Homework Exercises  –   Chapter 24



Noway Jose Communications, Inc., is considering purchasing a new piece of computerized data transmission equipment.  Estimated annual net cash inflows for the new equipment are $590,000.  The equipment costs $2 million, it has a five-year life and it will have no residual value at the end of the five years.  The company has a minimum rate of return of 12 percent.  Compute the present value of the piece of equipment.  Should the company purchase it?  Why?  (Hint:  Use Table 2 in Appendix C.)




Emerald Bay Furniture Company’s managers have gathered all of the capital investment proposals for the year, and they are ready to make their final selections.  The following proposals and related rate-of-return amounts were received during the period:


            Project                                    Capital Investment                            Rate of Return


AB                                                      $  450,000                                           19%

CD                                                          500,000                                           28%

EF                                                           654,000                                           12%

GH                                                          800,000                                           32%

IJ                                                           320,000                                             23%

KL                                                         240,000                                             18%

MN                                                        180,000                                             16%

OP                                                         400,000                                             26%

QR                                                        560,000                                             14%

ST                                                       1,200,000                                             22%

UV                                                     1,600,000                                             20%


Assume that the company’s minimum rate of return is 15 percent and that $5,000,000 is available for capital investments during the year.


  1. List the acceptable capital investment proposals in order of profitability.
  2. Which proposals should be selected for this year?  Why?



For each of the following situations, identify the correct factor to use from Tables 1 or @ in Appendix C.  Also compute the appropriate present value.


  1. Annual net cash inflows of $22,500 for a period of twelve years, discounted at 14 percent.
  2. The following five years of cash inflows, discounted at 10 percent:


Year 1                         $35,000

Year 2                           20,000

Year 3                           30,000

Year 4                           40,000

Year 5                           50,000

  1. The amount of $70,000 to be received at the beginning of year 7, discounted at 14 percent.



Eco Wet, Inc., a manufacturer of gears for lawn sprinklers, is thinking about adding a new fully automated machine.  This machine can produce gears that the company now produces on its third shift.  The machine has an estimated useful life of ten years and will cost $500,000.  The residual value of the new machine is $50,000.  Gross cash revenue from the machine will be about $420,000 per year, and related operating expenses, including depreciation, should total $400,000.  Depreciation is estimated to be $80,000 annually.  The payback period should be five years or less.  Use the payback period method to determine whether the company should invest in the new machine.  Show the computations that support your answer.



Assume the same facts as in E9A for Eco Wet, Inc.  Management has decided that only capital investments that yield at least an 8 percent return will be accepted.  Using the accounting rate-of-return method, decide whether the company should invest in the machine.  (Round percentages to one decimal place.)  Show the computations that support your decision.



Homework Exercises/Problems  –  Chapter 19





Westport Inspection Service specializes in inspecting cars that have been returned to automobile leasing companies at the end of their leases.  Westport’s charge for each inspection is $60; its average cost per inspection is $15.  The owner wants to expand his business by hiring another employee and purchasing an automobile.  The fixed costs of the new employee and automobile would be $3,000 per month.  How many inspections per month would the new employee have to perform to earn a profit of $1,500?



Americas Company has a plant capacity of 100,000 units per year, but its budget for this year indicates that only 60,000 units will be produced and sold.  The entire budget for this year follows.



Sales (60,000 units at $3.75)                                                                                       $225,000

Less cost of goods produced (based on production of 60,000 units) $60,000

Direct materials (variable)                                                         30,000

Direct labor (variable)                                                               45,000

Variable overhead costs                                                            75,000

Total cost of goods produced                                                                           210,000

Gross margin                                                                                                               $  15,000

Less selling and administrative expenses:

Selling (fixed)                                                                         $24,000

Administrative (fixed)                                                                          36,000

Total selling and administrative expenses                                                           60,000

Operating income (loss)                                                                                              $(45,000)

  1. Given the budgeted selling price and cost data, how many units would Americas have to sell to break even?  (Hint:  Be sure to consider selling and administrative expenses.)
  2. Market research indicates that if Americas were to drop its selling pride to $3.70 per unit, it could sell 100,000 units.  Would you recommend the drop in price?  What would the new operating income or loss be?



Wabash Company specializes in refurbishing exterior painted surfaces that have been hard hit by humidity and insect debris.  It uses a special technique, called pressure cleaning, before priming and painting the surface.  The refurbishing process involves the following steps:


  1. Unskilled laborers trim all trees and bushes within two feel of the structure.
  2. Skilled laborers clean the building with a high-pressure cleaning machine, using about 6 gallons of chlorine per job.
  3. Unskilled laborers apply a coat of primer.
  4. Skilled laborers apply oil-based exterior paint to the entire surface.


