of 4 years**………………………    18,316 

Total present value of Project 1…………………………………………………… $57,151 

Less total cost of Project 1……………………………………………………………   55,000 

Net present value of Project 1……………………………………………………… $  2,151 

* [$15,000 × 2.589 (Exhibit 2, 20%, 4 years)] 

** [$38,000 × 0.482 (Exhibit 1, 20%, 4 years)] 

b. Project 2. Project 1’s net present value of $2,151 is less than the net present 

value of Project 2, $5,000. 

Project A requires an original investment of $22,500. The project will yield cash flows of $5,000 per year for nine years

Project A requires an original investment of $22,500. The project will yield cash flows of $5,000 per year for nine years. Project B has a calculated net present value of $3,500 over a six-year life. Project A could be sold at the end of six years for a price of $12,000. (a) Determine the net present value of Project A over a six-year life, with residual value, assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value?

Answer:


a. Present value of $5,000 per year at 12% for 6 years*…………………………… $20,555 
Present value of $12,000 at 12% at the end of 6 years**………………………      6,084 
Total present value of Project A…………………………………………………… $26,639 
Less total cost of Project A…………………………………………………………   22,500 
Net present value of Project A……………………………………………………… $  4,139 
* [$5,000 × 4.111 (Exhibit 2, 12%, 6 years)] 
** [$12,000 × 0.507 (Exhibit 1, 12%, 6 years)] 
b. Project A. Project A’s net present value of $4,139 is more than the net present 
value of Project B, $3,500. 

A project is estimated to cost $74,035 and provide annual net cash flows of $17,000 for six years.

A project is estimated to cost $74,035 and provide annual net cash flows of $17,000 for six years. Determine the internal rate of return for this project, using Exhibit 2.

Answer:
10%
[($74,035 ÷ $17,000) = 4.355, the present value of an annuity factor for six periods at 10%, from Exhibit 2]

A project is estimated to cost $362,672 and provide annual net cash flows of $76,000 for nine years.

A project is estimated to cost $362,672 and provide annual net cash flows of $76,000 for nine years. Determine the internal rate of return for this project, using Exhibit 2.

Answer:

15% 

[($362,672 ÷ $76,000) = 4.772, the present value of an annuity factor for nine periods at 15%, from Exhibit 2] 

A project has estimated annual net cash flows of $12,200 for five years and is estimated to cost $39,800.

A project has estimated annual net cash flows of $12,200 for five years and is estimated to cost $39,800. Assume a minimum acceptable rate of return of 12%. Using Exhibit 2, determine (1) the net present value of the project and (2) the present value index, rounded to two decimal places.

Answer:
a. $4,181 [($12,200 × 3.605) – $39,800]
b. 1.11 ($43,981 ÷ $39,800)

A project has estimated annual net cash flows of $96,200 for four years and is estimated to cost $315,500.

A project has estimated annual net cash flows of $96,200 for four years and is estimated to cost $315,500. Assume a minimum acceptable rate of return of 10%. Using Exhibit 2, determine (1) the net present value of the project and (2) the present value index, rounded to two decimal places.

Answer:
a. ($10,546) [($96,200 × 3.170) – $315,500]
b. 0.97 ($304,954 ÷ $315,500)

Determine the average rate of return for a project that is estimated to yield total income of $36,000 over three years

Determine the average rate of return for a project that is estimated to yield total income of $36,000 over three years, has a cost of $70,000, and has a $10,000 residual value.

Answer:
Estimate average annual income $12,000
($36,000 ÷ 3 years)

Average investment $40,000
[($70,000 + $10,000) ÷ 2]

Average rate of return 30%
($12,000 ÷ $40,000)

A project has estimated annual net cash flows of $135,800. It is estimated to cost $787,640

A project has estimated annual net cash flows of $135,800. It is estimated to cost $787,640. Determine the cash payback period. Round to one decimal place.

Answer:
5.8 years ($787,640 ÷ $135,800)

A project has estimated annual net cash flows of $9,300. It is estimated to cost $41,850

A project has estimated annual net cash flows of $9,300. It is estimated to cost $41,850. Determine the cash payback period. Round to one decimal place.

Answer:
4.5 years ($41,850 ÷ $9,300)

Determine the average rate of return for a project that is estimated to yield total income of $148,500 over

Determine the average rate of return for a project that is estimated to yield total income of $148,500 over five years, has a cost of $300,000, and has a $30,000 residual value.

Answer:

Estimate average annual income $29,700 

($148,500 ÷ 5 years) 

Average investment $165,000 

[($300,000 + $30,000) ÷ 2] 

Average rate of return 18% 

($29,700 ÷ $165,000) 

Casual Cuts Inc. has total estimated factory overhead for the year of $225,000, divided into four activities:

Casual Cuts Inc. has total estimated factory overhead for the year of $225,000, divided into four activities: cutting, $90,000; sewing, $22,500; setup, $80,000; and inspection, $32,500. Casual Cuts manufactures two types of men’s pants: jeans and khakis. The activity-base usage quantities for each product by each activity are as follows:

  Cutting Sewing Setup Inspection

Jeans   500 dlh 1,000 dlh   250 setups 100 inspections

Khakis 1,000   500   750 400

1,500 dlh 1,500 dlh 1,000 setups 500 inspections

Each product is budgeted for 10,000 units of production for the year.  Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.

