Faculty of Commerce / / Prof: Salem A. Helles
Accounting Department / Data : 12 / 01 / 2013
Final Exam / Student No:
Name:......
Question 1
Selected sales and operating data for three divisions of different structural engineering firms are given below:
Division A / Division B / Division CSales / $12,000,000 / $14,000,000 / $25,000,000
Average operating assets / $3,000,000 / $7,000,000 / $5,000,000
Net operating income / $60,000 / $560,000 / $800,000
Minimum required rate of return / %14 / 10% / %16
Required:
1. Compute the return on investment (ROI) for each division, using the formula stated in terms of margin and turnover.
2. Compute the residual income for each division.
3. Assume that each division is presented with an investment opportunity that would yield a 15% rate of return.
a. If performance is being measured by ROI, which division or divisions will probably accept the opportunity? Reject? Why?
b. If performance is being measured by residual income, which division or divisions will probably accept the opportunity? Reject? Why?
Question 2
Dorsey Company manufactures three products from a common input in a joint processing operation joint processing costs up to the split-off point total $350,000 per quarter. The company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:
Product / Selling Price / Quarterly OutputA / $16 per pound / 15,000 pounds
B / $8 per pound / 20,000 pounds
C / $25 per pound / 4,000 gallons
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:
Product / Additionalprocessing costs / Selling Price
A / $63,000 / $20 per pound
B / $80,000 / $13per pound
C / $36,000 / $32 per pound
Required
Which product or products should. be sold at the split-off point and which product or products' should be processed further? Show computations.
Question 3
The Elberta Fruit Farm of Ontario has always hired transient workers to pick its annual cherry crop. Francie Wright, the farm manager, has just received information on a cherry picking machine that is being purchased by many fruit farms. The a chine is a motorized device that shakes the cherry tree, causing the cherries to fall onto plastic tarps that funnel the cherries into bins. Ms. Wright has gathered the following information to decide whether a cherry picker would be a profitable investment for the Elberta Fruit Farm:
a. Currently, the farm is paying an average of $40,000 per year to transient workers to pick the cherries.
b. The cherry picker would cost $94,500, and it would have an estimated 12-year useful life. The farm uses straight-line depreciation on all assets and considers salvage value in computing depreciation deductions. The estimated salvage value of the cherry picker is $4,500.
c. Annual out-of-pocket costs associated with the cherry picker would be: cost of an operator and an assistant, $14,000; insurance, $200; fuel, $1,800; and a maintenance contract, $3,000.
Required:
(Ignore income taxes.)
1. Determine the annual savings in cash operating costs that would be realized if the cherry picker were purchased.
2. Compute the simple rate of return expected from the cherry picker. (Hint: Note that this is a cost reduction project.) Would the cherry picker be purchased if Elberta Fruit Farm's required rate of return is 16%?
3. Compute the payback period on the cherry picker. The Elberta Fruit Farm will not purchase equipment unless it has a payback period of five years or less. Would the cherry. picker be purchased?
4. Compute (to the nearest whole percent) the internal rate of return promised by the cherry picker. Based. on this computation, does it appear that the. simple rate of return is an accurate guide in investment decisions?
Question 4
The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were:
Month / Guest days ofOccupancy / Custodial Supplies
Expense
March / 4,000 / $7,500
April / 6,500 / $8,250
May / 8,000 / $10,500
June / 10,500 / $12,000
July / 12,000 / $13,500
August / 9,000 / $10,750
September / 7,500 / $9,750
Guest-days is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is counted as three guest-days.
Required:
l. Using the high-low method, estimate a cost formula for custodial supplies expense.
2. Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days?
Question 5
A cash budget. by quarters, is given below for a retail company- (000 omitted). The company requires a minimum cash balance of at least $5,000 to start each quarter.
Quarter1 / 2 / 3 / 4 / Year
Cash balance, beginning / $6 / $ ? / $ ? / $ ? / $ ?
Add collections from customers / ? / ? / 96 / ? / 323
Total cash available / 71 / ? / ? / ? / ?
Less disbursements
Purchases of inventory / 35 / 45 / ? / 35 / ?
Operating expenses / ? / 30 / 30 / ? / 113
Equipment purchases / 8 / 8 / 10 / ? / 36
Dividends / 2 / 2 / 2 / 2 / ?
Total disbursements / ? / 85 / ? / ? / ?
Excess (deficiency)of cash available over disbursements / (2) / ? / 11 / ? / ?
Financing :
Borrowing / ? / 15 / - / - / ?
Repayments (including interest / - / - / (?) / (17) / (?)
Total financing / ? / ? / ? / ? / ?
Cash balance, ending / $ ? / $ ? / $ ? / $ ? / $ ?
Interest will total $1,000 for the year.
Required:
Fill in the missing amounts in the above table.
Question 6
Pryad Corporation makes ultra-lightweight backpacking tents. Data concerning the company's two; product lines appear below:
Deluxe / StandardDirect materials per unit / $60,000 / $45,000
Direct labor per unit / $9,60 / $7,20
Direct labor hours per unit / 0.8DLHs / 0.6 L Hs
Estimated annual production / 10,000 units / 50,000 units
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labour-hours. Data concerning manufacturing overhead and direct labour-hours for the upcoming year appear below:
Estimated total manufacturing overhead / $290,000Estimated total direct labour-hours / 50,000 DLHs
Required:
1. Determine the unit product costs of the Deluxe and Standard products under the company's traditional costing system.
2. The company is considering replacing its traditional costing system for determining unit product costs for external reports with an activity-based costing system. The activity-based costing sys-tem would have the following three activity cost pools:
Activities and Activity measures / Estimated overhead cost / Expected ActivityDeluxe / Standard / Total
Supporting direct labor ( direct labor-hours) / $150,000 / 8,000 / 42,000 / 50,000
Batch setups (setups) / 60,000 / 200 / 50 / 250
Safety testing (tests) / 80,000 / 80 / 20 / 100
Total manufacturing overhead cost / $290,000
Determine the unit product costs of the Deluxe and Standard products under the activity-based costing system.
Good Luke
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