Prof. Salem A Helles / / Advanced Managerial Accounting
Accounting Department / Faculty of Commerce
Final Exam
Date:30 Jan. 2010 / Master of Business Administration
Master of Accounting and Finance
الرقم الجامعي : / اسم الطالب :
ANSWER EIGHT QUESTIONS ONLY: (7.5 Mark for each Question)
Question One: Gaza Company is studying a project that would have an eight- years life and require a $2,400,000 investment in equipment. At the end of eight years, the project would terminate and the equipment would have no salvage value. The project would provide net operating income each year as follows:
Sales ...... $3,000,000
Less variable expenses … ……… 1,800,000
Contribution margin 1,200,000
Less fixed expenses:
Advertising, salaries, and other
fixed out-of-pocket costs ...... $700,000
Depreciation ...... 300,000
Total fixed expenses ...... 1,000,000
Net operating income ...... $200,000
The company's discount rate is 12%
Required:
1- Compute the project's net present value. Is the project acceptable.
2- Find the project's internal rate of return to the nearest whole percent.
3- Compute the project's payback period.
4- Compute the project's accounting rate of return.
Question Two : Gaza Farms produces strawberries and raspberries. Annual fixed costs are $ 15,600. The cost driver for variable costs is pints of fruit produced. The variable cost is $0.75 per pint of strawberries and $ .95 per pint of raspberries. Strawberries sell for $ 1.10 per pint, raspberries for $ 1.45 per pint. Two pints of strawberries are produced for every pint of raspberries.
Required:
1- Compute the number of pints of strawberries and the number of pints of raspberries produced and sold at the break-even point.
2- Suppose only strawberries are produced and sold. Compute the break-even point in pints.
3- Suppose only raspberries are produced and sold. Compute the break-even point in pints.
Question Three: LG Products markets two computer games: A and B. A contribution format income statement for a recent month for the two games appears below:
A / B / TotalSales / $30,000 / $70,000 / $100,000
Less variable expenses / 20,000 / 50,000 / 70,000
Contribution margin / $10,000 / $20,000 / 30,000
Less fixed expenses / 24,000
Net operating income / $6,000
Required:
1. Compute the overall contribution margin (CM) ratio for the company.
2. Compute the overall break-even point for the company in sales dollars.
3. Compute the break- even point for each computer games in sales dollars.
Question Four: FG Company makes two products, P1 and P2. Data regarding the two products follow:
Direct Labor- Hours per Unit / Annual ProductionP1 / 0.80 / 10,000 units
P2 / 0.40 / 40,000 units
Additional information about the company follows:
a. P1 require $32 in direct materials per unit, and P2 require $18.
b. The direct labor wage rate is $15 per hour.
c. P1 are more complex to manufacture than P2 and they require special equipment.
d. The ABC system has the following activity cost pools:
Estimated Overhead cost / ActivityActivity Cost Pool / Activity Measure / Total / P1 / P2
Machine setups / Number of setups / $72,000 / 400 / 100 / 300
Special processing / Machine-hours / $200,000 / 5,000 / 5,000 / -
General factory / Direct labor-hours / $816,000 / 24,000 / 8,000 / 16,000
Required:
1. Compute the activity rate for each activity cost pool.
2. Determine the unit cost of each product according to the ABC system, including direct materials and direct labor.
Question Five: Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well," said, president of MB Company. "Our $18,300 overall manufacturing cost variance is only 1.2% of the $1,536,000 standard cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year."
The company produces and sells a single product. The standard cost card for the product follows:
Standard Cost Card – Per Unit
Direct materials, 2 feet at $8.45 per foot $16.90
Direct labor, 1.4 direct labor-hours at $16 per direct labor-hour. 22.40
Variable overhead, 1.4 direct labor-hours at $2.50 per direct labor-hour. 3.50
Fixed overhead, 1.4 direct labor-hours at $6 per direct labor-hour. 8.40
Standard cost per unit $51.20
The following additional information is available for the year just completed:
a. The company manufactured 30,000 units of product during the year.
b. A total of 64,000 feet of material was purchased during the year at a cost of $8.55 per foot. All of this material was used to manufacture the 30,000 units. There were no beginning or ending inventories for the year.
c. The company worked 43,500 direct labor-hours during the year at a direct labor cost of $15.80 per hour.
d. Overhead cost is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow:
Denominator activity level (direct labor-hours) 35,000
Budgeted fixed overhead costs (from the flexible budget) $210,000
Actual variable overhead costs $108,000
Actual fixed overhead costs $211,800
Required:
1. Compute the direct materials price and quantity variances for the year.
2. Compute the direct labor rate and efficiency variances for the year.
3. For manufacturing overhead, compute the following:
a. The variable overhead spending and efficiency variances for the year.
b. The fixed overhead budget and volume variances for the year.
4. Total the variances you have computed, and compare the net amount with the $18,300 mentioned by the president. Do you agree that bonuses should be given to everyone for good cost control during the year? Explain.
Question Six: "I know headquarters wants us to add that new product line," said, manager of Billings Company's Office Products Division. "But I want to see the numbers before I make any move. Our division's return on investment (ROI) has led the company for three years, and I don't want any letdown."