Answer:

a. Cutting: $90,000 ÷ 1,500 direct labor hours = $60 per dlh 

Sewing: $22,500 ÷ 1,500 direct labor hours = $15 per dlh 

Setup: $80,000 ÷ 1,000 setups = $80 per setup 

Inspection: $32,500 ÷ 500 inspections = $65 per inspection 

b. Jeans Khakis 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Cutting 500  dlh $60  /dlh $30,000 1,000  dlh $60  /dlh $ 60,000 

Sewing 1,000  dlh $15  /dlh 15,000 500  dlh $15  /dlh 7,500 

Setup 250  setups $80  /setup 20,000 750  setups $80  /setup 60,000 

Inspection 100  insp. $65  /insp. 6,500 400  insp. $65  /insp. 26,000 

Total $71,500  $153,500 

÷ Budgeted units to be produced ÷  10,000  ÷  10,000 

Factory overhead per unit $ 7.15  $ 15.35 

Wave Wake Marine Company has total estimated factory overhead for the year of $1,200,000,

Wave Wake Marine Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: fabrication, $450,000; assembly, $210,000; setup, $240,000; and inspection, $300,000. Wave Wake manufactures two types of boats: a speedboat and a bass boat. The activity-base usage quantities for each product by each activity are as follows:

Fabrication Assembly      Setup      Inspection

Speedboat   800 dlh 1,200 dlh  60 setups 600 inspections

Bass boat 1,200   800 100 200

2,000 dlh 2,000 dlh 160 setups 800 inspections

Each product is budgeted for 200 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.

Answer:

a. Fabrication: $450,000 ÷ 2,000 direct labor hours = $225 per dlh 

Assembly: $210,000 ÷ 2,000 direct labor hours = $105 per dlh 

Setup: $240,000 ÷ 160 setups = $1,500 per setup 

Inspection: $300,000 ÷ 800 inspections = $375 per inspection 

b. Speedboat Bass Boat 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Fabrication 800  dlh $225  /dlh $180,000 1,200  dlh $225  /dlh $270,000 

Assembly 1,200  dlh $105  /dlh 126,000 800  dlh $105  /dlh 84,000 

Setup 60  setups $1,500  /setup 90,000 100  setups $1,500  /setup 150,000 

Inspection 600  insp. $375  /insp. 225,000 200  insp. $375  /insp. 75,000 

Total $621,000  $579,000 

÷ Budgeted units to be produced ÷ 200  ÷ 200 

Factory overhead per unit $ 3,105  $ 2,895 

Product K has a unit contribution margin of $120. Product L has a unit contribution margin of $100

Product K has a unit contribution margin of $120. Product L has a unit contribution margin of $100. Product K requires five furnace hours, while Product L requires four furnace hours. Determine the most profitable product, assuming the furnace is a constraint.

Answer:

Product K Product L 

Unit contribution margin……………………………………………… $120 $100 

÷ Furnace hours per unit………………………………………………   5   4 

Unit contribution margin per production bottleneck hour……… $  24 $  25 

Product L is the most profitable in using bottleneck resources. 

Product A has a unit contribution margin of $24. Product B has a unit contribution margin of $30

Product A has a unit contribution margin of $24. Product B has a unit contribution margin of $30. Product A requires four testing hours, while Product B requires six testing hours. Determine the most profitable product, assuming the testing is a constraint.

Answer:


Product A Product B 
Unit contribution margin……………………………………………… $24 $30 
÷ Testing hours per unit………………………………………………     4     6 
Unit contribution margin per production bottleneck hour……… $  6 $  5 
Product A is the most profitable in using bottleneck resources. 

Green Thumb Garden Tools Inc. produces and sells home and garden tools and equipment.

Green Thumb Garden Tools Inc. produces and sells home and garden tools and equipment. A lawnmower has a total cost of $230 per unit, of which $160 is product cost and $70 is selling and administrative expenses. In addition, the total cost of $230 is made up of $120 variable cost and $110 fixed cost. The desired profit is $58 per unit. Determine the markup percentage on product cost.

Answer:


Markup percentage on product cost
Desired Profit + Selling and Admin. Exp. 
Total Product Cost 
Markup percentage on product cost: 
* $230 – $70 

Crystal Lighting Inc. produces and sells lighting fixtures. An entry light has a total cost of $80 per unit,

Crystal Lighting Inc. produces and sells lighting fixtures. An entry light has a total cost of $80 per unit, of which $54 is product cost and $26 is selling and administrative expenses. In addition, the total cost of $80 is made up of $40 variable cost and $40 fixed cost. The desired profit is $55 per unit. Determine the markup percentage on product cost.

Answer:

Markup percentage on product cost

Desired Profit + Selling and Admin. Exp. 

Total Product Cost 

Markup percentage on product cost: 

* $80 – $26 

Product A is normally sold for $9.60 per unit. A special price of $7.20 is offered for the export market.

