(1.5) Managerial Accounting(Jiabalvo) - Answer and Analysis

7/29/2019 (1.5) Managerial Accounting(Jiabalvo) - Answer and Analysis

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Managerial Accounting 4/e 2010)

Michael Bordellet is the owner/pilot of Bordellet Air Service. The company files a daily round

trip from Seattles Lake Union to a resort in Canada. In 2010, the company reported an annual

income before taxes of $8,084 although that included a deduction of $70,000 reflecting Michaels

salary.

Revenue($360*1,248 passengers) $ 449,280

Less costs: :

Pilot(owners salary) $ 70,000

Fuel(35,657 gallons*$4.15) 147,977

Maintenance (variable) () 127,920

Depreciation of plane 25,000

Depreciation of office equipment 2,800

Rent expense 40,000

Insurance 20,000

Miscellaneous (fixed) () 7,500 441,197

Income before taxes $ 8,083

Revenue of $449,280 reflects six round trips per week for 52 weeks with an average of four

passengers paying $360 each per round trip (6*52*4*$360 = $449,280).The flight to the resort is

400 miles one way. With 312 round trips (6 per week *52 weeks), that amounts to 249,600 miles.

The plane averages 7miles per gallon.

( Round all monetary calculations to the nearest cent and all trips to the nearest

whole trip.)

a. How many round trips is Michael currently flying, and how many round trips are needed to

break even?

b. How many round trips are needed so that Michael can draw a salary of $110,000 and still not

show a loss?

[a1]: 2010

$8,084Michael$70,000

[a2]:$449,280:

6, 52 = 312/

4,$360,

:312*4*$360= $449,280

[a3]:400, 312

(312*2=624) ,

400*624=249,600

7


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c. What is the average before-tax profit of a round trip flight in 2010?

d. What is the incremental profit associated with adding a round-trip flight?


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2. P4-11. Break-Even Analysis, Margin of Safety, Increase in Profit

Edison Entrepreneur Services, Inc., is a legal services firm that files the paperwork toincorporate a business. Edison charges $1,200 for the incorporation application package and

plants to file 1,500 applications next year. The companys projected income statement for the

coming year is:

Sales $1,800,000

Less variable expenses 1,110,000

Contribution margin 690,000

Less fixed expenses 300,000

Operating income $ 390,000

a. Compute the contribution margin per application and calculate the break-even point in number

of applications. ( Round to the nearest whole unit, since it is not possible to file a partial

application.) Calculate the contribution margin ratio (round to 4 decimal places) and the

break-even sales revenue (round to the nearest dollar.)

[a4]: Edison

$1,200 1,500

:


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() ()() ?()

b. What is the current margin of safety in terms of the units? What is the current margin of safety

in terms of sales dollars?

??

c. If Edison wants to have operating income of $450,000 next year, how many applications must

it process? (Round to the nearest whole unit. ) What dollar level of sales is required to achieve

operating income of $450,000? (Round to the nearest dollar. )

Edison $450,000?()

?()

d. The office manager for Edison has proposed that Edition increase advertising (a fixed cost) for

the upcoming year by $80,000; she feels that this increase in advertising will lead to an

increase in sales of $324,000. Prepare a new projected income statement for this proposal.

Should Edison increase its advertising to this new level?

()$80,000$324,000:

? ()


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3. P 4-12. Multiproduct CVP

Fidelity Multimedia sells audio and video equipment and car stereo products. After performing

a study of fixed and variable costs in the prior year, the company prepared a product-line profit

statement as follows:

Sales $3,200,000 $1,920,000 $1,280,000 $6,400,000

Less variable cost: :

Cost of merchandise 1,900,000 1,360,000 610,000 3,870,000

Salary, part-time staff 180,000 100,000 55,600 335,600

Total variable costs 2,080,000 1,460,000 665,600 4,205,600

Contribution margin 1,120,000 460,000 614,400 2,194,400

Less direct fixed costs:

Salary, full-time staff 325,000 240,000 220,000 785,000

Segment Margin $ 795,000 $ 220,000 $ 394,400 $ 1,409,400

Less common fixed costs:

Advertising 115,000

Utilities 25,000

Other administrative costs 570,000

Total common fixed cost 710,000

Profit $ 699,400

[a5]: 1,800,000+324,000

[a6]: 38.33%

= /

38.33% = / 2,124,000

=814,200

[a7]: 300,000+80,000


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a. Calculate the contribution margin ratios for the audio, video, and car product lines.

audio, video, car

b. What would be the effect on profit of a $125,000 increase in sales of audio equipment

compared with a $125,000 increase in sales of video equipment or a $125,000 increase in

sales of car equipment? Based on this limited information, which product line would you

recommend expanding?

