CHAPTER 16

DISCUSSION QUESTIONS

16-1

Q16-1. A capital expenditure is an expenditureintended to benefit future periods. It is nor-mally associated with the acquisition orimprovement of plant assets. The real distinc-tion between a capital and revenue expendi-ture is not the immediate charging of theexpenditure to income, as opposed to itsgradual amortization, but the length of timerequired for its recovery in cash. Recoveriesof revenue expenditures, such as productcosts, are expected to take place in a matterof weeks or, at the most, months. The finan-cial recovery of capital expenditures is meas-ured in terms of years.

Q16-2. Purposes of a research and development pro-gram are:(a) A planned search for new knowledge per-

taining to the industry without referenceto a specific application.

(b) Creation of a new product or improve-ment of an existing product.

(c) Invention of a new or improved process ormachinery to make a finished product orcomponent.

Reasons for a research and developmentprogram are:(a) To protect the sales dollar, that is, to meet

competition. Improving the quality of per-formance of products or achieving costsavings in either operating or capitalexpenditures falls into this category.

(b) To do research to promote new salesdollars, either by entering a new marketor by significantly expanding an existingmarket.

(c) To investigate problems with respect toenvironmental protection, safety, workingconditions, etc.

Q16-3. Budgetary procedures for research anddevelopment expenditures are designed to:(a) force management to think about planned

expenditures;(b) coordinate research and development

plans with the immediate and long-rangeplans of the company;

(c) force the research and development staffto consider major nonfinancial aspects ofthe program, such as personnel, equip-ment, and facilities requirements.

Q16-4. A cash budget involves detailed estimates ofanticipated cash receipts and disbursementsfor a specified period of time. It is designed toassist management in coordinating cash flowfrom operations as a basis for financial plansand control. The cash budget provides a sys-tematic approach to the synchronization ofcash resources with needs. It assists man-agement in making intelligent decisions con-cerning capital expenditures, dividend policies,investments, and other financial matters, andoften exerts a cautionary influence on any ofthe above plans. Periodic reports comparingactual with planned receipts and disburse-ments permit effective and continuous con-trol of cash by signaling significant deviationsfrom the financial plans for the period.

Q16-5. (a) Nonmanufacturing businesses must planfor the future just as carefully as manu-facturing concerns. Seasonal patterns inrevenues and expenditures must be pro-vided for, and required equipment replacement and expansions must bebudgeted.

(b) Not-for-profit organizations generallyoperate on relatively fixed incomes thatare received at one time. Such receiptpatterns are common for organizationsthat rely on tax dollars for support. Thesefunds must be allocated throughout theyear in order to maintain operations.Careful budget plans are a necessity forsuch allocations.

Q16-6. PPBS stands for Planning, Programming,Budgeting System, and is an analytical toolfocused on the output or final results ratherthan input or initial dollars expended. The out-put is directly relatable to planned goals orobjectives.

Q16-7. Zero-base budgeting (ZBB) is a planning andbudgeting tool using cost-benefit analysis of

projects and functions to improve an organiza-tion’s resource allocation. Budget requestsconsist of decision packages that are ana-lyzed, evaluated, and ranked in a priority orderbased on cost-benefit analysis. Managementcan then evaluate possible activities for thecoming period, selecting those that will bestachieve organizational goals.

Traditional budgeting tends to concentrateon the differential change from the prior year,assuming that existing activities are essential,must be continued, are currently performed ina cost-efficient and optimum manner, and willbe cost-effective in the coming year. Costs aredeveloped more on a line-item rather than anactivity basis. ZBB organizes all budget costsin the form of activities and/or operations(decision packages) and evaluates the effec-tiveness of each decision package as if itwere a new activity.

Q16-8. (a) Zero-base budgeting requires managersto justify their entire budget requests. Itplaces the burden of proof on the man-ager to justify why any money at allshould be budgeted. It does this by start-ing with the assumption that zero will be spent on each activity, so the budgetingprocess begins with a base of zero.

(b) The two kinds of alternatives consideredfor each activity are (1) different ways ofperforming the activity and (2) differentlevels of effort in performing the activity.

(c) A decision package includes an analysisof an activity’s cost and purpose, alterna-tive courses of action, measures of per-formance of the activity, consequences ofnot performing the activity, and the activ-ity’s benefits.

(d) A package identifies and describes oneactivity in sufficient detail so that it canbe evaluated and compared with otheractivities.

(e) Success in the implementation of zero-base budgeting requires the following:1. Linkage of zero-base budgeting with

short- and long-range planning2. Sustained support and commitment

from executive management3. Innovation by managers in develop-

ing decision packages4. Acceptance of zero-base budgeting

by persons who must perform the budgeting work

Q16-9. Prospective information should be provided inexternal financial statements when it willenhance the reliability of the user’s predic-tions.