Product A is normally sold for $9.60 per unit. A special price of $7.20 is offered for the export market. The variable production cost is $5.00 per unit. An additional export tariff of 15% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated March 16, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

Answer:

Differential Analysis 

Reject Order (Alt. 1) or Accept Order (Alt. 2) 

March 16, 2014 

Reject 

Order 

(Alternative 1) 

Revenues, per unit $0.00 $7.20 $7.20 

Costs:    

Variable manufacturing costs, per unit 0.00 –5.00 –5.00 

Export tariff, per unit 0.00 –1.08* –1.08 

Income (Loss), per unit $0.00 $1.12 $1.12 

    

* $7.20 × 15% 

The company should accept the special order. 

Product R is normally sold for $52 per unit. A special price of $39 is offered for the export market

Product R is normally sold for $52 per unit. A special price of $39 is offered for the export market. The variable production cost is $31 per unit. An additional export tariff of 25% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated October 23, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

Answer:

Differential Analysis 

Reject Order (Alt. 1) or Accept Order (Alt. 2) 

October 23, 2014 

Reject Order 

(Alternative 1) 

Revenues, per unit $0.00 $39.00 $39.00 

Costs:    

Variable manufacturing costs, per unit 0.00 –31.00 –31.00 

Export tariff, per unit 0.00 –9.75* –9.75 

Income (Loss), per unit $0.00 –$  1.75 –$  1.75 

    

* $39.00 × 25% 

The company should not accept the special order. 

Product D is produced for $24 per gallon. Product D can be sold without additional processing for $36 per gallon,

Product D is produced for $24 per gallon. Product D can be sold without additional processing for $36 per gallon, or processed further into Product E at an additional cost of $9 per gallon. Product E can be sold for $43 per gallon. Prepare a differential analysis dated February 26, 2014, on whether to sell Product D (Alternative 1) or process further into Product E (Alternative 2).

Answer:


Differential Analysis 
Sell Product D (Alt. 1) or Process Further into Product E (Alt. 2) 
February 26, 2014 

Sell 
Product D 
(Alternative 1) 
Process 
Further into 
Product E 
(Alternative 2) 
Revenues, per unit $36 $43 $7 
Costs, per unit –24 –33* –9 
Income (Loss), per unit $12 $10 –$2 
    
* $24 + $9 
The company should sell Product D without further processing. 

Product T is produced for $3.90 per pound. Product T can be sold without additional processing for $4.65 per pound

Product T is produced for $3.90 per pound. Product T can be sold without additional processing for $4.65 per pound, or processed further into Product U at an additional cost of $0.58 per pound. Product U can be sold for $5.30 per pound. Prepare a differential analysis dated August 2, 2014, on whether to sell Product T (Alternative 1) or process further into Product U (Alternative 2).

Answer:

Differential Analysis 

Sell Product T (Alt. 1) or Process Further into Product U (Alt. 2) 

August 2, 2014 

Sell Product T 

(Alternative 1) 

Revenues, per unit $4.65 $5.30 $0.65 

Costs, per unit –3.90 –4.48* –0.58 

Income (Loss), per unit $0.75 $0.82 $0.07 

    

* $3.90 + $0.58 

The company should process further into Product U. 

A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500

A machine with a book value of $80,000 has an estimated five-year life. A proposal is offered to sell the old machine for $50,500 and replace it with a new machine at a cost of $75,000. The new machine has a five-year life with no residual value. The new machine would reduce annual direct labor costs from $11,200 to $7,400. Prepare a differential analysis dated April 11, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

Answer:

Differential Analysis 

Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) 

April 11, 2014 

 Continue 

with Old 

Machine 

(Alternative 1) 

Revenues:    

Proceeds from sale of old machine $ 0 $50,500 $50,500 

Costs:    

Purchase price 0 –75,000 –75,000 

Direct labor (5 years) –56,000I

ncome (Loss) –$56,000 –$61,500 –$  5,500 

    

1 

$11,200 × 5 years 

2 

$7,400 × 5 years 

The company should continue with the old machine. 

A machine with a book value of $126,000 has an estimated six-year life. A proposal is offered to sell the old machine for $98,000

A machine with a book value of $126,000 has an estimated six-year life. A proposal is offered to sell the old machine for $98,000 and replace it with a new machine at a cost of $155,000. The new machine has a six-year life with no residual value. The new machine would reduce annual direct labor costs from $68,000 to $58,000. Prepare a differential analysis dated February 18, 2014, on whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2).

Answer:


Differential Analysis 
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2) 
February 18, 2014 
 Continue with 
Old Machine 
(Alternative 1) 
Revenues:    
Proceeds from sale of old machine $ 0 $  98,000 $  98,000 
Costs:    
Purchase price 0 –155,000 –155,000 
Direct labor (6 years) –408,000I
ncome (Loss) –$408,000 –$405,000 $ 3,000 
    
1 
$68,000 × 6 years 
2 
$58,000 × 6 years 
The company should replace the old machine. 

A company manufactures various sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $67 per unit

A company manufactures various sized plastic bottles for its medicinal product. The manufacturing cost for small bottles is $67 per unit (100 bottles), including fixed costs of $22 per unit. A proposal is offered to purchase small bottles from an outside source for $35 per unit, plus $5 per unit for freight. Prepare a differential analysis dated March 30, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative 2) the bottles, assuming fixed costs are unaffected by the decision.

