1.)Trim Force Corp. had the following information in their accounting records:
|
Work in process inventory, beginning balance |
$50,000 |
|
Cost of direct materials used |
$350,000 |
|
Direct labor cost applied to production |
$200,000 |
|
Cost of finished goods manufactured |
$750,000 |
Manufacturing overhead during production was $250,000. What was the work in process inventory on hand at the end of the year?
2.)Walsh Corp. uses direct labor hours to determine their applied manufacturing overhead. They use a rate of $30 per direct labor hour. During the production period, company employees worked 10,000 direct labor hours, and had actual overhead costs of $305,000.
a.)Record the year-end journal entry to close out the Manufacturing Overhead account to the Cost of Goods Sold account.
b.)Was manufacturing overhead underapplied or was it overapplied?
3.)Sorin Corp. uses process costing for its two production departments: Cutting and Painting. The company’s manufacturing information for the month of August is provided below:
|
Cutting |
Painting |
|
|
Beginning work in process |
$1,000 |
$1,200 |
|
Costs transferred in |
? |
? |
|
Costs incurred in Aug |
$3,500 |
$5,000 |
|
Ending work in process |
$2,000 |
$2,500 |
a.)Record the transfer costs from the cutting department to the painting department in Aug.
b.)Record the transfer costs from the painting department to the finished goods inventory account in Aug.
4.)Badin Corp. has the following information about its most popular product line:
|
Sales price per unit |
$50 |
|
Variable cost per unit |
$25 |
|
Total fixed manufacturing & overhead costs |
$400,000 |
Compute the following:
a.)Unit contribution margin.
b.)Units that must be sold to break even.
c.)Units that must be sold to earn an operating income of $500,000.
5.)Complete Dillon Corp.’s flexible budget for 75,000 units using the information listed below:
|
|
25,000 Units |
50,000 Units |
75,000 Units |
|
Sales |
$375,000 |
$750,000 |
|
|
Cost of Goods Sold |
$250,000 |
$500,000 |
|
|
Gross Profit on Sales |
$125,000 |
$250,000 |
|
|
Operating expenses ($10,000 of it is fixed) |
$35,000 |
$60,000 |
|
|
Operating Income |
$90,000 |
$190,000 |
|
|
Income Taxes (30% of operating income) |
$27,000 |
$57,000 |
|
|
Net Income |
$63,000 |
$133,000 |
|
Assume that cost of goods sold and any variable operating expenses vary directly with sales and that income taxes remain constant at 30%.
6.)Del Sol Healthcare is considering two capital investment proposals. The information for both projects is listed below:
|
|
Proposal #1 |
Proposal #2 |
|
Cost of the investment |
$250,000 |
$300,000 |
|
Estimated salvage value |
$25,000 |
$30,000 |
|
Average estimated net income |
$50,000 |
$60,000 |
Calculate the return on average investment for both proposals and discuss which one would be the best option for investment.
E25.4
Sapsora Company uses ROI to measure the performance of its operating divisions and to reward
division managers. A summary of the annual reports from two divisions is shown below. The company’s weighted-average cost of capital is 12 percent.
A.Which division is more profitable?
B.Would EVA more clearly show the relative contribution of the two divisions to the company as
a whole? Show the computations.
C.Suppose the manager of Division A was offered a one-year project that would increase his investment base by $250,000 and show a profit of $37,500. Would the manager choose to invest in the new project?
E25.5
An investment center in Shellforth Corporation was asked to identify three proposals for its capital budget. Details of those proposals are:
Shellforth uses residual income to evaluate all capital budgeting projects. Its minimum required
return is 12 percent.
a.Assume you are the investment center manager. Which project do you prefer? Why?
b. Assume your investment center’s current ROI is 18 percent and that the president of Shellforth is thinking about using ROI for the investment center’s evaluation. Would your preferences for the projects listed above change? Why?
E25.6
Jennifer Baskiter is president and CEO of Plants & More.com , an Internet company that sells plants and flowers. The success of her startup Internet company has motivated her to expand and create two divisions. One division focuses on sales to the general public and the other focuses on business-to-business sales to hotels, restaurants, and other firms that want plants and flowers for their businesses. She is considering using return on investment as a means of evaluating her divisions and their managers. She has hired you as a compensation consultant. What issues or concerns would you raise regarding the use of ROI for evaluating the divisions and their managers?
E25.7
You are the manager of the Midwest Region, a 27-restaurant division that is part of the chain “Bites and Bits.” The restaurants offer casual dining and compete with such chains in your region as Olive Garden and Outback Steakhouse. You receive an annual cash bonus of 5 percent of sales when residual income in your region exceeds the required minimum return on invested capital of 15 percent. You are using a similar performance evaluation plan to reward each of the managers in your 27 restaurants. You are concerned that important performance variables are being overlooked. For example, you have heard complaints from other regions and in your own region that the quality of the food is bad, it is difficult to retain serving staff in the restaurants, and finding a good chef is very difficult. At an upcoming planning meeting for all regional directors, the agenda includes considering the business performance evaluation and compensation plan. What could you say about the current compensation plan and what would you propose to remedy the problems?
E26.8
Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality luggage. The new equipment would cost $1,728,125, with an estimated five-year life and no salvage value. The estimated annual operating results with the new equipment are as follows:
All revenue from the new luggage line and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following for the investment in the new equipment to produce the new luggage line:
a. Annual cash flows.
b. Payback period.
c. Return on average investment.
d. Total present value of the expected future annual cash inflows, discounted at an annual rate of 10 percent.
e. Net present value of the proposed investment discounted at 10 percent.
E26.9
The division managers of Chester Construction Corporation submit capital investment proposals each year for evaluation at the corporate level. Typically, the total dollar amount requested by the divisional managers far exceeds the company’s capital investment budget. Thus, each proposal is first ranked by its estimated net present value as a primary screening criterion. Jeff Hensel, the manager of Chester’s commercial construction division, often overstates the
projected cash flows associated with his proposals, and thereby inflates their net present values. He does so because, in his words, “Everybody else is doing it.”
a. Assume that all the division managers do overstate cash flow projections in their proposals.What would you do if you were recently promoted to division manager and had to compete for funding under these circumstances?
b. What controls might be implemented to discourage the routine overstatement of capital budgeting estimates by the division managers?
E26.10
EnterTech has noticed a significant decrease in the profitability of its line of portable CD players. The production manager believes that the source of the trouble is old, inefficient equipment used to manufacture the product. The issue raised, therefore, is whether EnterTech should (1) buy new equipment at a cost of $120,000 or (2) continue using its present equipment. It is unlikely that demand for these portable CD players will extend beyond a five-year time horizon. EnterTech estimates that both the new equipment and the present equipment will have a remaining useful life of five years and no salvage value. The new equipment is expected to produce annual cash savings in manufacturing costs of $34,000, before taking into consideration depreciation and taxes. However, management does not believe that the use of new equipment will have any effect on sales volume. Thus, its decision rests entirely on the magnitude of the potential cost savings. The old equipment has a book value of $100,000. However, it can be sold for only $20,000 if it is replaced. EnterTech has an average tax rate of 40 percent and uses straight-line depreciation for tax purposes. The company requires a minimum return of 12 percent on all investments in plant assets.
a. Compute the net present value of the new machine using the tables in Exhibits 26–3 and 26–4.
b. What nonfinancial factors should EnterTech consider?
c. If the manager of EnterTech is uncertain about the accuracy of the cost savings estimate, what actions could be taken to double-check the estimate?