Q16-10. PERT is particularly appropriate as a sched-uling and controlling technique for projectsconsisting of a large number of tasks, someof which cannot be started until others arecomplete, and some of which can be under-taken concurrently.

Conceptually, the reference is to a net-work of interdependent activities which, as agroup, require considerable time to com-plete. There is usually substantial set-uptime (and cost) associated with analyzing,defining, and estimating each discrete proj-ect activity; thus, the benefit is in projectsrequiring a considerable amount of time andconsisting of a relatively complex network.

PERT allows the user to update and revisescheduled activities and thereby determinethe effects of changes on the overall project.It is particularly appropriate when the timingof individual activities and the project comple-tion date are critical to success.

Q16-11. Slack is computed by subtracting the earli-est expected time from the latest allowabletime. The earliest expected time is the earli-est time that an activity can be expected tostart, because of its relationship to pendingactivities. The latest allowable time is thelatest time that an activity may begin andnot delay completion of the project. Slack isdeterminable only in relation to an entirepath through the network

Q16-12. PERT/cost is really an extension of PERT.With time-options available, it seems advis-able to assign cost to time and activities,thereby providing total financial planningand control by functional responsibility.

Q16-13. Computer support offers distinct advantagesto PERT users. PERT is a mathematically-oriented technique and is therefore ideallysuited to the high-speed response of com-puters for deriving the critical path, slacktimes, and costs, and for storing and report-ing results to management. Revisions to allschedule elements, whether during the ini-tial estimating phase or during the activeproject phase, can be updated and therevised results promptly reported.

Computer support is helpful in dealing withlarge, complex networks of interdependencies

16-2 Chapter 16

and when project control requires timelyprogress reporting against the updatedplan. Most program packages offer a vari-ety of reporting features and formats,including graphic network display as wellas printed reports at various summary lev-els. Current reporting provides informationto project managers, enabling quick reac-tion to deviations.

Q16-14. The traditional budget focuses on one set ofassumptions. The probabilistic budget pro-vides for evaluating several sets of assump-tions, including the probability of each and acomposite expected value, range, and stan-dard deviation for each budget element.

Chapter 16 16-3

EXERCISES

E16-1

January February MarchBeginning cash balance ................................................ $ 6,000 $20,500 $26,500Budgeted cash receipts:

Collect accounts receivable:November credit sales:

($60,000 × 10%) ................................ $ 6,000December credit sales:

($70,000 × 60%) ................................ 42,000($70,000 × 10%) ................................ $ 7,000

January credit sales:($50,000 × 25%) ................................ 12,500($50,000 × 60%) ................................ 30,000($50,000 × 10%) ................................ $ 5,000

February credit sales:($60,000 × 25%) ................................ 15,000($60,000 × 60%) ................................ 36,000

March credit sales:($70,000 × 25%) ................................ 17,500

Total cash receipts ............................................ $60,500 $52,000 $58,500Cash available during month ........................................ $66,500 $72,500 $85,000Budgeted cash disbursements:

Pay accounts payable:December purchases:

($20,000 × 80%) ................................ $16,000January purchases:

($15,000 × 20%) ................................ 3,000($15,000 × 80%) ................................ $12,000

February purchases:($25,000 × 20%) ................................ 5,000($25,000 × 80%) ................................ $20,000

March purchases:($20,000 × 20%) ................................ 4,000

Payroll ................................................................. 21,000 22,000 23,000Miscellaneous cash expenses.......................... 6,000 7,000 6,000Debt retirement .................................................. 26,000

Total cash disbursements........................ $46,000 $46,000 $79,000Ending cash balance ..................................................... $20,500 $26,500 $ 6,000

16-4 Chapter 16

E16-2 Finished Goods

April May JuneUnits required to meet sales budget............................ 9,000 10,000 12,000Add desired ending inventory (20% of

following month’s sales) ................................... 2,000 2,400 2,200Total units required ........................................................ 11,000 12,400 14,200Less estimated beginning inventory

(20% of current month’s sales) ........................ 1,800 2,000 2,400Planned production........................................................ 9,200 10,400 11,800

MaterialsApril May June

Units required to meet planned production(planned production × 3)................................... 27,600 31,200 35,400

Add desired ending inventory (40% of followingmonth’s production requirements) .................. 12,480 14,160

Total materials required .......................................... 40,080 45,360Less estimated beginning inventory (40% of

current month’s requirements)......................... 11,040 12,480Planned purchases................................... 29,040 32,880

Cash disbursements during May for payment of accounts payable for materialpurchases:1/3 × 29,040 × $20 × .98 = $189,7282/3 × 32,880 × $20 × .98 = 429,632

$619,360

CGA-Canada (adapted). Reprint with permission.