Answer:

Differential Analysis 

Make Bottles (Alt. 1) or Buy Bottles (Alt. 2) 

March 30, 2014 

Make 

Bottles 

(Alternative 1) 

Unit costs:    

Purchase price $  0 –$35 –$35 

Freight 0 –5 –5 

Variable costs ($67 – $22) –45 0 45 

Fixed factory overhead –22 –22 0 

Income (Loss) –$67 –$62 $  5 

    

The company should buy the bottles. 

A restaurant bakes its own bread for $152 per unit (100 loaves), including fixed costs of $39 per unit

A restaurant bakes its own bread for $152 per unit (100 loaves), including fixed costs of $39 per unit. A proposal is offered to purchase bread from an outside source for $105 per unit, plus $12 per unit for delivery. Prepare a differential analysis dated August 16, 2014, to determine whether the company should make (Alternative 1) or buy (Alternative  2) the bread, assuming fixed costs are unaffected by the decision.

Answer:

Differential Analysis 

Make Bread (Alt. 1) or Buy Bread (Alt. 2) 

August 16, 2014 

Make Bread 

(Alternative 1) 

Unit costs:    

Purchase price $ 0 –$105 –$105 

Delivery 0 –12 –12 

Variable costs ($152 – $39) –113 0 113 

Fixed factory overhead –39 –39 0 

Income (Loss) –$152 –$156 –$ 4 

    

The company should make the bread. 

Product B has revenue of $39,500, variable cost of goods sold of $25,500, variable selling expenses of $16,500

Product B has revenue of $39,500, variable cost of goods sold of $25,500, variable selling expenses of $16,500, and fixed costs of $15,000, creating a loss from operations of $17,500.Prepare a differential analysis as of May 9, 2014, to determine if Product B should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision.

Answer:

Differential Analysis 

Continue Product B (Alt. 1) or Discontinue Product B (Alt. 2) 

May 9, 2014 

Continue 

Product B 

(Alternative 1) 

Revenue $39,500 $ 0 –$39,500 

Costs:    

Variable cost of goods sold –25,500 0 25,500 

Variable selling and admin.    

expenses –16,500 0 16,500 

Fixed costs –15,000 –$15,000 0 

Income (Loss) –$17,500 –$15,000 $  2,500 

    

Product B should be discontinued. 

Product S has revenue of $149,000, variable cost of goods sold of $88,500, variable selling expenses of $24,500

Product S has revenue of $149,000, variable cost of goods sold of $88,500, variable selling expenses of $24,500, and fixed costs of $40,000, creating a loss from operations of $4,000. Prepare a differential analysis as of September 12, 2014, to determine if Product S should be continued (Alternative 1) or discontinued (Alternative 2), assuming fixed costs are unaffected by the decision.

Answer:


Differential Analysis 
Continue Product S (Alt. 1) or Discontinue Product S (Alt. 2) 
September 12, 2014 


Continue 
Product S 
(Alternative 1) 
Revenue $149,000 $ 0 –$149,000 
Costs:    
Variable cost of goods sold –88,500 0 88,500 
Variable selling and admin.    
expenses –24,500 0 24,500 
Fixed costs –40,000 –40,000 0 
Income (Loss) –$ 4,000 –$40,000 –$  36,000 
    
Product S should be continued. 

Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000

Timberlake Company owns equipment with a cost of $165,000 and accumulated depreciation of $60,000 that can be sold for $82,000, less a 6% sales commission. Alternatively, the equipment can be leased by Timberlake Company for five years for a total of $84,600, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Timberlake Company on the equipment would total $7,950 over the five years. Prepare a differential analysis on March 23, 2014, as to whether Timberlake Company should lease (Alternative 1) or sell (Alternative 2) 

the equipment.

Answer:

Differential Analysis 

Lease Equipment (Alt. 1) or Sell Equipment (Alt. 2) 

March 23, 2014 

Lease 

Equipment 

(Alternative 1) 

Revenues $84,600 $82,000 –$2,600 

Costs –7,950 –4,920* 3,030 

Income (Loss) $76,650 $77,080 $   430 

    

* $82,000 × 6% 

Timberlake Company should sell the equipment. 

Jerrod Company owns a machine with a cost of $305,000 and accumulated depreciation of $45,000 that

Jerrod Company owns a machine with a cost of $305,000 and accumulated depreciation of $45,000 that can be sold for $231,000, less a 5% sales commission. Alternatively, the machine can be leased by Jerrod Company for three years for a total of $243,000, at the end of which there is no residual value. In addition, the repair, insurance, and property tax expense that would be incurred by Jerrod Company on the machine would total $16,900 over the three years. Prepare a differential analysis on January 12, 2014, as to whether Jerrod Company should lease (Alternative 1) or sell (Alternative 2) the machine.

Answer:

Differential Analysis 

Lease Machine (Alt. 1) or Sell Machine (Alt. 2) 

January 12, 2014 

  

Lease 

Machine 

(Alternative 1) 

Revenues $243,000 $231,000 –$12,000 

Costs –16,900 –11,550* 5,350 

Income (Loss) $226,100 $219,450 –$  6,650 

    

* $231,000 × 5% 

Jerrod Company should lease the machine. 