125,000 audio, video, car ? ,

?

C. Calculate the break-even level of sales dollars for the company as a whole. (Round to the

nearest dollar. )

()

d. Calculate sales needed to achieve a profit of $1,800,000, assuming the current mix. (Round to

the nearest dollar. )

1,800,000 ()

e. Determine the sales of audio, video, and car products in the total sales amount calculated for

part d. (Round to the nearest dollar. )

d. audio, video, car()


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4. P 6-4. Allocated Cost and Opportunity Cost

Mighty Mint Co. produces a mint syrup used by gum and candy companies. Recently, the

company has had excess capacity due to a foreign supplier entering its market. Mighty Mint is

currently bidding on a potential order from Quality Candy for 5,000 cases of syrup. The estimated

cost of each case is $21, as follow:

Direct material $ 7

Direct labor 5

Overhead 9

Total $21

The predetermined overhead rate is $1.80 per direct labor dollar. This was estimated by

dividing estimated annual overhead ($1,080,000) by estimated annual direct labor ($600,000).

The $1,080,000 of overhead is composed of $270,000 of variable costs and $810,000 of fixed

cost. The largest fixed cost relates to depreciation of plant and equipment.

a. With respect to overhead, what is the opportunity cost of producing a case of syrup??

b. Suppose Mighty Mint can win the Quality Candy business by bidding a price of $18 per case

(but no higher price will result in a winning bid). Should Mighty Mint bid $18?

Q $18?

c. Discuss how an allocation of overhead based on opportunity cost would facilitate an

appropriate bidding decision.

[a8]::$1.8

$1.8

$1,080,000

$600,000

= ,00,000

600,000= 1.8

[a9]:$1,080,000

: $270,000:

$810,000


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5. P 6-14. Traditional Allocation vs. ABC Allocation of

Manufacturing Overhead Costs

TriTech Company has been allocating overhead to individual product lines based on each

lines relative shares of direct labor hours. For the upcoming year, the company estimated that

manufacturing overhead will be $1,800,000 and estimated direct labor hours will be 120,000.

The company also has the following estimates:

Maintenance costs Direct labor hours $ 700,000 120,000

Setup costs Number of setups 500,000 200

Engineering costs Number of design changes 600,000 400

$1,800,000

Among many other products, TriTech has two switches, Standard and Elite switches.

Standard switches are a high-volume product that the company makes in large batches, while

Elite switches are a specialty product that is fairly low in sales volume.

Information about Standard and Elite usage of the different activities follows:Standard Elite

Direct labor hours 1,600 200

Number of setups 7 14

Number of design changes 6 21

a. Calculate the predetermined overhead rate based on direct labor hours (traditional allocation).

Use this predetermined overhead rate to calculate the amount of overhead to apply to

Standard and Elite switches, based on their usage of direct labor hours.() Standard

Elite

b. Calculate the individual ABC pool rates by taking the total amount of overhead for each cost

pool and dividing that total by the total amount of activity for that pool. Allocate overhead to

each of the two products using these three activity rates.

ABC

[a10]: T

:

$1,800,000 120,000

:

$1,800,000/120,000 = $15 per hour.

[a11]: Standard

Elite


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c. Compare the overhead calculated in part a to that calculated in part b. Why are they different?Which allocation method (traditional or ABC) must likely results in a batter estimate of product

cost?

ABC (ABC )?


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5. P. 6-14

$,,

,

6. E 7-12. Make-or-Buy Decision

Imperial Corp. produces whirlpool tubs. Currently the company uses internally manufactured

pumps to power water jets. Imperial Corp. has found that 40 percent of the pumps have failed

within their 12-month warranty period, causing huge warranty costs. Because of the companys

inability to manufacture high-quality pumps, management is considering buying pumps form a

reputable manufacturer that also will bear any related warranty costs. Imperials unit cost of

manufacturing pumps is $75 per unit, which includes $17 of allocated fixed overhead (primarily

depreciation of plant and equipment). Also, the company has spent an average of $20 (labor and

parts) repairing each pump returned. Imperial Corp. can purchase pumps for $80 per pump.

During 2011, Imperial Corp. plans to sell 15,000 whirlpools (requiring 15,000 pumps). Determine

whether the company should make or buy the pumps and the amount of cost savings related to

the better alternative. What alternative factors should be considered in the outsourcing decision?