Chapter 16 16-5

E16-3 Par production budget:

June JulyUnits required to meet sales budget .......................... 50,000 30,000Add desired ending inventory..................................... 3,000 3,000Total units required ...................................................... 53,000 33,000Less beginning inventory ............................................ 5,000 3,000Planned production...................................................... 48,000 30,000

Tee purchases budget:

June JulyUnits required for production:

48,000 × 3 ............................................................. 144,00030,000 × 3 ............................................................. 90,000

Add desired ending inventory..................................... 14,000 11,000158,000 101,000

Less beginning inventory ............................................ 20,000 14,000Units to be purchased.................................................. 138,000 87,000

Cash disbursements in July for purchases of Tee:

138,000 × $5 × 1/3 × .98 = $225,40087,000 × $5 × 2/3 × .98 = 284,200

$509,600

CGA-Canada (adapted). Reprint with permission.

16-6 Chapter 16

E16-4(1) JAMESTOWN COMPANY

Cash BudgetFor July

Cash balance, July 1................................................................. $ 5,000Cash receipts:

June sales ($30,000 × 48%) ......................................... $14,400July sales ($40,000 × 50%) .......................................... 20,000 34,400

Cash available ........................................................................... $39,400Cash disbursements:

June purchases ($10,000 × 75%) ................................ $ 7,500July purchases ($15,000 × 25%).................................. 3,750Other marketing and administrative expenses ......... 10,000Income tax..................................................................... 1,600Dividends ...................................................................... 15,000 37,850

Cash balance, July 31............................................................... $1,550

*Calculation of June income tax:Sales........................................................................................... $30,000Cost of goods sold ................................................................... 12,000Gross profit ............................................................................... $18,000Commercial expenses:

Depreciation .............................................. $5,000Other marketing and administrative ....... 9,000 14,000

Taxable income.......................................................................... $4,000

Income tax ($4,000 × 40%) ....................................................... $1,600

(2) Since the desired minimum cash balance is $5,000, arrangements should bemade to borrow $3,450 ($5,000 – $1,550).

CGA-Canada (adapted). Reprint with permission.

Chapter 16 16-7

E16-5(1) PERT network:

(2) Alternate paths and times and the critical path and the expected project time:1-2-5-6-7 = 11 weeks critical path1-2-3-5-6-7 = 10 weeks1-2-3-4-5-6-7 = 10 weeks

(3) The two activities in question are 3-4 and 4-5. If these activities were eliminated,there would be no effect on the critical path or the expected completion timebecause 3-4 and 4-5 are not on the critical path.

16-8 Chapter 16

1 2 5 6 7

3 4

Start Finish

1

1

1

12

4 4 2

E16-6

(1) Activity (to + tm(4) + tp) = Total ÷ 6 = te

1-2 1 2(4) 3 12 6 2.001-3 2 6(4) 9 35 6 5.831-4 1 4(4) 6 23 6 3.832-6 2 11(4) 18 64 6 10.673-5 4 6(4) 8 36 6 6.004-5 3 4(4) 5 24 6 4.005-6 4 5(4) 6 30 6 5.00

(2) Path tes Total te

1-2-6 2 + 10.67 12.671-4-5-6 3.83 + 4 + 5 12.831-3-5-6 5.83 + 6 + 5 16.83 critical path

CGA-Canada (adapted). Reprint with permission.

Chapter 16 16-9

E16-7

(1) 6 + 11 + 5 + 4 + 3 = 291 2 5 6 7 9

6 + 11 + 5 + 1 + 2 = 251 2 5 6 8 9

6 + 8 + 9 + 4 + 3 = 30 critical path

1 2 4 6 7 96 + 8 + 9 + 1 + 2 = 26

1 2 4 6 8 96 + 8 + 13 + 2 = 29

1 2 4 8 96 + 0 + 3 + 9 + 4 + 3 = 25

1 2 3 4 6 7 96 + 0 + 3 + 9 + 1 + 2 = 21

1 2 3 4 6 8 96 + 0 + 3 + 13 + 2 = 24

1 2 3 4 8 910 + 3 + 9 + 4 + 3 = 29

1 3 4 6 7 910 + 3 + 9 + 1 + 2 = 25

1 3 4 6 8 910 + 3 + 13 + 2 = 28

1 3 4 8 9

(2) Earliest Expected Latest Allowable SlackEvent Time Time Time

1 0 0 02 6 6 03 10 11 14 14 14 05 17 18 16 23 23 07 27 27 08 27 28 19 30 30 0

CGA-Canada (adapted). Reprint with permission.