The materials used by the Multinomah Division of Isbister Company are currently purchased from outside

The materials used by the Multinomah Division of Isbister Company are currently purchased from outside suppliers at $90 per unit. These same materials are produced by the Pembroke Division. The Pembroke Division can produce the materials needed by the  Multinomah Division at a variable cost of $75 per unit. The division is currently producing 120,000 units and has capacity of 150,000 units. The two divisions have recently negotiated a transfer price of $82 per unit for 15,000 units. By how much will each division’s income increase as a result of this transfer?

Answer:

Increase in Pembroke (Supplying) 

Division’s Income from Operations  = 

(Transfer Price – Variable Cost per Unit) 

× Units Transferred 

Increase in Pembroke (Supplying) 

Division’s Income from Operations  = 

($82 – $75) × 15,000 units = $105,000 

Increase in Multinomah (Purchasing) 

Division’s Income from Operations  = 

(Market Price – Transfer Price) 

× Units Transferred 

Increase in Multinomah (Purchasing) 

Division’s Income from Operations  =  ($90 – $82) × 15,000 units = $120,000 

The materials used by the North Division of Horton Company are currently purchased from outside suppliers

The materials used by the North Division of Horton Company are currently purchased from outside suppliers at $60 per unit. These same materials are produced by Horton’s South Division. The South Division can produce the materials needed by the North Division at a variable cost of $42 per unit. The division is currently producing 200,000 units and has capacity of 250,000 units. The two divisions have recently negotiated a transfer price of $52 per unit for 30,000 units. By how much will each division’s  income increase as a result of this transfer?

Answer:


Increase in South (Supplying) 
(Transfer Price – Variable Cost per Unit) 
Division’s Income from Operations  = 

× Units Transferred 
Increase in South (Supplying) 
Division’s Income from Operations  = 
($52 – $42) × 30,000 units = $300,000 
Increase in North (Purchasing) 
Division’s Income from Operations  = 
(Market Price – Transfer Price) 
× Units Transferred 
Increase in North (Purchasing) 
Division’s Income from Operations  =  ($60 – $52) × 30,000 units = $240,000 

The Consumer Division of Hernandez Company has income from operations of $90,000 and assets of

The Consumer Division of Hernandez Company has income from operations of $90,000 and assets of $450,000. The minimum acceptable rate of return on assets is 10%. What is the residual income for the division?

Answer:

Income from operations…………………………………………………………………… $90,000 

Less:  Minimum acceptable income from operations as a 

      percent of assets ($450,000 × 10%)……………………………………………………   45,000 

Residual income…………………………………………………………………………… $45,000 

The Commercial Division of Herring Company has income from operations of $420,000 and assets of $910,000

The Commercial Division of Herring Company has income from operations of $420,000 and assets of $910,000. The minimum acceptable rate of return on assets is 8%. What is the residual income for the division?

Answer:
Income from operations…………………………………………………………………… $420,000
Less:  Minimum acceptable income from operations as a
    percent of assets ($910,000 × 8%)………………………………………………………     72,800
Residual income…………………………………………………………………………… $347,200

Briggs Company has income from operations of $36,000, invested assets of $180,000, and sales of $720,000

Briggs Company has income from operations of $36,000, invested assets of $180,000, and sales of $720,000. Use the DuPont formula to compute the rate of return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the rate of return on investment.

Answer:
a. Profit Margin = $36,000 ÷ $720,000 = 5.0%
b. Investment Turnover = $720,000 ÷ $180,000 = 4.0
c. Rate of Return on Investment = 5.0% × 4.0 = 20%

Using the data for Lee Company from Practice Exercise 24-2B along with the data provided below,

Using the data for Lee Company from Practice Exercise 24-2B along with the data provided below, determine the divisional income from operations for the Retail Division and the Commercial Division.

                               Retail Division | Commercial Division

Sales.                               $945,000 | $966,000

Cost of goods sold            504,000 | 559,300

Selling expenses               156,800 | 175,000

Answer:

Retail Commercial 

Division Division 

Sales……………………………………………………… $945,000 $966,000 

Cost of goods sold……………………………………    504,000   559,300 

Gross profit…………………………………………… $441,000 $406,700 

Selling expenses………………………………………   156,800   175,000 

Income from operations before service 

department charges………………………………… $284,200 $231,700 

Service department charges…………………………    118,800   145,200 

Income from operations……………………………… $165,400 $  86,500 

McBreen Company has income from operations of $96,000, invested assets of $400,000, and sales of $1,200,000

McBreen Company has income from operations of $96,000, invested assets of $400,000, and sales of $1,200,000. Use the DuPont formula to compute the rate of return on investment and show (a) the profit margin, (b) the investment turnover, and (c) the rate  of return on investment.

Answer:

a. Profit Margin = $96,000 ÷ $1,200,000 = 8.0% 

b. Investment Turnover = $1,200,000 ÷ $400,000 = 3.0 

c. Rate of Return on Investment = 8.0% × 3.0 = 24% 

Using the data for Kensy Company from Practice Exercise 24-2A along with the data provided below,

Using the data for Kensy Company from Practice Exercise 24-2A along with the data provided below, determine the divisional income from operations for the Northeast and Pacific divisions.

