Reference no: EM13952568

1. Activity-Based Costing of Suppliers

Davis Fabricators buys metal for manufacturing from two suppliers, Alpha Metals and First Parts. If the metal is delivered late, the shipment to the customer is delayed. Delayed shipments lead to contractual penalties that call for Davis to reimburse a portion of the purchase price to the customer.

During the past quarter, the purchasing and delivery data for the two suppliers showed the following:

	Alpha	First	Total
Total purchases (tons)	11,000	5,500	16,500
Average purchase price	$10.00	$16.00	$12.00
Number of deliveries	80	20	100
Percentage of late deliveries	25%	5%	21%

The accounting department recorded $32,670 as the cost of late deliveries to customers.

Required: Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the past. What is the effective price for metal from the two companies when late deliveries are considered?

2. Trading-Off Costs of Quality

Nuke-It-Now manufactures microwave ovens. The following represents the financial information from one of its manufacturing plants for two years.

	Year 1	Year 2
Sales Costs	$3,490,000	$3,890,000
Redesign process	$31,000	$36,500
Discard defective units	36,100	42,900
Training on equipment	241,000	203,000
Warranty claims	134,000	179,000
Contract cancellations	209,000	154,000
Rework	66,000	102,000
Preventive maintenance	142,000	114,000
Product liability claims	300,000	173,000
Final inspection	194,000	201,000

Required: Construct a cost of quality report for year 1 and year 2.

3. Estimate Sales Revenues

Starlite Company manufactures office products. Last year, it sold 20,000 electric staplers for $25 per unit. The company estimates that this volume represents a 25 percent share of the current electric stapler market. The market is expected to increase by 10 percent next year. Marketing specialists have determined that as a result of new competition, the company's market share will fall to 20 percent (of this larger market). Due to changes in prices, the new price for the electric staplers will be $26 per unit. This new price is expected to be in line with the competition and have no effect on the volume estimates.

Required: Estimate Starlite's sales revenues from electric staplers for the coming year.

4. Prepare Budgeted Financial Statements

Rhodes, Inc., is a fast-growing start-up firm that manufactures bicycles. The following income statement is available for July:

Revenues (210 units @ $520 per unit)	$109,200
Less
Manufacturing costs
Variable costs	15,300
Depreciation (fixed)	16,200
Marketing and administrative costs
Fixed costs (cash)	37,500
Depreciation (fixed)	13,700
Total costs	$82,700
Operating profits	$26,500

Sales volume is expected to increase by 20 percent in August, but the sales price is expected to fall 10 percent. Variable manufacturing costs are expected to increase by 3 percent per unit in August. In addition to these cost changes, variable manufacturing costs also will change with sales volume. Marketing and administrative cash costs are expected to increase by 5 percent.

Rhodes operates on a cash basis and maintains no inventories. Depreciation is fixed and should remain unchanged over the next three years.

Required: Prepare a budgeted income statement for August.

5. Sensitivity Analysis

Bay Area Limos operates transportation services to Bay City airport. The price of service is fixed at a flat rate for each trip and most costs of providing the service are fixed for each trip. Betty Smith, the owner, forecasts income by estimating two factors that fluctuate with the economy: the fuel cost associated with the trip and the number of customers who would take trips. Looking at next year, Betty develops the following estimates of contribution margin (price less variable costs, including fuel) for the estimated number of customers. For simplicity, she assumes that the fuel costs (therefore the contribution margin per ride) and the number of customers are independent.

Contribution Margin
Scenario	Per-Ride(Price-Variable cost	Number of customer
Excellent	$45	4,600
Fair	35	3,000
Poor	20	2,300

In addition to the costs of a ride, Betty estimates that other service costs are $54,000 plus $4 for each customer (ride) in excess of 3,000 rides. Annual administrative and marketing costs are estimated to be $23,000 plus 10 percent of the contribution margin.

Required: Compute the total contribution, costs and operating profit for each of the scenario and each group of customer.Exercise

6. Prepare Flexible Budget

Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:

	Actual (based on actual of 425,000 units)	Master Budget (based on budgeted 400,000 units
Sales revenue	$2,970,000	$3,600,000
Less
Variable costs
Blank flash drives	900,000	880,000
Direct labor	237,500	210,000
Variable overhead	353,500	390,000
Variable marketing and administrative	307,500	300,000
Total variable costs	$1,798,500	$1,780,000
Contribution margin	$1,171,500	$1,820,000
Less
Fixed costs
Manufacturing overhead	573,000	625,000
Marketing	175,000	175,000
Administrative	99,000	112,500
Total fixed costs	$847,000	$912,500
Operating profits	$324,500	$907,500

Required: Prepare a flexible budget for Data-2-Go.

7. Sales Activity Variance

Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:

	Actual (based on actual of 425,000 units)	Master Budget (based on budgeted 400,000 units
Sales revenue	$2,905,00	$3,280,000
Less
Variable costs
Blank flash drives	900,000	880,000
Direct labor	247,500	210,000
Variable overhead	358,500	390,000
Variable marketing and administrative	305,000	300,000
Total variable costs	$18,111,000	$1,780,000
Contribution margin	$1,094,000	$1,500,000
Less
Fixed costs
Manufacturing overhead	586,000	575,000
Marketing	175,000	175,000
Administrative	98,000	110,000
Total fixed costs	$859,000	$860,000
Operating profits	$235,000	$640,000

Required: Prepare a sales activity variance analysis for Data-2-Go.

8. Variable Cost Variances

The following data reflect the current month's activity for Sills, Inc.:

Actual total direct labor	$158,640
Actual hours worked	12,000
Standard labor-hours allowed for actual output (flexible budget)	13,500
Direct labor price variance	$3,840 U
Actual variable overhead	$38,200
Standard variable overhead rate per standard direct labor-hour	$3.30

Variable overhead is applied based on standard direct labor-hours allowed.

Required: Compute the labor and variable overhead price and efficiency variances.

9. Manufacturing Cycle Time and Efficiency

Lancaster Metals has the following average times (in hours):

Transporting product	0.25
Manufacturing product	1.00
Inspecting product	0.25
Storing inventory	2.50

Required: Calculate the manufacturing cycle efficiency.

10. Present Value Analysis in Nonprofit Organizations

The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of 7 years so it will not have to use outsiders' laboratories for certain types of work. The following are all of the cash flows affected by the decision:

Investment (outflow at time 0)	$6,450,000
Periodic operating cash flows:
Annual cash savings because outside laboratories
are not used	1,430,000
Additional cash outflow for people and supplies to operate
the equipment	230,000
Salvage value after seven years, which is the estimated
life of this project	430,000
Discount rate	8%

Required: Calculate the net present value of this decision. Should the organization buy the equipment?