2011 Imperial Corp. 15,000 whirlpools( 15,000 )

??

?

[a12]: Imperial Corp.

40%

12


$75

$17(

)$20()


$80


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7. E 7-13. Dropping a Product LineComputer Village sells computer equipment and home office furniture. Currently the furniture

product line takes up approximately 50 percent of the companys retail floor space. The president

of Computer Village is trying to decide whether the company should continue offering furniture or

concentrate on computer equipment. Below is a product line income statement for the company.

If furniture is dropped, salaries and other direct fixed costs can be avoided. In addition, sales of

computer equipment can increase by 13 percent without affecting direct fixed costs. Allocated

fixed costs are assigned based on relative sales.

Sales $1,200,000 $800,000 $2,000,000

Less cost of goods sold : 700,000 500,000 1,200,000

Contribution margin 500,000 300,000 800,000

Less direct fixed costs: :

Salaries 175,000 175,000 350,000

Other 60,000 60,000 120,000

Less allocated fixed costs: :

Rent 14,118 9,882 24,000

Insurance 3,529 2,471 6,000

Cleaning 4,117 2,883 7,000

Presidents salary 76,470 53,530 130,000

Other 7,058 4,942 12,000

Net income $ 159,708 ($ 8,708) $ 151,000

Determine whether Computer Village should discontinue the furniture line and the financial

benefit (cost) of dropping it.

Computer Village ??

Computer

Equipment

DROP!!

=500,000/1,200,000

=5/12

[a15]:

13%


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Income Without

Home Office Furniture

[a16]:

[a17]:


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8. E 8-6. Analyzing a Special OrderPowerDrive, Inc. produces a hard disk drive that sells for $175 per unit. The cost of producing

25,000 drives in the prior year was:

Direct material $ 625,000 @ 25

Direct labor 375,000 @ 15

Variable overhead 125,000 @ 5

Fixed overhead 1,500,000

Total cost $2,625,000

At the start of the current year, the company received an order for 3,000 drives form a

computer company in China. Management of PowerDrive has mixed feelings about the order.

On one hand, they welcome the order because they currently have excess capacity. Also, this is

the companys first international order. On the other hand, the company in China is willing to pay

only $125 per unit.

What will be the effect on profit of accepting the order?

?

[a18]:

3,000

[a19]:

$125


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9. P 9-7. Net Present Value, Internal Rate of Return, Payback,

Accounting Rate of Return, and Taxes

Adrian Sonnetson, the owner of Adrian Motors, is considering the addition of a paint and body

shop to his automobile dealership. Construction of a building and the purchase of necessary

equipment is estimated to cost $1,000,000 and both the building and equipment will be

depreciated over 10 years using the straight-line method. The building and equipment have zero

estimated residual value at the end of 10 years. Sonnetsons required rate of return for this

project is 12 percent Net income related to each year of the investment is as follows:

Revenue $420,000

Less: :

Material cost 65,000

Labor 140,000

Depreciation 70,000

Other 5,000

Income before taxes 140,000

Taxes at 40% :40% 56,000

Net income $ 84,000

a. Determine the net present value of the investment in the paint and body shop. Should

Sonnetson invest in the paint and body shop?

NPVS ?

b. Calculate the internal rate of return of the investment (approximate).

IRR() NPV=0

c. Calculate the payback period of the investment.

NPV=0

d. Calculate the accounting rate of return.

ARR()

[a20]:

$1,000,000

10

12%


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Cash Present Value

Flow Factor Total


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10. 9-12. Comprehensive Capital Budgeting Problem

Van Doren Corporation is considering producing a new product, Autodial. Marketing data

indicate that the company will be able to sell 45,000 units per year at $30. The product will be

produced in a section of an existing factory that is currently not in use.

To produce Autodial, Van Doren must buy a machine that costs $500,000. The machines has

an expected life of five years and will have an ending residual value of 15,000. Van Doren will

depreciate the machine over five years using the straight-line method for both tax and financial

reporting purposes.In addition to the cost of the machine, the company will incur incremental manufacturing costs

of $370,000 for component parts, $425,000 for direct labor, and $200,000 of miscellaneous costs.

Also, the company plans to spend $150,000 annually to advertise Autodial. Van Doren has a tax

rate of 40 percent, and the companys required rate of return is 12 percent.

a. Compute the net present value.

