BUS2003 Practice Final Exam

These questions are representative of the types of questions you may find on the final exam, but in total are longer than the actual final exam.

QUESTION ONE

Bellow Division of Sound Corporation is currently operating at a loss. Bellow makes radios that are sold to retail stores. The senior management of Sound Corporation is considering closing the Bellow Division. Bellow’s statement of operations for the last year follows:

Bellow DivisionStatement of Operations

for the past year

Revenues (80,000 units) $ 5,300,000Operating expenses:

Variable costs 4,095,000Traceable fixed costs 1,500,000Allocated corporate overhead 800,000 6,395,000

Operating income (loss) $(1,095,000)

Recently, Sound Corporation acquired the Boom Speaker Company which manufactures speakers that are sold to radio manufacturers.

In an effort to save the division from closing, the manager of the Bellow Division has asked that the new Boom Speaker Division supply it with 80,000 speakers. The Bellow Division currently purchases the speakers from outside suppliers for $28 each.

Boom Speaker produces and externally sells 400,000 speakers per year which represents 80% of its operating capacity. At this production level the standard cost to produce one speaker is as follows:

Direct materials $ 8.00Direct labour 6.00Overhead 3.00Total unit cost $17.00

The standard direct labour rate is $12.00 per hour. The variable overhead rate is $2.00 per direct labour hour and the fixed overhead rate is $4.00 per direct labour hour. Boom sells the speakers for $32 each.

Required:

1. Calculate the minimum and maximum transfer prices. Show all your computations. (2 ½ marks)

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2. Should the transfer take place? Calculate the effect on Sound’s operating income if the transfer takes place. Show all your computations. (3 marks)

3. Of the allocated corporate overhead, 10% is caused by the presence of Bellow and will be avoided if Bellow is closed.

i. Assume the transfer takes place. Should the Bellow Division still be closed? Show all your calculations. (4 marks)

4. Assume the transfer does not take place. Should the Bellow Division be closed? Show all your calculations. (2 marks)

5. Assume Bellow Division has unlimited demand for its radios. What is the maximum number of speakers that should be transferred from Boom Speaker Division? Show all your computations. (3 ½ marks)

QUESTION ONE Solution (15 marks)

Part 1. (2 ½ marks)

Minimum transfer price: Direct materials 8.00 ½ markDirect labour 6.00 ½ markVariable overhead 50% x 2.00 = 1.00 1 mark

Minimum transfer price 15.00

Maximum transfer price 28.00 ½ mark

Part 2. (3 marks)

With transfer:Cost of units transferred 80,000 x 15 (cfwd) = 1,200,000 1 mark cfwd

Without transfer:External purchase cost of units 80,000 x 28 = 2,240,000 1 mark

Savings (increase in operating income) with transfer 1,040,000

Or:

Saving (increase in operating income) with transfer = (28 - 15) x 80,000 = 1,040,000

1 mark cfwd 1 mark

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Yes, the transfer should take place. (1 mark, cfwd with quantitative analysis. No mark awarded if a quantitative analysis is not completed)

Part 3. (i) (4 marks)

Revenues 5,300,000 ½ markVariable costs 4,095,000 - 1,040,000 cfwd = 3,055,000 1 markTraceable fixed costs 1,500,000 ½ markavoidable allocated corporate overhead 10% x 800,000 = 80,000 1 markSegment margin 665,000

If the transfer takes place Bellow Division should not be closed because it contributes $665,000 to Sound’s operating income.

1 mark, cfwd with quantitative analysis. No mark awarded if a quantitative analysis is not completed.

Part 3. (ii) (2 marks)

Calculation of Bellow’s Segment Margin if the transfer does not take place:

Operating income (loss) (1,095,000)

Add back unavoidable corporate overhead 90% x 800,000 = 720,000Segment margin (375,000) 1 mark

If the transfer does not take place Bellow Division should be closed because it decreases Sound’s operating income by $375,000.

1 mark, cfwd with quantitative analysis. No mark awarded if a quantitative analysis is not completed.

