8 PROBLEMS – MANAGERIAL ACCOUNTING

8 PROBLEMS – MANAGERIAL ACCOUNTING

QUESTIONS
1.
Evaluating a special order (LO – 7-5)
Miyamoto
Jewelers is considering a special order for 10 handcrafted gold bracelets to be
given as gifts to members of a wedding party. The normal selling price of
a gold bracelet is $389.95 and its unit product cost is $264 as shown below.
Direct Materials
……………………………………..$143.00
Direct
Labor……………………………………………. 86.00
Manufacturing
Overhead……………………….. 35.00
Unit Product
Cost……………………………………$264.00

Most of the
manufacturing overhead is fixed and unaffected by variations in how much
jewelry is produced in any given period. However, $7 of the overhead is
variable with respect to the number of bracelets produced. The customer
who is interested in the special bracelet order would like special filigree
applied to the bracelets. This filigree would require additional material
costing $6 per bracelet and would also require acquisition of a special tool
costing $465 that would have no other use once the special order is
completed. This order would have no effect on the company’s regular sales
and the order could be fulfilled using the company’s existing capacity without
affecting any other order.
Required:

What effect would accepting this order have on the company’s net operating
income if a special price of $349.95 is offered per bracelet for this
order? Should the special order be accepted at this price?

2.
Uncertain Future Cash Flows (LO – 8-3)
Union Bay
Plastics is investigating the purchase of automated equipment that would save
$100,000 each year in direct labor and inventory carrying costs. This
equipment costs $750,000 and is expected to have a 10-year useful lift with no
salvage value. The company’s required rate of return is 15% on all
equipment purchases. This equipment would provide intangible benefits
such as greater flexibility and higher-quality output that are difficult to
estimate and yet are quite significant.

Required:
(Ignore income taxes)

What dollar value per year would the intangible benefits have to have in order
to make the equipment an acceptable investment?

3. Production
Budget (LO -9-3)
Chrystal
Telecom has budgeted the sales of its innovative mobile phone over the next
four months as follows:

Sales in Units
July………………………………………………………………………30,000
August………………………………………………………………….45,000
September…………………………………………………………..60,000
October……………………………………………………………….50,000
The company
is now in the process of preparing a production budget for the third
quarter. Past experience has shown that end-of-month finished goods
inventories must equal 10% of the next month’s sales. The inventory at
the end of Jun was 3,000 units.

Required:
Prepare a production budget for the third quarter showing the number of units
to be produced each month and for the quarter in total.

4. The
direct labor budget of Krispin Corporation for the upcoming fiscal year
includes the following budgeted direct labor-hours. The company’s variable
manufacturing overhead rate is $1.75 per direct labor-hour and the company’s
fixed manufacturing overhead is $35,000 per quarter. The only noncash item
included in fixed manufacturing overhead is depreciation, which is $15,000 per
quarter.

Required:
Construct
the company’s manufacturing overhead budget for the upcoming fiscal year.
Compute the
company’s manufacturing overhead rate (including both variable and fixed
manufacturing overhead) for the upcoming fiscal year. Round off to the
nearest whole cent.

5.
Prepare a flexible budget (LO – 10-1)
Gator Divers
is a company that provides divers services such as underwater ship repairs to
clients in the Tampa Bay area. The company’s planning budget for March
appears below.
Gator Divers
Planning Budget
For the Month Ended March 31

Budgeted diving-hours (q)
. . . . . . . . . . . . . . . . . . . . . 200
Revenue ($380.00q) . . . .
. . . . . . . . . . . . . . . . . . . . . .
$76,000
Expenses:
Wages and salaries ($12,000 + $130.00q)
. . . . . . 38,000
Supplies ($5.00q) . . . .
. . . . . . . . . . . . . . . . . . . . . . 1,000
Equipment rental ($2,500 + $26.00q)
. . . . . . . . . . 7,700
Insurance ($4,200) . . . . . . .
. . . . . . . . . . . . . . . . . . 4,200
Miscellaneous ($540 + $1.50q)
. . . . . . . . . . . . . . . 840
Total expense . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . 51,740
Net operating income . . . . . .
. . . . . . . . . . . . . . . . . . . $24,260

Required:
During March, the company’s activity was actually 190 diving-hours. Prepare a
flexible budget for that level of activity. unlikely
that all costs are strictly variable. Some are likely to be fixed or mixed.

6.
Prepare a Report Showing Activity Variances (L0 – 10-2)
Air Meals is
a company that prepares in-flight meals for airlines in its kitchen located
next to the local airport. The company’s planning budget for December appears
below:
In December,
21,000 meals were actually served. The company’s flexible budget for this
level of activity follows:

Required:
Prepare a
report showing the company’s activity variances for December.
Which of the
activity variances should be of concern to management? Explain

7.
Residual Income (LO – 12-2)
Midlands
Design Ltd. Of Manchester, England, is a company specializing in providing
design services to residential developers. Last year the company had net
operating income of £400,000 on sales of £2,000,000. The company’s
average operating assets for the year were £2,200,000 and its minimum required
rate of return was 16%. (The currency in the United Kingdom is the pound,
denoted by £)

Required:
Compute the company’s residual income for the year.

8.
Effects of Changes in Sales, Expenses, and Assets on ROI (LO – 12-1)
BusServ.com
Corporation provides business-to-business services on the Internet. Data
concerning the most recent year appear below:

Required:
Consider each question below independently. Carry out all computations to
two decimal places.
Compute the
company’s return on investment (ROI).
The entrepreneur
who founded the company is convinced that sales will increase next year by 150%
and that net operating income will increase by 400%, with no increase in
average operating assets. What would the company’s ROI?
The Chief
Financial Officer of the company believes a more realistic scenario would be a
$2 million increase in sales, requiring an $800,000 increase in average
operating assets, with a resulting $250,000 increase in net operating
income. What would be the company’s ROI in this scenario?
Prepare a
production budget for the third quarter showing the number of units to be
produced each month and for the quarter in total.

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