NPV

b. Compute the payback period.

c. Compute the accounting rate of return.

d. Should Van Doren make the investment required to produce Autodial?

V ?

[a21]:

45,000$30

[a22]: A

: $500,000

5$15,000

[a23]:

:$370,000

: $425,000

: $200,000

: $150,000

[a24]::40%

=12%


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Cash Present Value

Flow Factor Total


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11. E 12-13. Overinvestment and Underinvestment

Consider two companies: Quantum Products and Aquafin Products. Senior managers at

Quantum Products are evaluated in terms of increases in profit. In fiscal 2007, Quantum

Products had a net operating profit after taxes of $2,000,000 and invested capital of $20,000,000.

In fiscal 2008, the company had net operating profit after taxes of $2,500,000 and invested

capital of $30,000,000. Senior managers at Aquafin Products are evaluated in terms of ROI. In

fiscal 2009, ROI was 18 percent while the cost of capital was only 14 percent. Near the end of

fiscal 2009, managers had an opportunity to make an investment that would have yielded a

return of 16 percent. However, the senior managers did not support making the investment.

a. Explain why the senior managers at Quantum Products have an incentive to overinvest.

Q

b. Explain why the senior managers at Aquafin Products have an incentive to underinvest.

A

[a25]: Q

2007Q

2,000,000 20,000,000

2008 2,500,000

30,000,000

[a26]: AROI

2009ROI 18% 14%

2009

16%


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12. P 12-7. ROI and EVAELN Waste Management has a subsidiary that disposes of hazardous waste and a subsidiary

that collects and disposes of residential garbage. Information related to the two subsidiaries

follows.

Total assets $12,000,000 $65,000,000

Noninterest-bearing current liabilities 2,500,000 10,300,000

Net income 1,600,000 5,700,000

Interest expense 1,200,000 7,000,000

Required rate of return 12% 14%

Tax rate 40% 40%

a. Calculate ROI for both subsidiaries.

b. Calculate EVA for both subsidiaries. Note that since no adjustments for accounting distortions

are being made, EVA is equivalent to residual income.

c. Which subsidiary has added the most to shareholder value in the last year?

?

d. Base on the limited information, which subsidiary is the best candidate for expansion? Explain

?


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Hazardous Residential

Waste Waste


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13. P 12-10. Economic Value Added and the Balanced Scorecard

Spectrum Book Company has two divisions: The Brick and Mortar division sells books through

more than 100 bookstores throughout the United States; the Internet division was formed 18

months ago and sells books via the Internet. Data for the past year are:

Total assets $180,000,000 $17,200,000

Noninterest-bearing current liabilities 7,800,000 2,800,000

Interest expense 1,400,000 465,000

Net income (loss) 30,900,000 (1,250,000)

Tax rate 40% -0-

Cost of capital 13% 15%

a. Evaluate the two divisions in terms of economic value added (EVA).

EVA

b. Explain why it might be better to evaluate the Internet division in terms of a balanced

scorecard rather than just using EVA.

Internet

c. Consider the customer and internal processes dimensions of the balanced scorecard. Suggest

two measures for each dimension that would be appropriate for the Brick and Mortar division

and two measures for each dimension that would be appropriate for the Internet division.

d. A strategy map diagrams the relationship across the dimensions of the balanced scorecard.

Identify the potential links between the custom and internal processes dimensions you

identified in part c.

c.

[a27]: B&M

100 Internet

18


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a. Brick and Mortar Internet

Division Division

Brick and Mortar Division


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Internet Division

Brick and Mortar Division

Internet Division

14. P 12-18. Comparing Performance Evaluation MethodsTop management of the Gates Corporation is trying to construct a performance evaluation

system to use to evaluate each of its three divisions. This past years financial data as follows:

Total assets

$530,000 $10,700,000 $6,375,000

Noninterest-bearing current liabilities 30,000 1,250,000 600,000

Net income 102,000 1,040,000 780,000

Interest expense 30,000 1,100,000 700,000

Tax rate 40% 40% 40%

Required rate of return 10% 12% 14%

a. How would the divisions be ranked (from best to worst performance) if the evaluation were

based on net income?

?


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b. How would the divisions be ranked (from best to worst performance) if the evaluation werebased on ROI?

(ROI)?

c. How would the divisions be ranked (from best to worst performance) if the evaluation were

based on residual income?

(RI)?

14.

b. Division A Division B Division C


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c. Division A Division B Division C

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(1.5) Managerial Accounting(Jiabalvo) - Answer and Analysis