On average, skilled laborers work 12 hours per job, and unskilled laborers work hours.  The refurbishing process generated the following operating results during the year on 500 jobs:


Skilled labor                                                                $20      per hour

Unskilled labor                                                              $8      per hour

Gallons of chlorine used                                          3,000      gallons at $5.50 per gallon

Paint primer                                                              7,536      gallons at $15.50 per gallon

Paint                                                                         6,280      gallons at $16.00 per gallon

Depreciation on paint-spraying equipment               $600      per month depreciation

Lease of two vans                                                     $800      per month total

Rent on storage building                                           $421      per month


Data on utilities for the year follow:


Month                                     Number of jobs                     Cost                Hours Worked


January                                                42                                $ 3,950                        840

February                                              37                                   3,550                        740

March                                                  44                                  4,090                         880

April                                                    49                                  4,410                         980

May                                                     54                                  4,720                      1,080

June                                                     62                                  5,240                      1,240

July                                                      71                                  5,820                      1,420

August                                                73                                  5,890                      1,460

September                                           63                                  5,370                      1,260

October                                               48                                  4,340                         960

November                                           45                                  4,210                         900

December                                            40                                  3,830                         800

Totals                                    628                              $55.420                    12,560


  1. Classify the costs as variable, fixed, or mixed.
  2. Using the high-low method, separate mixed costs into their variable and fixed components.  Use total hours worked as the basis.
  3. Compute the average cost per job for the year. (Hint:  Divide the total of all costs for the year by the number of jobs completed.)  Use estimated hours to determine utilities costs.  (Round to two decimal places.)


Park & Moran, a law firm, is considering opening a legal clinic for middle-and low-income clients.  The clinic would bill at a rate of $18 per hour.  It would employ law students as paraprofessional help and pay them $9 per hour.  Other variable costs are anticipated to be $5.40 per hour, and annual fixed costs are expected to total $27,000.


  1. Compute the breakeven point in billable hours.
  2. Compute the breakeven point in total billings.
  3. Find the new breakeven point in total billings if fixed costs should go up by $2,340.




Homework Exercises – Chapter 21



Complete the current liabilities, total assets – current liabilities, and economic value added calculations for investment Centers M and N.


Center M        Center N


Sales                                                                              $15,000           $18,000

After-tax operating income                                             $1,000             $1,100

Total assets                                                                      $4,000             $5,000

Current liabilities                                                             $1,000             ______

Total assets – current liabilities                                       ______            $3,500

Cost of capital                                                                       15%                15%

Economic value added                                                   ______             ______



Identify the most appropriate type of responsibility center for each of the organizational units that follow.


  1. The sheets and towels laundry facility of a large hotel chain             __________
  2. The on-line order department of a retailer      __________
  3. A manufacturing department of a large corporation __________
  4. An urgent care clinic in a community hospital            __________
  5. A famous brand of a large corporation           __________



Roofing tile is Tops Corporation’s major product.  It sold 88,400 cases of tile during the year.  Variable cost of goods sold was $848,640; variable selling expenses were $132,600; fixed overhead was $166,680; fixed selling expenses were $1152,048; and fixed administrative expenses were $96,450.  The selling price was $18 per case.  There were no partially completed jobs in process at the beginning or the end of the year.  Prepare the calendar year-end income statement for Tops using:


  1. The traditional reporting format
  2. The variable costing format



Game, LLP, is evaluating the performance of three divisions:  Rock, Scissors, and Paper.  Using the data that follow, compute the economic value added by each division, and comment on each division’s performance.



Rock             Scissors                         Paper


Sales                                                    $50,000           $50,000                       $50,000

After-tax operating income                   $5,000             $5,000                       $20,000

Total assets                                          $25,000           $12,500                       $25,000

Current liabilities                                   $5,000             $5,000                         $5,000

Cost of capital                                           15%                 15%                             15%

  • P1


Beverage Products Company specializes in 12-ounce drinking glasses.  The president asks the controller to prepare a performance report for April.  The following report was handed to her a few days later:




In discussing the report with the controller, the president stated.  “Profits have been decreasing in recent months, but this report indicates that our production process is operating efficiently.”




  1. Prepare a flexible budget for the company using production levels of 45,000 units, 50,000 units, and 55,000 units.


  1. Assume that the company produced 45,560 units in April and that all fixed costs remained constant.  Prepare a revised performance report similar to the one above, using actual production in units as a basis for the budget column.  (Do not round your answers.)



Beverage Products Company
Monthly Flexible Budget
Units Produced Variable
Cost Category 45,000 50,000 55,000 Cost per Unit
Direct materials $0.10
Direct labor   0.12
Variable overhead:
     Indirect labor  0.03
     Supplies  0.02
     Heat and power  0.03
     Other  0.05
Total variable overhead costs $0.35
Fixed overhead:
     Heat and power
     Insurance and taxes
Total fixed overhead costs
Total costs


Beverage Products Company
Performance Report
For April
Variable Difference
Unit Budgeted Actual Under (Over)
Cost Category Cost Costs* Costs Budget
Direct materials $0.10
Direct labor $0.12
Variable overhead:
     Indirect labor $0.03
     Supplies $0.02
     Heat and power $0.03
     Other $0.05
     Total variable overhead costs
Fixed overhead:
     Heat and power
     Insurance and taxes
     Total fixed overhead costs


*Based on actual production of 45,560 units



Homework Exercises – Chapter 22





Meanwhile Products uses standard costing.  The following information about overhead was generated during August:


Standard variable overhead rate                                 $2.50 per machine hour

Standard fixed overhead rate                                     $3.00 per machine hour

Actual variable overhead costs                                   $60,100

Actual fixed overhead costs                                       $68,800

Budgeted fixed overhead costs                                  $70,000

Standard machine hours per unit produced                2.8

Good units produced                                                  8,000

Actual machine hours                                                 24,200


Compute the variable overhead spending and efficiency variances and the fixed overhead budget and volume variances.


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