Part 4. (3 ½ marks)

Minimum transfer price if Boom has no idle capacity: Variable cost from part 1 15.00 1 mark cfwdLost contribution margin: $32 – 15 = 17.00 1 mark cfwd

Minimum transfer price 32.00

Maximum transfer price 28.00 ½ markAs soon as regular sales are displaced, Boom will want to charge $32 but Bellow could use an outside supplier for $28, which would be cheaper for both Bellow and the corporation.Only the current idle capacity of Boom should be used to produce units for transfer, a total of (400,000/80%) – 400,000 = 100,000 units. 1 mark

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QUESTION TWO

Child Play Inc. produces a special kind of plastic toy car which does not contain lead paint, the Scooter, for various manufacturers. Child Play produces Scooters in batches. After each batch of Scooters is run, the moulds are cleaned. The labour costs of cleaning the moulds can be traced directly to Scooters because of the unique mould required. Cleaning labour is paid on an hourly basis. The following information pertains to June 2007:

Static Budget Actual

Number of Scooters produced and sold 60,000 45,000Batch size (number of Scooters per batch) 500 450Cleaning labour hours per batch 6 7Cleaning labour cost per hour $16.80 $15.00

Required:

1. Calculate the rate variance for total cleaning labour costs in June 2007. Show all your calculations. (3 marks)

2. Calculate the efficiency variance for total cleaning labour costs in June 2007. Show all your calculations. (3 marks)

3. Comment on the efficiency variance. Your comments should include possible causes of the variance and who should be held accountable for the variance. Do not include “an incorrect standard” as a possible cause. (6 marks)

QUESTION Two Solution (12 marks)

Part 1. (3 marks)

{(45,000 ÷ 450) x 7 x $15} – {(45,000 ÷ 450) x 7 x $16.80}

1 mark 1 mark

= $10,500 - $11,760

= $1,260F 1 mark cfd

Part 2. (3 marks)

{(45,000 ÷ 450) x 7 x $16.80} - {(45,000 ÷ 500) x 6 x $16.80}

1 mark 1 mark

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= $11,760 - $9,072

= $2,688U 1 mark cfd

Part 3. (6 marks)

The unfavourable (cfd) variance was caused by two factors:

1. a smaller batch size increased the number of batches, increasing the number of times the moulds require cleaning, resulting in higher cleaning labour costs (1 mark)• the manager responsible for scheduling production (batches) should be held

accountable for the variance (1 mark)• possible causes: smaller orders, inefficient scheduling (1 mark for at least one

explanation)

2. the cleaning staff spent more time cleaning the moulds after each batch, resulting in higher cleaning labour costs (1 mark)• the manager responsible for supervising the cleaning staff should be held accountable

for the variance (1 mark)• possible causes: poorly trained staff, inexperienced staff, poorly supervised staff,

moulds may be more difficult to clean than anticipated (1 mark for at least one explanation)

QUESTION Three - MCQS

1. An assembly worker at a manufacturing company earns $12 per hour for regular work hours. A regular work week consists of 40 hours. The assembler gets time and a half or $18 per hour for overtime. In a given week, the assembler worked 47 hours. The amount charged to direct labour is:

a. $564.b. $480.c. $606.d. $846.e. none of the above.

2. The YWG Company used a budgeted manufacturing overhead rate of $0.175 per machine-hour during 2006. Two machine-hours were budgeted per unit produced. For 2006, actual manufacturing overhead incurred was $350,000 and overhead was over-applied by $10,500. How many units were produced in 2006?

a. 970,000.b. 1,030,000.c. 1,650,000.d. 1,940,000.e. 2,000,000.f. 2,060,000.

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3. Widget Company sells widgets for $20 each. The manufacturing costs, all variable, are $6 each. The company is planning on renting an exhibition booth for both display and selling purposes at the annual convention. The company’s sales manager will earn a vacation bonus if she can earn a target profit of $150,000 for the sales operation at the convention. The convention organizers provide the advertising and guarantee a certain level of traffic in exchange for 15% of the profit earned at each booth.

How many widgets does the sales manager have to sell to earn the vacation bonus?a. 7,500.b. 8,824.c. 9,108 .d. 10,714e. 10,715.f. none of the above.

4. Worley Company has over-applied overhead of $45,000 for its first year ended December 31, 2006, which is considered material in amount. Before disposing of the over-applied overhead, selected December 31, 2006, balances from Worley’s accounting records are as follows:

Revenue $1,200,000Cost of goods sold 691,200Raw materials inventory 57,600Work in process inventory 43,200Finished goods inventory 129,600

After disposing the overhead variance, the balance of cost of goods sold in the income statement for the year ended December 31, 2006 would be:

a. $724,950.b. $646,200.c. $655,200.d. $657,450.e. $727,200.f. none of the above.

