FUNDAMENTALS OF ACCOUNTING II
Homework Exercises – Chapter 24
SE5
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.)
E1A
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.
- List the acceptable capital investment proposals in order of profitability.
- Which proposals should be selected for this year? Why?
E4A
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.
- Annual net cash inflows of $22,500 for a period of twelve years, discounted at 14 percent.
- 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
- The amount of $70,000 to be received at the beginning of year 7, discounted at 14 percent.
E9A
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.
E10A
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.
FUNDAMENTALS OF ACCOUNTING II
Homework Exercises/Problems – Chapter 19
E14A
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?
E15A
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)
- 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.)
- 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?
P1
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:
- Unskilled laborers trim all trees and bushes within two feel of the structure.
- Skilled laborers clean the building with a high-pressure cleaning machine, using about 6 gallons of chlorine per job.
- Unskilled laborers apply a coat of primer.
- 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
- Classify the costs as variable, fixed, or mixed.
- Using the high-low method, separate mixed costs into their variable and fixed components. Use total hours worked as the basis.
- 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.)
P2
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.
- Compute the breakeven point in billable hours.
- Compute the breakeven point in total billings.
- Find the new breakeven point in total billings if fixed costs should go up by $2,340.
FUNDAMENTALS OF ACCOUNTING II
Homework Exercises – Chapter 21
SE7
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 ______ ______
E1A
Identify the most appropriate type of responsibility center for each of the organizational units that follow.
- The sheets and towels laundry facility of a large hotel chain __________
- The on-line order department of a retailer __________
- A manufacturing department of a large corporation __________
- An urgent care clinic in a community hospital __________
- A famous brand of a large corporation __________
E6A
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:
- The traditional reporting format
- The variable costing format
E8A
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:
USE THE DATA ON PAGE 986 IN YOUR TEXT TO COMPLETE
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.”
Required:
- Prepare a flexible budget for the company using production levels of 45,000 units, 50,000 units, and 55,000 units.
- 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 | ||||
| Depreciation | ||||
| Insurance and taxes | ||||
| Other | ||||
| 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 | ||||
| Depreciation | ||||
| Insurance and taxes | ||||
| Other | ||||
| Total fixed overhead costs | ||||
| Totals | ||||
*Based on actual production of 45,560 units
FUNDAMENTALS OF ACCOUNTING II
Homework Exercises – Chapter 22
SE8
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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