                       Northeast Division | Pacific Division
Sales                           $1,155,000 | $1,204,000
Cost of goods sold          590,800 |    658,000
Selling expenses             231,000 |    252,000

Answer:


Northeast  Pacific 
Division Division 
Sales……………………………………………………… $1,155,000 $1,204,000 
Cost of goods sold……………………………………    590,800   658,000 
Gross profit…………………………………………… $   564,200 $   546,000 
Selling expenses………………………………………    231,000   252,000 
Income from operations before service 
department charges…………………………………  $   333,200 $   294,000 
Service department charges…………………………    195,750   239,250 
Income from operations……………………………… $   137,450 $  54,750 

The centralized computer technology department of Lee Company has expenses of $264,000

The centralized computer technology department of Lee Company has expenses of $264,000. The department has provided a total of 2,500 hours of service for the period. The Retail Division has used 1,125 hours of computer technology service during the period, and the Commercial Division has used 1,375 hours of computer technology service. How much should each division be charged for computer technology department services?

Answer:
Retail Division Service Charge for Computer Technology Department:
$118,800 = 1,125 billed hours × ($264,000 ÷ 2,500 hours billed)

Commercial Division Service Charge for Computer Technology Department:
$145,200 = 1,375 billed hours × ($264,000 ÷ 2,500 hours billed)

The centralized employee travel department of Kensy Company has expenses of $435,000

The centralized employee travel department of Kensy Company has expenses of $435,000. The department has serviced a total of 4,000 travel reservations for the period. The Northeast Division has made 1,800 reservations during the period, and the Pacific Division has made 2,200 reservations. How much should each division be charged for travel services?

Answer:

Northeast Division Service Charge for Travel Department: 

$195,750 = 1,800 billed reservations × ($435,000 ÷ 4,000 reservations) 

Pacific Division Service Charge for Travel Department: 

$239,250 = 2,200 billed reservations × ($435,000 ÷ 4,000 reservations) 

Mandel Company’s costs were over budget by $252,000. The company is divided into West and East regions

Mandel Company’s costs were over budget by $252,000. The company is divided into West and East regions. The East Region’s costs were under budget by $74,000. Determine the amount that the West Region’s costs were over or under budget.

Answer:
$326,000 over budget ($252,000 + $74,000)

Conley Company’s costs were under budget by $198,000. The company is divided into North and South regions

Conley Company’s costs were under budget by $198,000. The company is divided into North and South regions. The North Region’s costs were over budget by $52,000. Determine the amount that the South Region’s costs were over or under budget.

Answer:
$250,000 under budget ($198,000 + $52,000)

The following are inputs and outputs to the cooking process of a restaurant:

The following are inputs and outputs to the cooking process of a restaurant:

Number of times ingredients are missing
Number of customer complaints
Number of hours kitchen equipment is down for repairs
Number of server order mistakes
Percent of meals prepared on time
Number of unexpected cook absences

Identify whether each is an input or output to the cooking process.

Answer:
Number of times ingredients are missing……………………………………………Input
Number of customer complaints………………………………………………………Output
Number of hours kitchen equipment is down for repairs…………………………Input
Number of server order mistakes………………………………………………………Input
Percent of meals prepared on time……………………………………………………Output
Number of unexpected cook absences………………………………………………Input

Prepare a 2014 income statement through gross profit for Dvorak Company, using the variance data

Prepare a 2014 income statement through gross profit for Dvorak Company, using the variance data in Practice Exercises 23-1B, 23-2B, 23-3B, and 23-4B. Assume Dvorak sold 1,000 units at $90 per unit.

Answer:


DVORAK COMPANY 
Income Statement Through Gross Profit 
For the Year Ended December 31, 2014 
Sales (1,000 units × $90) $90,000 
Cost of goods sold—at standard* 69,500 
Gross profit—at standard $20,500 
    F
avorable Unfavorable  
Less variances from standard cost:    
Direct materials price (PE23–1B)  $2,250  
Direct materials quantity (PE23–1B) $1,250   
Direct labor rate (PE23–2B) 1,400   
Direct labor time (PE23–2B) 3,400   
Factory overhead controllable (PE23–3B) 200   
Factory overhead volume (PE23–4B)  300 3,700 
Gross profit   $24,200 
    
* Direct materials (1,000 units × 5 lbs. × $2.50)…………………………………………………… 

$12,500 
Direct labor (1,000 units × 3 hrs. × $17.00)……………………………………………………… 51,000 
Factory overhead [1,000 units × 3 hrs. × ($1.40 + $0.60)]………………………………………     6,000 
Cost of goods sold at standard…………………………………………………………………… $69,500 

The following are inputs and outputs to the copying process of a copy shop:Number of employee errors

The following are inputs and outputs to the copying process of a copy shop:

Number of employee errors

Number of times paper supply runs out

Copy machine downtime (broken)

Number of pages copied per hour

Number of customer complaints

Percent jobs done on time

Identify whether each is an input or output to the copying process.

Answer:

Number of employee errors…………………………………………………………… Input 

Number of times paper supply runs out……………………………………………  Input 

Copy machine downtime (broken)…………………………………………………… Input 

Number of pages copied per hour…………………………………………………… Output 

Number of customer complaints………………………………………………………Output 

Percent jobs done on time…………………………..………………………………… Output 

Prepare a 2014 income statement through gross profit for Giovanni Company, using the variance data

Prepare a 2014 income statement through gross profit for Giovanni Company, using the variance data in Practice Exercises 23-1A, 23-2A, 23-3A, and 23-4A. Assume Giovanni sold 3,500 units at $400 per unit.