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5. At the end of the year, the company had 30,000 units in its ending inventory. Every year, its variable production costs are $10 per unit, and its fixed manufacturing overhead costs are $5 per unit. The company's operating income for the year was $12,000 higher under variable costing than under absorption costing. Given these facts, what must have been the number of units in inventory at the beginning of the year?

a. 27,600 units.b. 28,800 units. c. 32,400 units. d. 42,000 units.e. None of the above.

6. A packaging company produces cardboard boxes in an automated process. Expected production per month is 40,000 units. The direct material cost is $0.30 per unit and the fixed manufacturing overhead cost is $0.60 per unit. Contribution margin per unit is $1.85 and administrative fixed costs are $7,500 per month.

What is the flexible budget amount for operating income (loss) if 20,000 units are produced and sold?

a. $17,500.b. $(500).c. $29,500.d. $37,000.e. $5,500.f. None of the above.

7. Central Medical Supply, Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000; the market value would then be $136,000. However, Tripac offered to purchase the obsolete equipment as is for $88,000.

What is the opportunity cost if Central accepts Tripac’s offer?a. $72,000.b. $78,000.c. $88,000.d. $136,000.e. $168,000.f. $240,000.g. $304,000.

8. At zero machine hours the total budgeted cost line intersects the vertical axis at $60,000. At 20,000 machine hours, a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $180,000. Fixed and variable costs may be expressed as:

a. $60,000 fixed plus $3 per machine hour.b. $90,000 fixed plus $3 per machine hour.c. $180,000 fixed plus $9 per machine hour.d. $60,000 fixed plus $6 per machine hour.

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e. $90,000 fixed plus $6 per machine hour.f. $180,000 fixed plus $6 per machine hour.g. none of the above.

9. A company provides the following information:

Sales $14,000,000Net income $336,000Return on investment 14%Tax rate 40%Minimum required return $480,000

The company’s residual income is:a. ($144,000).b. $435,000.c. $80,000.d. ($278,400).e. $480,000.f. none of the above.

10. The 2006 income statement for Crank Division follows:

Sales $3,120,000Cost of goods sold 1,650,000Gross margin 1,470,000Selling & administrative expenses 1,282,800Operating income $ 187,200

The division’s operating assets employed were $1,296,000 at the end of 2006, which represents an 8% increase over the previous year-end balance. All investments in operating assets are expected to earn a minimum required rate of return of 12%.

Crank has an investment opportunity that would yield an estimated return of 13%.

If Crank is evaluated on the basis of return on investment it will:a. reject the investment opportunity because it will decrease its current return on

investment of 14.4%.b. reject the investment opportunity because it will decrease its current return on

investment of 15%.c. reject the investment opportunity because it will decrease its current return on

investment of 15.05%.d. accept the investment opportunity because it yields a return greater than the

minimum required rate of return.

11. A company pays cash to purchase an investment that will generate interest income of $50,000 per year. Return on investment will:

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a. increase because the turnover will increase.b. increase because the margin will increase.c. increase because the margin and turnover will increase.d. decrease because turnover will decrease.e. decrease because the margin will decrease.f. none of the above.

12. A company manufactures and sells a single product that has a positive contribution margin. If the selling price and variable expenses both decrease by 5% and fixed expenses do not change, then what would be the effect on the contribution margin per unit and the contribution margin ratio?

a. The contribution margin per unit will decrease and the contribution margin ratio will decrease.

b. The contribution margin per unit will decrease and the contribution margin ratio will not change.

c. The contribution margin per unit will not change and the contribution margin ratio will decrease.

d. The contribution margin per unit will not change and the contribution margin ratio will not change.

e. None of the above.

Use the following information for questions 13 to 14:

Baked Brick Company has a bottleneck in the production process. The kiln has a total capacity of 2,000 hours per year. Data concerning the company’s four main products appear below:

StandardBrick

QualityBrick

EconomyBrick

Antique Brick

Revenue per pallet $756 $1,356 $589 $857Contribution margin per pallet $472 $632 $376 $440Annual demand (pallets) 90 110 100 120Hours required in the kiln per pallet 8 8 4 5

13. The kiln could be operated for more than 2,000 hours per year by running it after normal working hours. Up to how much per hour should the company be willing to pay in incremental costs to operate the kiln additional hours?

a. $59.b. $79.c. $94.d. $88.e. $80.