Billings Company is a decentralized wholesaler with five autonomous divisions. The divisions are evaluated on the basis of ROI, with year-end bonuses given to the divisional managers who have the highest ROIs. Operating results for the company's Office Products Division for the most recent year are given below:
Sales ……………………………………………..……… $10,000,000
Variable expenses …………………………… …… 6,000,000
Contribution margin …………………………… … 4,000,000
Fixed expenses ……………………………………… 3,200,000
Net operating income ……………………… …… $800,000
Divisional operating assets ………………… … $4,000,000
The company had an overall return on investment (ROI) of 15% last year (considering all divisions). The Office Products Division has an opportunity to add a new product line that would require an additional investment in operating assets of $1,000,000. The cost and revenue characteristics of the new product line per year would be:
Sales ……………………………………………..……… $2,000,000
Variable expenses …………………… …………… 60% of sales
Fixed expenses ……………………………………… $640,000
Required:
1. Compute the Office Products Division's ROI for the most recent year; also compute the ROI as it would appear if the new product line is added.
2. If you were in Manager's position, would you accept or reject the new product line? Explain.
3. Suppose that the company's minimum required rate of return on operating assets is 12% and that performance is evaluated using residual income.
a. Compute the Office Products Division's residual income for the most recent year; also compute the residual income as it would appear if the new product line is added.
b. Under these circumstances, if you were in Manager's position, would you accept or reject the new product line? Explain.
Question Seven: Bed & Bath, a retailing company, has two departments, Hardware and Linens. A recent monthly contribution format income statement for the company follows:
Total / DepartmentHardware / Linens
Sales / $4,000,000 / $3,000,000 / $1,000,000
Variable expenses / 1,300,000 / 900,000 / 400,000
Contribution margin / 2,700,000 / 2,100,000 / 600,000
Fixed expenses / 2,200,000 / 1,400,000 / 800,000
Net operating income (loss) / $ 500,000 / $ 700,000 / ($200,000)
A study indicates that $340,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 10% decrease in the sales of the Hardware Department.
Required:
If the Linens Department is dropped, what will be the effect on the net operating income of the Company as a whole?
Question Eight: Gaza Company has limited funds available for investment and must ration the funds among five competing projects. Selected information on the five projects follows:
Project / Investment Required / Net Present Value / Life of the project (years) / Internet Rate of Return (percent)A ……..…. / $160,000 / $44,323 / 7 / 18%
B ……..…. / $135,000 / $42,000 / 12 / 16%
C ……..…. / $100,000 / $35,035 / 7 / 20%
D ……..…. / $175,000 / $38,136 / 3 / 22%
E …………. / $150,000 / $(8,696) / 6 / 8%
The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first. second, and so forth. The company's investment funds are limited.
Required:
1. Compute the project profitability index for each project.
2. In order of preference, rank the five projects in terms of:
a. Net present value.
b. Project profitability index.
c. Internal rate of return.
3. Which ranking do you prefer? Why?
Question Nine: The administrator of Alwafa Hospital would like a cost formula linking the administrative costs involved in admitting patients to the number of patients admitted during a month. The admitting department's costs and the number of patients admitted during the immediately preceding eight months are given in the following table:
Month / Number of patients Admitted / Admitting Department CostMay / 1,800 / $14,700
June / 1,900 / $15,200
July / 1,700 / $13,700
August / 1,600 / $14,000
September / 1,500 / $14,300
October / 1,300 / $13,100
November / 1,100 / $12,800
December / 1,500 / $14,600
Required:
1. Use the high-low method to establish the fixed and variable components of admitting costs.
2. Compute admitting department cost if number of patient is 1400.
Question Ten: Computer Sales, Inc., Sells Computer supplies. Management is planning its cash needs for the second quarter. The company usually has to borrow money during this quarter to support peak sales, which occur during May. The following information has been assembled to assist in preparing a cash budget for the quarter:
A. Budgeted monthly income statements for April- July are:
April / May / June / JulySales……………….. / $ 600,000 / $ 900,000 / $ 500,000 / $ 400,000
Cost of goods sold………. / 420,000 / 630,000 / 350,000 / 280,000
Gross Margin…………….. / 180,000 / 270,000 / 150,000 / 120,000
Less operating expenses:
- Selling expense….
- Administrative expense* / 79,000
45,000 / 120,000
52,000 / 62,000
41,000 / 51,000
38,000
Total expenses……… / 124,000 / 172,000 / 103,000 / 89,000
Net income……. / $ 56,000 / $ 98,000 / $ 47,000 / $ 31,000
* Includes $ 20,000 depreciation each month.
B. Sales are 20% for cash and 80% on account,
C. Sales on account are collected over a three- month period in the following ratio: 10% collected in the month of sale, 70% collected in the first month following the month of sale, the remaining 20% collected in the second month following the month of sale. February’s sales totaled $200,000, and March’s sales totaled $300,000
D. Inventory purchases are paid for within 15 days. Therefore, 50% of a month’s inventory purchases are paid for in the month of purchase. The remaining 50% is paid in the following month. Accounts payable at March 31 for inventory purchases during March total $126,000
E. At the end of each month, inventory must be on hand equal to 20% of the cost of the merchandise to be sold in the following month. The merchandise inventory at March 31 is $ 84,000
F. Dividends of $ 49,000 will be declared and paid in April.
G. Equipment costing $16,000 will be purchased for cash in May.
H. The cash balance at March 31 is $52,000, the company must maintain a cash balance of at least $40,000 at all times.
I. The company can borrow from its bank as needed to bolster the cash account. Borrowings and repayments must be in multiples of $1,000. All borrowings take place at the beginning of a month, and all repayments are made at the end of a month. The annual interest rate is 12%. Compute interest on whole months (1/12, 2/12, and so forth).
Required:-
Prepare a cash budget for the second quarter, by month as well as in total for the quarter. Show borrowing from the company’s bank and repayments to the bank as needed to maintain the minimum cash balance.
GOOD LUCK
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