Busy Beaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $10,000. The machine was expected to increase net income (and cash flows) before depreciation expense by $15,000 per year. The criteria for approving a new investment are that it have a rate of return of 16% and a payback period of three years or less. Required: a. Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. Based on this analysis, would the investment be made? Explain your answer. b. Calculate the payback period for this investment. Based on this analysis, would the investment be made? Explain your answer. c. Calculate the net present value of this investment using a cost of capital of 16%. Based on this analysis, would the investment be made? Explain your answer. d. What recommendation would you make to the management of Busy Beaver Corp. about evaluating capital expenditure proposals? Support your recommendation with the appropriate rationale.
> Elgart Company produces plastic mailboxes. The projected income statement for the coming year follows: Sales ……………………………………………………………… $460,300 Total variable cost …………………………………………….. 165,708 Contribution margin ………………………………………. $294,592 Total fixed cost
> Legrand Company produces hand cream in plastic jars. Each jar sells for $3.40. The variable cost for each jar (materials, labor, and overhead) totals $2.55. The total fixed cost is $58,140. During the most recent year, 81,600 jars were sold. Required: 1
> Aldovar Company produces a variety of chemicals. One division makes reagents for laboratories. The division’s projected income statement for the coming year is: Sales (203,000 units @ $70) ………………………………………. $14,210,000 Total variable cost ………………………………………
> Kallard Manufacturing Company produces t-shirts screen-printed with the logos of various sports teams. Each shirt is priced at $13.50 and has a unit variable cost of $9.85. Total fixed cost is $197,600. Required: 1. Compute the break-even point in units
> Khumbu Company’s projected profit for the coming year is as follows: Required: 1. Compute the break-even point in units. 2. How many units must be sold to earn a profit of $240,000? 3. Compute the contribution margin ratio. Using that
> Income statements for two different companies in the same industry are as follows: Required: 1. Compute the degree of operating leverage for each company. 2. CONCEPTUAL CONNECTION Compute the break-even point in dollars for each company. Explain why th
> Parker Pottery produces a line of vases and a line of ceramic figurines. Each line uses the same equipment and labor; hence, there are no traceable fixed costs. Common fixed cost equals $30,000. Parker’s accountant has begun to assess t
> Medina Company produces a single product. The projected income statement for the coming year is as follows: Sales (40,000 units @ $45) …………………………….. $1,800,000 Total variable cost …………………………………………….. 1,044,000 Contribution margin …………………………………………. $ 756
> Klamath Company produces a single product. The projected income statement for the coming year is as follows: Sales (54,600 units @ $34) …………………………………….. $1,856,400 Total variable cost …………………………………………………….. 1,064,700 Contribution margin …………………………………………
> Lotts Company produces and sells one product. The selling price is $10, and the unit variable cost is $6. Total fixed cost is $10,000. Required: 1. Prepare a CVP graph with ‘‘Units Sold’’ as the horizontal axis and ‘‘Dollars’’ as the vertical axis. Labe
> The Bedron Company is a closely held investment service group that has been quite successful over the past 5 years, consistently providing most members of the top management group with 50% bonuses. In addition, both the chief financial officer and the ch
> Arberg Company’s controller prepared the following budgeted income statement for the coming year: Sales ……………………………………………………….. $415,000 Total variable cost ……………………………………… 302,950 Contribution margin …………………………………. $112,050 Total fixed cost ……………………………
> Comer Company produces and sells strings of colorful indoor/outdoor lights for holiday display to retailers for $8.12 per string. The variable costs per string are as follows: Direct materials ……………………………………. $1.87 Direct labor ……………………………………………. 1.70 V
> Werner Company produces and sells disposable foil baking pans to retailers for $2.75 per pan. The variable cost per pan is as follows: Direct materials …………………………………………………… $0.37 Direct labor …………………………………………………………… 0.63 Variable factory overhead ………………
> The controller of Pelley Company prepared the following projected income statement: Sales ……………………………………………………………….. $95,000 Total variable cost ……………………………………………… 68,400 Contribution margin ………………………………………… $26,600 Total fixed cost ………………………………………………….