14. Baked Brick Company is considering introducing a new product whose variable cost would be $820 per pallet and that would require 10 hours in the kiln per pallet. What is the minimum acceptable selling price for this new product?

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a. $820.b. $1,292.c. $1,410.d. $879.e. None of the above.

15. Last year, a company reported $750,000 in sales (25,000 units) and an operating income of $25,000. At the break-even point, the company's total contribution margin equals $500,000. Based on this information, which of the following statements is true?

a. The company's contribution margin ratio is 40%.b. The company's break-even point is 24,000 units.c. The company's variable expense per unit is $9.d. The company's variable expenses are 60% of sales.e. None of the above.

16. A company has a margin of safety percentage of 20%. The break-even point is $400,000 and the variable costs are 40% of sales. Given this information, what is the operating income?

a. $48,000.b. $80,000.c. $60,000.d. $ 0.e. None of the above.

17. Iris Company makes two products from a common input. Joint processing costs up to the split-off point total $42,000 a year. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. The total sales value at the split-off point is $40,000. Each product may be sold at the split-off point or processed further. Data concerning these products appear below:

Product X Product Y Total

Allocated joint processing costs $22,680 $19,320 $42,000Costs of further processing 11,600 25,300 36,900Sales value after further processing 40,800 54,200 95,000

The minimum amount the company should accept for Product Y if it is to be sold at the split-off point is:

a. $19,320.b. $25,300.c. $27,600.d. $28,900.e. $52,900.f. $54,200.g. $56,500.

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Question Three Solution1. a2. b3. f4. c 5. c6. e7. a8. c9. c10. b11. a12. b13. a14. c15. c16. c17. d

Question Four:The following are independent of each other:a) Flowers Inc. has budgeted cost of goods sold for August of $1,000 for plastic flowers.

Management also wants to have $500 in inventory at the end of the month to prepare for the fall season. Beginning inventory in August was $400.

Required: What dollar amount of plastic flowers should be purchased to meet the above objectives? 2 marks

Solution$1,000 + $500 - $400 = $1100; 0.5 marks per item

b) Lighting Inc.'s sales budget showed the following projections for the coming year:

Quarter UnitsFirst 100,000Second 120,000Third 140,000Fourth 160,000

520,000

Inventory on December 31 of the current year is expected to be 20,000 units. The quantity of finished goods inventory at the end of each quarter was to equal seven percent of the next quarter's budgeted units to be sold.

Required: Calculate the units to be produced during the third quarter. 3 marks

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Solution:Units of sales 140,000Desired ending inventory 160,000 x 7% =

+ 11,200

Total units needed 151,200Beginning inventory 140,000 x 7% = - 9,800Units to be produced 141,400

0.5 marks for sales; 1 mark for EI, 1 mark for BI, 0.5 marks for total

c) Lovely Pet Store has budgeted cost of goods sold for May of $6,000 for flea collars. Management also wants to have $300 in inventory at the end of the month to prepare for the summer season. Beginning inventory in May was $200.

Required: What dollar amount of flea collars should be purchased to meet the above objectives? 2 marks

Solution$6,000 + $300 - $200 = $6,100 ; 0.5 marks per item

d) Allmakes Software budgeted August purchases of new software at $140,000.The store had software costing $6,000 on hand at the beginning of August, and to cover part of anticipated back-to-school sales in September they expect to have $15,000 of software on hand at the end of August.

Required: What was the budgeted cost of goods sold for August? 3 marks

SolutionBeginning inventory

$ 6,000

Purchases +140,000

Total available $146,000

Ending inventory

- 15,000

Cost of goods sold

$131,000

1 mark for BI, EI and purchases

Question Five:

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Finish-It-Yourself Furniture Company manufactures replicas of antique oak filing cabinets. Additional information is as follows:

Price $500 per filing cabinetVariable production cost $170 per filing cabinetFixed production costs $8,000 per monthVariable selling and administration $20 per filing cabinetFixed selling and administration $3,000 per month

Required:a. Estimate operating income for a month in which 100 filing cabinets are manufactured

and 90 are sold, if the firm uses variable costing. Assume no beginning inventory. Use the proper variable costing income statement format.

b. Estimate operating income for a month in which 100 filing cabinets are manufactured and 90 are sold, if the firm uses absorption costing and actual costing. Assume no beginning inventory. Use the proper absorption costing income statement format.

c. What is the cost assigned to ending inventory under each of the above costing methods? Explain the differences between the two ending inventory valuations (do not perform a computation for this answer).

d. Reconcile the operating incomes between variable costing and absorption costing.e. If the manager of Finish-It-Yourself Furniture Company is given a bonus based on

income, which type of costing income statement would you recommend for evaluating manager performance? Justify your choice.