Answer:

GIOVANNI COMPANY 

Income Statement Through Gross Profit 

For the Year Ended December 31, 2014 

Sales (3,500 units × $400) $1,400,000 

Cost of goods sold—at standard* 1,093,750 

Gross profit—at standard $   306,250 

    F

avorable Unfavorable  

Less variances from standard cost:    

Direct materials price (PE23–1A) $10,800   

Direct materials quantity (PE23–1A)  $13,600  

Direct labor rate (PE23–2A)  8,850  

Direct labor time (PE23–2A)  6,000  

Factory overhead controllable (PE23–3A)  2,150  

Factory overhead volume (PE23–4A) 900  (18,900) 

Gross profit   $   287,350 

    

* Direct materials (3,500 units × 4 gal. × $34.00)…………………………………………………… 

$  476,000 

Direct labor (3,500 units × 5 hrs. × $30.00)……………………………………………………… 525,000 

Factory overhead [3,500 units × 5 hrs. × ($3.50 + $1.80)]………………………………………   92,750 

Cost of goods sold at standard……………………………………………………………………… $1,093,750 

Giovanni Company produced 3,500 units that require four standard gallons per unit at $34.00 standard price

Giovanni Company produced 3,500 units that require four standard gallons per unit at $34.00 standard price per gallon. The company actually used 14,400 gallons in production. Journalize the entry to record the standard direct materials used in production.

Answer:

Work in Process (14,000* gal. × $34.00) 476,000  

Direct Materials Quantity Variance** 13,600  

Materials (14,400 gal. × $34.00)  489,600 

* 3,500 units × 4 standard gal. per unit 

** [(14,400 gal. – 14,000 gal.) × $34.00] 

Dvorak Company produced 1,000 units that require five standard pounds per unit at $2.50 standard price

Dvorak Company produced 1,000 units that require five standard pounds per unit at $2.50 standard price per pound. The company actually used 4,500 pounds in production. Journalize the entry to record the standard direct materials used in production.

Answer:

Work in Process (5,000* lbs. × $2.50) 12,500  

Direct Materials Quantity Variance**  1,250 

Materials (4,500 lbs. × $2.50)  11,250 

* 1,000 units × 5 standard lbs. per unit 

** [(4,500 lbs. – 5,000 lbs.) × $2.50] 

Giovanni Company produced 3,500 units of product that required five standard hours per unit.

Giovanni Company produced 3,500 units of product that required five standard hours per unit. The standard fixed overhead cost per unit is $1.80 per hour at 17,000 hours, which is 100% of normal capacity. Determine the fixed factory overhead volume variance.

Answer:

–$900 favorable $1.80 × [17,000 hrs. – (3,500 units × 5 hrs.)] 

Dvorak Company produced 1,000 units of product that required three standard hours per unit

Dvorak Company produced 1,000 units of product that required three standard hours per unit. The standard fixed overhead cost per unit is $0.60 per hour at 3,500 hours, which is 100% of normal capacity. Determine the fixed factory overhead volume variance.

Answer:
$300 unfavorable $0.60 × [3,500 hrs. – (1,000 units × 3 hrs.)]

Giovanni Company produced 3,500 units of product that required five standard hours per unit.

Giovanni Company produced 3,500 units of product that required five standard hours per unit. The standard variable overhead cost per unit is $3.50 per hour. The actual variable factory overhead was $63,400. Determine the variable factory overhead controllable variance.

Answer:

Variable Factory Overhead 

Controllable Variance  =  $63,400 – [$3.50 × (3,500 units × 5 hrs.)] 

Variable Factory Overhead 

Controllable Variance 

Variable Factory Overhead 

Controllable Variance 

=  $63,400 – $61,250 

=  $2,150 Unfavorable 

Dvorak Company produced 1,000 units of product that required three standard hours per unit

Dvorak Company produced 1,000 units of product that required three standard hours per unit. The standard variable overhead cost per unit is $1.40 per hour. The actual variable factory overhead was $4,000. Determine the variable factory overhead controllable variance.

Answer:


Variable Factory Overhead 
Controllable Variance  = 

Variable Factory Overhead 
$4,000 – [$1.40 × (1,000 units × 3.0 hrs.)] 
Controllable Variance  =  $4,000 – $4,200 
Variable Factory Overhead 
Controllable Variance  = –$200 Favorable 

Dvorak Company produces a product that requires three standard hours per unit at a standard hourly rate of $17

Dvorak Company produces a product that requires three standard hours per unit at a standard hourly rate of $17 per hour. If 1,000 units required 2,800 hours at an hourly rate of $16.50 per hour, what is the direct labor (a) rate variance, (b) time variance, and (c) cost variance?

Answer:

a. Direct labor rate 

variance (favorable) 

–$1,400 [($16.50 – $17.00) × 2,800 hrs.] 

b. 

Direct labor time 

variance (favorable) 

–$3,400 

[(2,800 hrs. – 3,000 hrs.) × $17.00] 

c. 

Direct labor cost 

–$4,800 

(–$1,400 – $3,400) or 

 variance (favorable)  [($16.50 × 2,800 hrs.) – ($17.00 × 3,000 hrs.)] 