16-10 Chapter 16

E16-8

(1) te = (to + 4tm + tp) ÷ 6 = (1 + (4 × 2) + 9) ÷ 6 = 3 days

(2)

(3)Path Time Required

0-1-2-6-7 = 4 + 3 + 6 + 5 = 18 days0-1-3-4-6-7 = 4 + 4 + 3 + 3 + 5 = 19 days0-1-3-4-7 = 4 + 4 + 3 + 6 = 17 days0-1-3-5-7 = 4 + 4 + 6 + 6 = 20 days

The critical path is 0-1-3-5-7, because it requires the greatest total time (20 days).

(4) Critical path time .......................................................... 20 daysLess time required after event 2:

Activity 2-6 ........................................................... 6 daysActivity 6-7 ........................................................... 5 days 11 days

Maximum time to event 2 ............................................ 9 daysEstimated time to event 2:

Activity 0-1 ........................................................... 4 daysActivity 1-2 ........................................................... 3 days 7 daysSlack time at event 2 ........................................... 2 days

Chapter 16 16-11

0

2

3 5

4

6

74 6

5

6

6

3

6

3

4 3

1

PROBLEMS

P16-1

(1) Budgeted cash disbursements during June:Purchase of materials:

May (11,2501 × $20 × 46%) ......................... $103,500June (12,1802 × $20 × 54%)........................ 131,544 $235,044

Marketing, general, and administrative expenses:May ($51,5503 × 46%) ................................. $23,713June ($49,3004 × 54%) ................................ 26,622 50,335

Wages and salaries ............................................. 37,9005

Total ...................................................................... $323,2791May 31 ending inventory (11,400 × 130%).................. 14,820 unitsMay production............................................................. 11,900Materials needed in May .............................................. 26,720 unitsApril 30 ending inventory ($309,400 ÷ $20) ............... 15,470May purchases.............................................................. 11,250 units

2June 30 ending inventory (12,000 × 130%) ................ 15,600 unitsJune production............................................................ 11,400Materials needed in June............................................. 27,000 unitsMay 31 ending inventory.............................................. 14,820June purchases ............................................................ 12,180 units

3($357,000 May sales × 15%) – $2,000 depreciation = $51,550

4($342,000 June sales × 15%) – $2,000 depreciation = $49,300

5Accrued payroll on June 1........................................... $ 3,300Payroll earned during June........................... 38,000

$41,300Accrued payroll on June 30.......................... 3,400Cash paid out for payroll .............................. $37,900

(2) Budgeted cash collections during May:March sales ($354,000 × 9%) .............................. $ 31,860April sales ($363,000 × 97% × 60%)................... 211,266April sales ($363,000 × 25%) .............................. 90,750Total ...................................................................... $333,876

16-12 Chapter 16

P16-1 (Concluded)(3) Budgeted units of inventory to be purchased during July:

July 31 ending inventory (12,200 × 130%) ........ 15,860 unitsJuly production.................................................... 12,000Materials needed in July:.................................... 27,860 unitsJune 30 ending inventory (12,000 × 130%) ....... 15,600July purchases..................................................... 12,260 units

Chapter 16 16-13

P16-2

April May JuneBeginning cash balance .................................................................. $ 100,000 $ 100,000 $ 100,000Cash receipts during month:

Collections of accounts receivable:February sales:

($2,000,000 × 40%) ...................................................... $ 800,000March sales:

($1,800,000 × 60%) ...................................................... 1,080,000($1,800,000 × 40%) ...................................................... $ 720,000

April sales:($2,200,000 × 60%) ...................................................... 1,320,000($2,200,000 × 40%) ...................................................... $ 880,000

May sales:($2,500,000 × 60%) ...................................................... 1,500,000

Total cash collections....................................................... $1,880,000 $2,040,000 $2,380,000Cash available for use during month ............................................. $1,980,000 $2,140,000 $2,480,000Cash disbursements during month:

Accounts payable for purchases:February purchases:

($2,000,000 February sales × 50% × 40% × 20%) .... $ 80,000($1,800,000 March sales × 50% × 60% × 20%) ......... 108,000

March purchases:($1,800,000 March sales × 50% × 40% × 80%) ......... 288,000($2,200,000 April sales × 50% × 60% × 80%)............ 528,000($1,800,000 March sales × 50% × 40% × 20%) ......... $ 72,000($2,200,000 April sales × 50% × 60% × 20%)............ 132,000

April purchases:($2,200,000 April sales × 50% × 40% × 80%)............ 352,000($2,500,000 May sales × 50% × 60% × 80%)............. 600,000($2,200,000 April sales × 50% × 40% × 20%)............ $ 88,000($2,500,000 May sales × 50% × 60% × 20%)............. 150,000

May purchases:($2,500,000 May sales × 50% × 40% × 80%)............. 400,000($2,800,000 June sales × 50% × 60% × 80%) ........... 672,000