Question Five Solution:

a. Variable costingRevenue $45,000 Variable costs:

Production: $15,300Selling 1,800

17,100Contribution margin 27,900

Fixed costs:Production $8,000Selling and administrative3,000

11,000Operating income $16,900

b. Absorption costingFixed overhead allocation rate = $8,000/100 = $80 per unitRevenue $45,000Cost of goods sold: 22,500

Gross Margin 22,500Selling and administrative:

Variable $1,800Fixed 3,000

4,800

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Operating income $17,700c. Inventory under variable costing is (10 x $170) = $1,700

Inventory under absorption costing is 10 x ($170 + $80) = $2,500Inventory valuation under variable costing includes only variable costs, whereas under absorption costing it includes an allocation of fixed production costs.

d. The income under variable costing is $16,900 and under absorption costing is $17,700. The difference ($800) is the same as the difference between ending inventory valuations ($2,500 - $1,700 = $800). $800 of fixed overhead cost is kept off the income statement and is instead reported in the balance sheet for absorption costing, whereas fixed overhead is fully expensed as a period cost under variable costing.

e. Student answers to this question will vary, but they need to provide reasonable justification for their choice. For example, they could argue that managers should be compensated using absorption costing because it is the same method used to report to outsiders under GAAP or that this method provides the best matching of revenues against costs. Or, they could argue in favour of variable costing because it removed the inventory effects of fixed overhead and discourages inappropriate building-up of inventory. Or, they could argue in favour of throughput costing because it encourages managers to seek ways to reduce labour and variable overhead costs.

Question SixFlick Company uses a standard cost system. Manufacturing overhead is applied to units of product on the basis of direct labour hours. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20,000 for variable overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both fixed and variable components, is $2.50 per direct labour hour. The standards call for two direct labour hours per unit of output produced. Last year, the company produced 11,500 units of product and worked 22,000 direct labour hours. Actual costs were $22,500 for variable overhead and $31,000 for fixed overhead.

Required:a) What is the denominator level of activity? (2 marks)b) What were the standard hours allowed for the output last year? (1 mark)c) What was the variable overhead spending variance? (3 marks)d) What was the variable overhead efficiency variance? (2 marks)e) What was the fixed overhead budget variance? (2 marks)f) What was the fixed overhead volume variance? (3 marks)

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Question Six Solutiona) Total overhead at the denominator level of activity $50,000

Denominator level of activity = $50,000 / $2.50= 20,000 DLHs

b) Actual output 11,500 units Standard DLH per unit X 2 DLH per unit Standard DLHs allowed 23,000 DLHs

c) Computation of variable overhead spending variance:Spending variance = (AH x AR) - (AH x SR)= ($22,500) - (22,000 DLHs x $1.00*)= $500 unfavourable (2 marks) * $20,000 / 20,000 DLHs = $1.00 (1 mark)

d) Computation of variable overhead efficiency variance:Spending variance = (AH x SR) - (SH x SR)= (22,000 DLHs x $1.00) - (23,000 DLHs* x $1.00)= $1,000 favourable * 2 DLHs per unit x 11,500 units = 23,000 DLHs

e) Computation of the fixed overhead budget variance:Budget variance = Actual fixed overhead - Flexible budget fixed overhead= $31,000 - $30,000= $1,000 unfavourable

f) Computation of the fixed overhead volume variance:Volume variance = Fixed portion of predetermined overhead rate x(Denominator hours - Standard hours allowed) = $1.50* (20,000 DLH - 23,000 DLH) = $4,500 favourable (2 marks) *$30,000 / 20,000 DLH = $1.50 (1 mark)

Question Seven:

Norex Corporation is a manufacturer of electronic equipment. The large, diversified organization is decentralized and has a number of different divisions. The components division makes electronic components that can be sold either internally to the equipment division or sold to outside customers. Currently, the components division is producing a tiny motor that is often used to run fans to cool equipment. The variable cost of making the motors is $15 per unit, the fixed cost is $5, and the market price is $28. Production is 100,000 units.

