Reference no: EM13490451

1. Morris & Brown, Ltd

Income Statements

For the Three Months Ended September 30

 

                                                 July                        August                  September

Sales in units                               4000                       4500                       5000      

 

Sales revenue                          A$400,000                   A$450,000            A$500,000

Cost of good sold                        240,000                      270,000               300,000

 

Gross margin                               160,000                       180,000              200,000

 

Selling and administrative expenses:

Advertising expense                     21,000                        21,000                   21,000

Shipping expense                       34,000                        36,000                   38,000

Salaries& commission                  78,000                          84,000                   90,000

Insurance expense                     6,000                            6,000                     6,000

Depreciate expense                    15,000                         15,000                   15,000

 

Total selling& admin expens         154,000                       162,000                 170,000

Net operation income              A$ 6000                      A$ 18,000                A$30,000

 

(Note: Morrisey & Brown, Ltd. Australian- formatted income statement has been recast in the format common in the United States. The Australian dollar is denoted here by A$.)

Question:

(1)    Identify each of the company's expenses (including cost of good sold) as either variable, fixed, or mixed.

(2)    Using the high- low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.

(3)    Redo the company's income statement at the 5,000-unit level of activity using the contribution format.

 

2) Menlo Company distributes a single product. The company's sales and expenses for last month follow:

 

Total                                                Per Unit
Sales	$450,000	$30
Variable expenses	180,000	12
Contribution margin	270,000	18
Fixed expenses	216,000
Net Operating income	54,000

 

1)      What is the month break-even point in units sold and in sales dollars?

2)      Without resorting to computations, what is the total contribution margin at the break-even point?

3)      How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method. Verify your answer by preparing contribution format income statement at the target sales level.

 

3) Silver Company makes a product that is very popular as a Mother's Day gift. Thus, peak sales occur in May of each year, as shown in the company's sales budget for the second quarter given below:

 

	April	May	June	Total
Budget sales (all on account)	$300,000	$500,000	$200,000	$1,000,000

 

From past experience, the company has learned that 20% of a month's sales are collected in the month of sale, another 70% are collected in the month following sale, and the remaining 10% are collected in the second following sale. Bad debts are negligible and can be ignored. February sales totaled $230,000, and March sales totaled $260,000.

1)      Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.

2)      Assume that the company will prepare a budgeted balance sheet as of June 30. Compute the accounts receivable as of that date.

 

4) Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budget cash flows:

 

	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
Total cash receipts	$180,000	$330,000	$210,000	$230,000
Total cash disbursements	$260,000	$230,000	$220,000	$240,000

 

The company's beginning cash balance for the upcoming fiscal year will be $20,000. The company requires a minimum cash balance of $10,000, and may borrow any amount needed from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. Interest payments are due on any principal at the time it is repaid. For simplicity, assume that interest is not compounded.

Prepare the company's cash budget for the upcoming fiscal year.

 

5) Vulcan Flyovers offers scenic overflights of Mount St. Helens, the volcano in Washington State that explosively erupted in 1982. Data concerning the company's operations in July appear below:

 

Vulcan Flyovers Operating Data For the Month Ended July 31
	Planning Budget	Flexible Budget	Actual Results
Flights (q)	50	48	48
Revenue ($320.00q)	$16,000	$15,360	$13,650
Expenses:
Wages and salaries ($4,000 + $82.00q)	8,100	7,936	8,430
Fuel ($23.00q)	1,150	1,104	1,260
Airport fees ($650 + $38.00q)	2,550	2,474	2,350
Aircraft depreciation ($7.00q)	350	336	336
Office expenses ($190 + $2.00q)	290	286	460
Total expense	12,440	12,136	12,836
Net operating income	$3,560	$3,224	$814

The company measures its activity in terms of flights. Customers can buy individual tickets for overflights or hire an entire plane for an overflight at a discount.

1)      Prepare a flexible budget performance report for July

2)      Which of the variances should be of concern to management? Explain.

 

6) Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow (in millions of yen, denoted by =Y):

 

Division Osaka                        Yokohama
Sales	=Y3,000,000	=Y9,000,000
Net operating income	=Y210,000	=Y720,000
Average operating assets	=Y1,000,000	=Y4,000,000

 

1)      For each division, compute the return on investment (ROI) in terms of margin and turnover. Where necessary, carry computations to two decimal places.

2)      Assume that the company evaluates performances using residual income and that the minimum required rate of return for any division is 15%. Compute the residual income for each division.

3)      Is Yokohama's greater amount of residual income an indication that it is better managed?

 

7) Wingate Company, a wholesale distributer of videotapes, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement, which follows:

 

Sales	$1,000,000
Variable expenses	390,000
Contribution margin	610,000
Fixed expenses	625,000
Net operating income (loss)	$ (15,000)

 

In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:

 

Division East                      Central                         West
Sales	$250,000	$400,000	$350,000
Variable expenses as a percentage of sales	52%	30%	40%
Traceable fixed expenses	$160,000	$200,000	$175,000

 

1)      Prepare a contribution format income statement segmented by divisions, as desired by the president.

2)      As a result of a marketing study, the president believes that sales in the West Division could be increased by 20% if monthly advertising in that division were increased by $15,000. Would you recommend the increased advertising? Show computations to support your answer.

8) Labeau Products, Ltd. Of Perth, Australia, has $35,000 to invest, The company is trying to decide between two alternative uses for the funds as follows:

	Invest in Project X	Invest in Project Y
Investment required	$35,000	$35,000
Annual cash inflows	$9,000
Single cash inflow at the end of 10 years		$150,000
Life of the project	10 years	10 years

The company's discount rate is 18%

(ignore income taxes) Which alternative would you recommend that the company accept? Show all computations using the net present value approach. Prepare separate computations for each project.