Wages (20% of current sales):April ($2,200,000 × 20%) ................................................... 440,000May ($2,500,000 × 20%) .................................................... 500,000June ($2,800,000 × 20%) ................................................... 560,000

General and administrative expenses:Salaries (1/12 × $480,000)................................................. 40,000 40,000 40,000Promotion (1/12 × $660,000)............................................. 55,000 55,000 55,000Property taxes (1/4 × $240,000) ....................................... 0 0 60,000Insurance (1/12 × $360,000).............................................. 30,000 30,000 30,000Utilities (1/12 × $300,000).................................................. 25,000 25,000 25,000

Income taxes ($1,020,000 income × 40% tax rate) ............... 408,000 0 0Total cash disbursements....................................................... $2,002,000 $1,806,000 $2,080,000

Cash balance before borrowing or investment ............................. $ (22,000) $ 334,000 $ 400,000Cash to be borrowed (or invested)................................................. 122,000 (234,000) (300,000)

Ending cash balance ....................................................................... $ 100,000 $ 100,000 $ 100,000

16-14 Chapter 16

P16-3

MAYNE MANUFACTURING COMPANYCash Budget

For the Years Ending March 31

20B 20CBalance of cash at beginning ..................... 0 $ 75,000Cash generated from operations:

Collections from customers—Schedule A............................................. $825,000 $1,065,000

Disbursements:Direct materials—Schedule B.............. $220,000 $ 245,000Direct labor ............................................ 300,000 360,000Variable overhead.................................. 100,000 120,000Fixed costs ............................................ 130,000 130,000

Total disbursements..................................... $750,000 $ 855,000Excess of cash collections over cash

disbursements from operations .......... $ 75,000 210,000Cash available from operations ................. $ 75,000 $285,000Cash received from liquidation of existing

accounts receivable and inventories . 90,000 0Total cash available...................................... $165,000 $285,000Payments to general creditors

(liquidation proceeds)........................... 90,000 270,0002

Balance of cash at end ................................ $ 75,0001 $ 15,000

1This amount could have been used to pay general creditors or carried forward to thebeginning of the next year.

2($600,000 × 60%) – $90,000

Chapter 16 16-15

P16-3 (Concluded)

Schedule A—Collections from customers:20B 20C

Sales .............................................................................. $900,000 $1,080,000Beginning accounts receivable................................... 0 75,000

Total........................................................................... $900,000 $1,155,000Less ending accounts receivable ............................... 75,000 90,000Collections from customers ........................................ $825,000 $1,065,000

Schedule B—Disbursements for direct materials:

20B 20CDirect materials required for production ................... $200,000 $240,000Required ending inventory .......................................... 40,0003 50,0004

Total........................................................................... $240,000 $290,000Less beginning inventory ............................................ 0 40,000Purchases...................................................................... $240,000 $250,000Beginning accounts payable....................................... 0 20,000

Total........................................................................... $240,000 $270,000Less ending accounts payable ................................... 20,000 25,000Disbursements for direct materials ............................ $220,000 $245,000

312,000 units × 2/12 = 2,000; 2,000 × $20 per unit = $40,000415,000 units × 2/12 = 2,500; 2,500 × $20 per unit = $50,000

P16-4

Production Budget:Required to meet sales forecast:

January ($360,000 sales ÷ $150 per unit).......... 2,400February ($450,000 sales ÷ $150 per unit) ........ 3,000March ($480,000 sales ÷ $150 per unit) ............. 3,200 8,600

Desired finished goods ending inventory:((($600,000 April sales ÷ $150 per unit) × 10%) + 100) 500

Total quantity of product to produce.......................... 9,100

Direct Materials Purchases Budget:Materials required for production (9,100 units × $20) $182,000Desired materials ending inventory ........................... 2,000Total direct materials purchases during first quarter $ 184,000

16-16 Chapter 16

P16-4 (Concluded)

Cash Budget for First Quarter Ending March 31, 20A:January 1, cash balance .............................................. $ 0Cash receipts:

Investment by owner ........................................... $50,000Mortgage taken out ............................................. 150,000Collections of accounts receivable:

January sales:($360,000 × 30% × 80% × 98%) .............. 84,672($360,000 × 30% × 20%).......................... 21,600($360,00 × 30%) ....................................... 108,000($360,000 × 38%) ..................................... 136,800

February sales:($450,000 × 30% × 80% × 98%) .............. 105,840($450,000 × 30% × 20%).......................... 27,000($450,000 × 30%) ..................................... 135,000

March sales:($480,000 × 30% × 80% × 98%) .............. 112,896($480,000 × 30% × 20%).......................... 28,800 960,608

Total cash available for use during quarter ............... $ 960,608Cash disbursements:

Accounts payable ................................................ $184,000Direct labor ((9,100 × $30) - $7,500) ................... 265,500Variable overhead (9,100 × $15) ......................... 136,500Factory rent ($10 × 5,000 capacity × 3) ............. 150,000Sales commissions (8,600 units × $8)............... 68,800Office rentals ($12,000 × 3)................................. 36,000Interest payment ($150,000 × 2% × 3)................ 9,000Payment of principal on long-term note ........... 30,000Equipment purchases ......................................... 150,000 1,029,800

March cash balance before current financing........... $ (69,162)Current financing required .......................................... 84,162Desired March 31 cash balance .................................. $ 15,000

Chapter 16 16-17

P16-5

(1) TRIPLE-F HEALTH CLUBBudgeted Statement of Income (Cash Basis)

For the Year Ending October 31, 20C(000s omitted)

Cash revenue:Annual membership fees, $355 × 1.1 × 1.03...................................... $402.2Lesson and class fees, $234 × $234 .................................................. 304.2

$180Miscellaneous, $2.0 × $2..................................................................... 2.7

$1.5

Total cash revenue...................................................................... $709.1Cash expenses:

Manager’s salary and benefits, $36 × 1.15 ........................................ $ 41.4Regular employees’ wages and benefits, $190 × 1.15...................... 218.5Lesson and class employee wages and benefits, $195 × 1.3 × 1.15 291.5Towels and supplies, $16 × 1.25......................................................... 20.0Utilities (heat and light), $22 × 1.25.................................................... 27.5Mortgage interest, $360 ×.09............................................................... 32.4Miscellaneous, $2 × 1.25 ..................................................................... 2.5

Total cash expenses ................................................................... $633.8Cash income ..................................................................................................... $ 75.3Cash payments:

Mortgage payment ............................................................................... $ 30.0Accounts payable balance at 10/31/B................................................ 2.5Accounts payable on equipment at 10/31/B...................................... 15.0Planned new equipment purchase..................................................... 25.0

Total cash payments................................................................... $ 72.5Cash surplus..................................................................................................... $ 2.8Beginning cash balance .................................................................................. 8.3Cash available for working capital and to acquire property ........................ 10.1

(2) Operating problems that Triple-F Health Club could experience in 20C include:(a) The lessons and classes contribution to cash will decrease because the

projected wage increase for lesson and class employees is not made up bythe increased volume of lessons and classes.

(b) Operating expenses are increasing faster than revenues from membershipfees.

(c) Triple-F seems to have a cash management problem. Although thereappears to be enough cash generated for the club to meet its obligations,past due amounts occur. Perhaps the cash balance may not be largeenough for day-to-day operating purposes.

16-18 Chapter 16

P16-5 (Concluded)(3) Jane Crowe’s concern with regard to the board’s expansion goals are justified.

The 20C budget projections show only a minimal increase of $2.8 in the cashbalance. The total cash available is well short of the $60.0 annual additionalcash needed for the land purchase over and above the club’s working capitalneeds; however, it appears that the new equipment purchases can be made onan annual basis. If the board desires to purchase the adjoining property, it isgoing to have to consider significant increases in fees or other methods offinancing, such as membership bonds or additional mortgage debt.

P16-6

(1) Schedule of budgeted cash receipts by month for the third quarter of 20A (000somitted):

Billings Receipts

Actual/ PercentagesEstimated

Month Amount Class Timing July August SeptemberMay .............. $5,000 90% 20% $ 900May .............. 5,000 10 40 200June............. 5,000 90 50 2,250June............. 5,000 10 40 200June............. 5,000 90 20 $ 900June............. 5,000 10 40 200July .............. 4,500 90 20 810July .............. 4,500 10 10 45July .............. 4,500 90 50 2,025July .............. 4,500 10 40 180July .............. 4,500 90 20 $ 810July .............. 4,500 10 40 180August......... 5,000 90 20 900August......... 5,000 10 10 50August......... 5,000 90 50 2,250August......... 5,000 10 40 200September .. 5,500 90 20 990September .. 5,500 10 10 55

Total receipts from billings $4,405 $4,255 $4,485Endowment fund income 175 175 175Total cash receipts $4,580 $4,430 $4,660

Chapter 16 16-19

P16-6 (Concluded)

(2) Schedule of budgeted cash disbursements by month for the third quarter of 20A(000s omitted):

DisbursementsJuly August September

SalariesVariable:

$4,500 × 20%.......................................... $ 900$5,000 × 20%.......................................... $1,000$5,500 × 20%.......................................... $ 1,100

Total variable ................................ $ 900 $1,000 $ 1,100Fixed................................................................ 1,500 1,500 1,500