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The equipment division uses the motor when assembling small fans that are sold to computer manufacturers. Currently, the equipment division sells 50,000 fans. The additional variable cost for processing the motors into fans is $8 per unit. Top management is re-evaluating Norex’ transfer pricing policies. The managers are considering the following price options: variable cost, fully allocated cost, and market price.

Required:a. Assume the components division has enough capacity to meet both internal and

external demand. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate? Explain your reasoning.

b. Assume the components division is operating at full capacity and could sell more units to the outside market. If the transfer price is set using the opportunity cost for the components division, what transfer price would be most appropriate? Explain your reasoning.

c. Now assume the selling price for fans is $40 per unit, the transfer price is set at variable cost, and the components division could sell all of the units it produces externally.

1. What is the contribution margin for Norex if the motors are sold externally? What is the contribution margin for the components division if the motors are sold externally?

2. What is the contribution margin for Norex if the motors are sold internally? What is the contribution margin for the components division if the motors are sold internally?

3. Would the managers of the components division be willing to sell any units to the equipment division? Explain.

4. Calculate the opportunity cost of selling all of the motors externally.5. Recommend a transfer price policy to Norex that could potentially solve any

problems of suboptimal decision-making.

Question Seven Solution:

a. Using the general rule that the transfer price should equal the variable cost plus any opportunity cost results in a price of $15 per unit. Because the components division has plenty of capacity to meet demand, there is no market for additional units produced, and the transfer price would be the variable cost plus the opportunity cost of zero.

b. Using the general rule that the transfer price should be equal to the variable cost plus any opportunity cost results in a price at $28 per unit because now the opportunity cost is the contribution margin foregone by selling the unit internally. So, the transfer price is variable cost plus contribution margin = market price.

c. Transfer price questions1. Norex and components division contribution margin = $13 x 100,000 =

$1,300,000.2. Norex contribution margin = $17 x 50,000 + $13 x 50,000 = $850,000 +

$650,000 = $1,500,000. Components division CM = $13 x 50,000 + 0 = $650,000.

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3. Managers of the components division will not be willing to sell internally at variable cost, when they can get market price if all units are sold externally.

4. The opportunity cost is $200,000 ($1,500,000 - $1,300,000)5. The dual rate method would be best, so that seller is credited for the market

price (its opportunity cost) and buyer is charged the variable cost. In this problem, market price or negotiated prices would also work, so students may give this response.

Question Eight:

Following is information for the Krishnan Company’s three business divisions:Division A Division B Division C

Pretax operating income $800,000 $400,000 $600,000Current assets 80,000 60,000 80,000Long-term assets 3,200,000 2,600,000 1,600,000Current liabilities 400,000 200,000 300,000

Krishnan’s tax rate for the divisions is 30%, and its after-tax weighted-average cost of capital (WACC) for each segment is 12%. The WACC is also used as a required rate of return.

Required:a. Determine the division with the highest ROI. Show your calculations.b. Determine the division with the highest residual income. Show your calculations.c. Determine the segment with the highest EVA. Show your calculations.d. Compare and contrast these three performance measures and their influence on

managers.e. Why is it better to use multiple measures for evaluating manager performance rather

than a single measure such as ROI or EVA?

Question Eight Solution:

a. ROI: Division C is highestDivision A = $800,000/$3,280,000 = 24%Division B = $400,000/$2,660,000 = 15%Division C = $600,000/$1,680,000 = 36%

b. RI: Division A is highestDivision A = $800,000 – (12% x $3,280,000) = $406,400.Division B = $400,000 – (12% x $2,660,000) = $80,800Division C = $600,000 – (12% x $1,680,000) = $398,400

c. EVA: Division C is highestDivision A = (70% x $800,000) – (12% x $2,880,000) = $214,400Division B = (70% x $400,000) – (12% x 2,460,000) = $(15,200)Division C = (70% x $600,000) – (12% x $1,380,000) = $254,400

d. RI and EVA provide information about the dollar amount of return, whereas ROI is a percentage. RI and EVA incorporate a required rate of return, while ROI does not. ROI can easily be compared among divisions, whereas RI and EVA are not easily compared because size has an influence. ROI is subject to greater accounting

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manipulation than the other two methods. EVA allows development of a measure that is less subject to manipulation and results in more optimal decision-making.

e. No one single measure can capture all aspects of a manager’s performance, and all measures have both strengths and weaknesses. Multiple measures also reduce the likelihood that managers will focus on too narrow an aspect of operations.