   = $46,200 – $51,000 

Giovanni Company produces a product that requires five standard hours per unit at a standard hourly rate of $30

Giovanni Company produces a product that requires five standard hours per unit at a standard hourly rate of $30 per hour. If 3,500 units required 17,700 hours at an hourly rate of $30.50 per hour, what is the direct labor (a) rate variance, (b) time variance, and (c) cost variance?

Answer:

a. Direct labor rate 

variance (unfavorable) 

$8,850 [($30.50 – $30.00) × 17,700 hrs.] 

b. Direct labor time 

variance (unfavorable) 

$6,000 [(17,700 hrs. – 17,500 hrs.) × $30.00] 

c. 

Direct labor cost 

variance (unfavorable) 

$14,850 

($8,850 + $6,000) or 

[($30.50 × 17,700 hrs.) – ($30.00 × 17,500 hrs.)] 

= $539,850 – $525,000 

Dvorak Company produces a product that requires five standard pounds per unit. The standard price is $2.50

Dvorak Company produces a product that requires five standard pounds per unit. The standard price is $2.50 per pound. If 1,000 units required 4,500 pounds, which were purchased at $3.00 per pound, what is the direct materials (a) price variance, (b) quantity variance, and (c) cost variance?

Answer:

a. Direct materials price 

variance (unfavorable) 

$2,250 [($3.00 – $2.50) × 4,500 lbs.] 

b. Direct materials quantity –$1,250 [(4,500 lbs. – 5,000 lbs.) × $2.50] 

 variance (favorable)   

c. 

Direct materials cost 

variance (unfavorable) 

$1,000 

($2,250 – $1,250) or 

[($3.00 × 4,500 lbs.) – ($2.50 × 5,000 lbs.)] 

= $13,500 – $12,500 

Giovanni Company produces a product that requires four standard gallons per unit. The standard price is $34.00

Giovanni Company produces a product that requires four standard gallons per unit. The standard price is $34.00 per gallon. If 3,500 units required 14,400 gallons, which were purchased at $33.25 per gallon, what is the direct materials (a) price variance, (b) quantity variance, and (c) cost variance?

Answer:


a. Direct materials price 
variance (favorable) 
–$10,800 [($33.25 – $34.00) × 14,400 gal.] 
b. Direct materials quantity $13,600 [(14,400 gal. – 14,000 gal.) × $34.00] 
 variance (unfavorable)   
c. 

Direct materials cost 
variance (unfavorable) 

$2,800 

(–$10,800 + $13,600) or 
[($33.25 × 14,400 gal.) – ($34.00 × 14,000 gal.)] 
= $478,800 – $476,000 

Magnolia Candle Co. pays 10% of its purchases on account in the month of the purchase and 90% in the month

Magnolia Candle Co. pays 10% of its purchases on account in the month of the purchase and 90% in the month following the purchase. If purchases are budgeted to be $11,900 for March and $12,700 for April, what are the budgeted cash payments for purchases on account for April?

Answer:
                                                                                                                                          April
Payments for March purchases (90% × $11,900)…………………………………… $10,710
Payments for April purchases (10% × $12,700)…………………………………………1,270
Total payments for purchases on account………………………………………………  $11,980

LifeTyme Publishers Inc. collects 30% of its sales on account in the month of the sale and 70% in the month

LifeTyme Publishers Inc. collects 30% of its sales on account in the month of the sale and 70% in the month following the sale. If sales on account are budgeted to be $320,000 for June and $350,000 for July, what are the budgeted cash receipts from sales on account for July?

Answer:
                                                                                                                                               July
Collections from June sales (70% × $320,000)…………………………………………   $224,000
Collections from July sales (30% × $350,000)…………………………………………    105,000
Total receipts from sales on account……………………………………………………   $329,000

Prepare a cost of goods sold budget for Magnolia Candle Co., using the information in Practice Exercises 22-3B and 22-4B

Prepare a cost of goods sold budget for Magnolia Candle Co., using the information in Practice Exercises 22-3B and 22-4B. Assume the estimated inventories on January 1, 2014, for finished goods and work in process were $9,800 and $3,600, respectively. Also assume the desired inventories on December 31, 2014, for finished goods and work in process were $12,900 and $3,500, respectively. Factory overhead was budgeted at $109,600.

Answer:

Finished goods inventory, January 1, 2014   $ 9,800 

Work in process inventory, January 1, 2014  $ 3,600  

Direct materials:    

Direct materials inventory, January 1, 2014    

(2,500 × $4.10) $  10,250   

Direct materials purchases (from PE 22–3B) 150,470   

Cost of direct materials available for use $160,720   

Less direct materials inventory,    

December 31, 2014 (2,100 × $4.10) 8,610   

Cost of direct materials placed in    

production $152,110   

Direct labor (from PE 22–4B) 207,760   

Factory overhead 109,600   

Total manufacturing costs  469,470  

Total work in process during period  $473,070  

Less work in process inventory, December 31, 2014  3,500  

Cost of goods manufactured   469,570 

Cost of finished goods available for sale   $479,370 

Less finished goods inventory, December 31, 2014   12,900 

Cost of goods sold   $466,470