Total salaries ......................................... $2,400 $2,500 $ 2,600Purchases of previous month ................................... 1,200 1,250 1,500Interest ......................................................................... — — 450Depreciation (not relevant) ........................................ — — —Total cash disbursements.......................................... $3,600 $3,750 $ 4,550

(3) (000 omitted)Cash balance—July 1, 20A............................ $ 300Cash receipts in third quarter:

July ....................................................... $4,580August .................................................... 4,430September.............................................. 4,660 13,670

Total cash available........................................ $13,970Cash disbursements in third quarter:

July ....................................................... $3,600August .................................................... 3,750September.............................................. 4,550 11,900

Projected cash balance—September 30, 20A $ 2,070Minimum end-of-month cash balance required

($1,850 × 10%) ....................................... 185Cash available to acquire capital items....... $ 1,885Capital expenditures planned for October 1, 20A (3,700)Amount of borrowing necessary on October 1, 20A $(1,815)

16-20 Chapter 16

P16-7

(1) 5 + 7 + 10 = 22 critical path

1 ——— 3 ——— 6 ——— 75 + 10 + 5 = 20

1 ——— 3 ——— 4 ——— 75 + 7 + 5 = 17

1 ——— 2 ——— 4 ——— 75 + 5 + 10 = 20

1 ——— 2 ——— 5 ——— 7

(2) Day Activities Cost1 A, B $ 800 + $ 800 = $1,6002 A, B $ 800 + $ 800 = $1,6003 A, B $ 800 + $ 800 = $1,6004 A, B $ 800 + $ 800 = $1,6005 A, B $ 800 + $ 800 = $1,6006 F, C, D, E $2,000 + $1,500 + $ 500 + $2,000 = $6,0007 F, C, D, E $2,000 + $1,500 + $ 500 + $2,000 = $6,0008 F, C, D, E $2,000 + $1,500 + $ 500 + $2,000 = $6,0009 F, C, D, E $2,000 + $1,500 + $ 500 + $2,000 = $6,00010 F, C, D, E $2,000 + $1,500 + $ 500 + $2,000 = $6,00011 F, C, D, I $2,000 + $1,500 + $ 500 + $3,000 = $7,00012 F, C, D, I $2,000 + $1,500 + $ 500 + $3,000 = $7,00013 H, C, I $2,000 + $1,500 + $3,000 = $6,50014 H, C, I $2,000 + $1,500 + $3,000 = $6,50015 H, C, I $2,000 + $1,500 + $3,000 = $6,50016 H, G, I $2,000 + $1,000 + $3,000 = $6,00017 H, G, I $2,000 + $1,000 + $3,000 = $6,00018 H, G, I $2,000 + $1,000 + $3,000 = $6,00019 H, G, I $2,000 + $1,000 + $3,000 = $6,00020 H, G, I $2,000 + $1,000 + $3,000 = $6,00021 H $2,000 = $2,00022 H $2,000 = $2,000

CGA-Canada (adapted). Reprint with permission.

Chapter 16 16-21

P16-8

(1)

(2) Path Time RequiredA-B-E-G-H = 2 + 5 + 3 + 3 = 13 weeksA-B-E-F-H = 2 + 5 + 4 + 3 = 14 weeksA-B-D-E-G-H = 2 + 2 + 1 + 3 + 3 = 11 weeksA-B-D-E-F-H = 2 + 2 + 1 + 4 + 3 = 12 weeksA-C-D-E-G-H = 1 + 4 + 1 + 3 + 3 = 12 weeksA-C-D-E-F-H = 1 + 4 + 1 + 4 + 3 = 13 weeks

The critical path is A-B-E-F-H, because it is the longest path.

(3) The total cost of the project as planned is:

Activity Normal CostA-B .................................. $ 1,000A-C .................................. 800B-D .................................. 1,500B-E .................................. 5,100C-D .................................. 2,500D-E .................................. 600E-F .................................. 1,700E-G .................................. 1,200F-H .................................. 1,400G-H .................................. 1,300Total normal cost............. $17,100

16-22 Chapter 16

A E

B G

C F

D H

2wee

ks$1

,000

3wee

ks$1

,200

4wee

ks$2

,500

1 week$600

3wee

ks$1

,400

5 weeks$1,500

3weeks

$1,300

1week

$800

4weeks

$1,700

Start Finish

2weeks

P16-8 (Concluded)

(4) Since the critical path requires 14 weeks, at least 2 weeks must be cut from theproject in order to complete it in 12 weeks. As originally planned (determinedfrom requirement (2)), the following three paths require more than 12 weeks:

Path Time RequiredA-B-E-G-H = 2 + 5 + 3 + 3 = 13 weeksA-B-E-F-H = 2 + 5 + 4 + 3 = 14 weeksA-C-D-E-F-H = 1 + 4 + 1 + 4 + 3 = 13 weeks