Question Nine:

Hoshi is the chair of the Accounting Department at Big City College. The college has recently developed a balanced scorecard for its operations and is encouraging departments to do the same. For each perspective, develop one objective and one performance measure that Hoshi might use in a first draft of a balanced scorecard for the Accounting Department (the academic unit, not the accounting function for the college).

Objectives Performance MeasuresFinancial perspective

Increased enrollment in school.

# of students enrolled

Customer perspective

Increased student satisfaction

# of students who view courses as satisfactory

Internal business process perspective

Increased capacity of classrooms.

# of empty seats in classrooms

Learning and growth perspective

Increased training and hiring of skilled instructors

Aptitude of incoming hirees and dollars spent on training

Question Nine Solution:

Below are examples of balanced scorecard objectives and measures for the Accounting Department at Big City College; student answers will vary:

Objective Performance MeasureFinancial perspective

Meet budget expectations Budget variances

Customer perspective

Provide classes that satisfy students

Average students evaluation ratings per class

Internal business process perspective

Reduce the number of students that are wait-listed

Number of classes that are full during registration

Learning and growth perspective

Increase faculty quality Number of faculty with Ph.D. or other terminal degree

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Question TenGeneva Corporation has a Castings Division that does casting work of various types. The company's Machine Products Division has asked the Castings Division to provide it with 10,000 special castings each year on a continuing basis. The special castings would require $20 per unit in variable production costs. The Machine Products Division has a bid from an outside supplier of $30 per unit for the castings.

In order to have time and space to produce the new casting, the Castings Division would have to cut back production of another casting: the NW2, which it presently is producing. The NW2 sells for $40 per unit, and requires $25 per unit in variable production costs. Boxing and shipping costs of the NW2 are $4 per unit. Boxing and shipping costs for the new special casting would be only $2 per unit. The company is now producing and selling 100,000 units of the NW2 each year. Production and sales of this casting would drop by 10% if the new casting were produced.

Required:a) What is the range of transfer prices, if any, within which both the divisions' profits would increase as a result of agreeing to the transfer of 10,000 castings per year from the Castings Division to the Machine Products Division? 5 marksb) Is it in the best interests of Geneva Corporation for this transfer to take place? Explain. 3 marks

Question Ten Solution:a) From the perspective of the Castings Division, profits would increase as a result of the

transfer providing that:

Transfer price > Variable cost + Opportunity cost

The opportunity cost is the contribution margin on the lost sales, divided by the number of units transferred:

Opportunity cost = [($40 - $25 - $4) x 10,000] / 10,000 = $11 (1 mark)

Therefore,

Transfer price > ($20 + $2) + $11 = $33 (2 marks)

From the viewpoint of the purchasing division, the transfer price must be less than the cost of buying the units from the outside supplier.

Transfer price < $30 (1 mark)

Combining the two requirements, we find that no feasible range of transfer prices exists under current conditions. (1 mark)

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b) No, the transfer should not take place. (1 mark) From the viewpoint of the entire company, the cost of transferring the units within the company is $33, but the cost of purchasing them from the outside supplier is $30. Therefore, the company's profits decrease by $3 for each casting that is produced within the company rather than purchased in the outside market. (2 marks)

Question ElevenRedner, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

Fixed costs are applied to the products on the basis of direct labour hours.

Demand for the three products exceeds the company's productive capacity. The grinding machine is the constraint, with only 2,400 minutes of grinding machine time available this week.

Required:a) Given the grinding machine constraint, which product should be emphasized? Support your answer with appropriate calculations. 4 marksb) If there is still unfilled demand for the product that the company should emphasize in part a) above, up to how much should the company be willing to pay for an additional hour of grinding machine time? (2 marks)

Question Eleven Solution:a) The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is grinding machine time.