The first place to start reducing time is the critical path, A-B-E-F-H, because thelargest amount of time must be cut from this path. In this project, each activityon the critical path can be crashed, so the first activity to crash should be theone that has the smallest crash cost per week. By crashing activity F-H, whichcosts $2,800, path A-B-E-F-H is shortened by one week to 13 weeks. In addition,since activity F-H is on path A-C-D-E-F-H, it is shortened to the required 12weeks. Now one more week must be cut from activity A-B-E-F-H and from activ-ity A-B-E-G-H to bring each path and the total project down to 12 weeks. Theactivity that costs the least to crash and that is common to both paths is activ-ity B-E, which will cost $5,200 to crash one week. The only other way to reduceboth paths by one week would be to crash one activity on each path (activity E-G for $4,600 or G-H for $2,300 on path A-B-E-G-H and also activity E-F on pathA-B-E-F-H for $3,700), which will result in a minimum additional cost of $6,000.Therefore, the minimum cost to reduce the total project time from 14 weeks to 12weeks is $8,000, resulting from reducing activity B-E and F-H by one week eachfor costs of $2,800 and $5,200, respectively. Since the minimum additional costof cutting two weeks off of the total time required to complete the project is$8,000, the minimum total cost of completing the project in 12 weeks is $25,100($17,100 normal cost from requirement (3) plus $8,000 additional cost).

Chapter 16 16-23

P16-9

(1) The normal critical path is:3 + 5 + 1 + 1 + 1 = 11 weeks

A — B — E — H — K — LThe normal cost to be incurred in opening the store is the sum of the normal costof all 14 activities—$85,000.

(2) The minimum time in which the store could be opened is 8 weeks at an addi-tional cost of $11,500, or a total cost of $96,500 ($85,000 + $11,500).

PotentialAlternative Expected Time New

Paths Time Reduction TimeA-B-E-H-K-L 11 weeks 4 (A-B, B-E) 7 weeksA-C-F-I-K-L 7 — 7A-C-F-J-K-L 10 2 (F-J, J-K) 8A-D-G-J-K-L 7 2 (D-G, J-K) 5

The new critical path becomes A-C-F-J-K-L.

Reduced-time programs would be initiated on the following activities:

Reduced ReducedActivities Time CostA-B 1 week $ 4,500B-E 3 3,500F-J 2 2,000J-K 1 1,500

$11,500

The activity D-G reduction is excluded because it would not contribute to reduc-ing the total project time.

(3) The store should be opened on the normal schedule because the cost ($11,500)exceeds the benefit ($6,000).The reduced program would save 3 weeks at a costof $11,500, while the earlier opening can be expected to yield an operatingincome of $2,000 per week, or a total of $6,000.

16-24 Chapter 16

C16-1

(1) Network analysis forces the company to plan ahead and develop a detailed planfor project completion. It presents a visualization of all individual tasks and theirinterrelationships. Network analysis provides management with timely informa-tion for controlling schedules, shows the effects on the entire project of changesmade to individual activities, and allows for the continual updating of projectprogress.

Disadvantages of network analysis as a means of organizing and coordinat-ing projects include the use of probabilistic schedules that may be highly sub-jective, a bias toward overly optimistic time estimates often based onmanagement expectations, and the need for cooperation among a large numberof units to establish consistent priorities. A disproportionate amount of manage-ment time and effort may be required for planning for the benefit received; theremay be other alternatives that could be more effective.

(2) Norm Robertson would be concerned with the delay in activity A-D because itwould shift the critical path from Start-B-C-F-I-J-Finish. Shiela Neil’s estimate ofthe time for activity A-D (10 to 12 weeks) results in Start-A-D-G-J-Finish requir-ing 23 to 25 weeks. Furthermore, Neil’s comment that activity A-D cannot startuntil after activity B-E means that B-E becomes part of this new critical path,making the critical path Start-B-E-A-D-G-J-Finish with a time requirement of 28to 30 weeks. Thus, the change in the relationship of the activities would changethe critical path even more, so that the project will be completed 8 to 10 weekslater than the original estimate.

(3) Norm Robertson developed the PERT diagram for the Vector-12 project withinadequate input. Robertson should have consulted all the departments involvedin the project to ensure that the expected times required to complete the activi-ties were attainable. Because Neil was not consulted, the time required for activ-ity A-D was incorrect, and the relationship between activities A-D and B-E wasmissing from the network.

(4) The behavior problems that could arise within Caltron Inc. as a consequence ofthe planning of the Vector-12 project include:(a) A lack of commitment to the project on the part of the department direc-

tors, particularly Neil, because of their exclusion from the planningprocess.

(b) Conflict among the department directors that could affect future workingrelationships.

(c) A lack of goal congruence among the departments involved.

Chapter 16 16-25