1 mark for each CM/min calculation

Product L should be emphasized because it has the greatest contribution margin per unit of the scarce resource. (1 mark)

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b) If additional grinding machine time is used to produce more of Product L, the time would be worth 60 x $5 = $300 per hour. (2 marks)

QUESTION Twelve (13 marks, 21 minutes)

Timer Limited, a manufacturer of quality clocks, is facing increasing competition. The president of the company believes an aggressive marketing campaign will be necessary next year to maintain the company’s present growth.

To prepare for next year’s marketing campaign, the company’s controller has prepared the following data for the current year, 2008:

Unit cost per clock:Variable costs:

Direct manufacturing labour $9.60Direct materials 3.90Variable manufacturing, selling & administrative overhead 3.00 16.50

Fixed costs:Manufacturing 1.50Selling 2.40Administrative 4.20 8.10

Total unit cost per clock $24.60

Selling price per clock $30.00

Expected sales volume in 2008 20,000 units

Income tax rate 40%

Required:

1. Calculate the projected net income for 2008. Show all your computations. (2 marks)2. The president believes an additional marketing cost of $13,500 for advertising in 2009

will be necessary to attain the desired growth in revenue. Calculate the breakeven point in revenues for 2009 if the additional $13,500 is spent for advertising. Show all your computations. (3 marks)

3. If the additional $13,500 is spent for advertising in 2009, what is the required 2009 revenue for 2009’s net income to equal 2008’s net income? How many units must be sold to meet the target net income? Show all your computations. (4 marks)

4. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a 2009 net income of $72,000 is desired? Show all your computations. (4 marks)

QUESTION Twelve solution (13 marks)

Part 1 (2 marks)

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Operating income: 20,000 x (30.00 – 24.60) = 108,000 1 markIncome tax expense @ 40% 43,200 1 markNet income 64,800

Part 2 (3 marks)

2 marks

175,500 . = $390,00030.00 – 16.50 30.00

1 mark

Total fixed costs: (8.10 x 20,000) + 13,500 = 175,500

Part 3 (4 marks)

1 mark cfd 1 mark cfd

175,500 + 64,800 (1 – 40%) = 630,000 45%

1 mark

OR (175,500+108,000)/(30-16.5) = 21,000 units (1 mark)

Part 4 (4 marks)

Total contribution margin: 22,000 x 13.50 cfd = 297,000 1 markLess:

Fixed expenses excluding advertising: 20,000 x 8.10 = 162,000 1 markOperating income to achieve net income of 72,000: 72,000 ÷ (1 - 40%) = 120,000 2 marks

Maximum amount of advertising 15,000

Question Thirteen: (15 marks) (20 minutes)A list of accounts for a manufacturing company for an accounting period is given below:

Sales $39,000

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Cost of Goods Sold ?

Purchases of direct materials 11,000

Direct labour 5,000

Finished goods inventory, beginning 5,000

Work in process, beginning 800

Work in process, ending 3,000

Gross Margin 11,700

Finished goods inventory, ending ?

Accounts payable, beginning 4,000

Accounts payable, ending 2,800

Advertising expense 1,500

Direct materials inventory, beginning 1,000

Direct materials inventory, ending 3,000

Indirect labour 2,000

Sales commissions (10%) 3,900

Indirect materials used 3,000

Utilities expense, factory 2,000

Amortization on office equipment 2,000

Amortization on factory equipment 6,000

Over-applied manufacturing overhead 3,000

Any over or under applied overhead is closed out to cost of goods sold.

Required:a) Calculate the components of cost of goods manufactured. (11 marks)b) Calculate adjusted cost of goods sold. (1 mark)c) Calculate finished goods inventory, ending. (3 marks)

Question thirteen solution:a)Direct materials inventory, beginning 1,000Add: Purchases 11,000Direct materials available for use 12,000Less: direct materials inventory, ending 3,000Direct materials used in production 9,000Direct labour 5,000Manufacturing overhead:Indirect labour 2,000Indirect materials 3,000Utilities 2,000

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Amortization 6,000Over-applied overhead 3,000Total manufacturing overhead applied 16,000Total manufacturing costs 30,000Add: WIP, beginning 800Less: WIP, ending (3,000)COGM 27,800

b)COGS = Sales – GMCOGS = 39,000-11,700COGS = 27,300Normal COGS = 27,300 – 3,000 = 24,300

c)FG, ending = FG, beginning + COGM – normal COGSFG, ending = 5,000 + 27,800 – (27,300-3000)FG, ending = 8,500

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