> For each of the following independent situations, calculate the amount(s) required. Required: 1. At the break-even point, Jefferson Company sells 115,000 units and has fixed cost of $349,600. The variable cost per unit is $4.56. What price does Jefferso
> Suppose that Adams Company sells a product for $20. Unit costs are as follows: Direct materials …………………………………………………….. $1.90 Direct labor …………………………………………………………….. 1.40 Variable factory overhead ………………………………………… 2.10 Variable selling and administrative
> Jellico Inc.’s projected operating income (based on sales of 450,000 units) for the coming year is as follows: Total Sales …………………………………………………… $11,700,000 Total variable cost …………………………………… 8,190,000 Contribution margin …………………………….. $ 3,510,000 Total
> Suppose a firm with a contribution margin ratio of 0.3 increased its advertising expenses by $10,000 and found that sales increased by $30,000. Was it a good decision to increase advertising expenses? Suppose that the contribution margin ratio is now 0.4
> Explain why contribution margin per unit becomes profit per unit above the break-even point.
> Describe the difference between the units sold approach to CVP analysis and the sales revenue approach.
> Identify the three forms of accounting certification. Which form of certification do you believe is best for a managerial accountant? Why?
> What is the difference between a product and a service? Give an example of each.
> On February 1, 2010, the balance of the retained earnings account of Blue Power Corporation was $630,000. Revenues for February totaled $123,000, of which $115,000 was collected in cash. Expenses for February totaled $131,000, of which $108,000 was paid
> For the year ended December 31, 2010, Ebanks, Inc., earned an ROI of 12%. Sales for the year were $96 million, and average asset turnover was 2.4. Average owners’ equity was $32 million. Required: a. Calculate Ebanks, Inc.’s margin and net income. b. Ca
> At the beginning of the year, the net assets of Carby Co. were $346,800. The only transactions affecting owners’ equity during the year were net income of $42,300 and dividends of $12,000. Required: Calculate Carby Co.’s return on equity (ROE) for the y
> From the following data, calculate the retained earnings balance as of December 31, 2009: Retained earnings, December 31, 2010 . . . . . . . . . . . . . ………... . . . . . . . $841,200 Decrease in total liabilities during 2010 . . . . . . . . . . . . . .
> From the following data, calculate the retained earnings balance as of December 31, 2010: Retained earnings, December 31, 2009 . . . . . . . . …………... . . . . . . . . . . …. $311,800 Cost of equipment purchased during 2010 . . . . . . . ………………….. . . .
> From the following data, calculate the Retained Earnings balance as of December 31, 2011: Retained earnings, December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $346,400 Cost of buildings purchased during 2011 .
> Prepare a bank reconciliation as of October 31 from the following information: a. The October 31 cash balance in the general ledger is $844. b. The October 31 balance shown on the bank statement is $373. c. Checks issued but not returned with the bank s
> Prepare a bank reconciliation as of August 31 from the following information: a. The August 31 balance shown on the bank statement is $9,810. b. There is a deposit in transit of $1,260 at August 31. c. Outstanding checks at August 31 totaled $1,890. d.
> Assume that you own 600 shares of common stock of a company, that you have been receiving cash dividends of $6 per share per year, and that the company has a 4-for-3 stock split. Required: a. How many shares of common stock will you own after the stock
> A firm issues long-term debt with an effective interest rate of 10% and the proceeds of this debt issue can be invested to earn an ROI of 12%. What effect will this financial leverage have on the firm’s ROE relative to having the same amount of funds inv
> A bookkeeper prepared the year-end financial statements of Giftwrap, Inc. The income statement showed net income of $47,400, and the balance sheet showed ending retained earnings of $182,000. The firm’s accountant reviewed the bookkeeper’s work and deter
> Maliha, Inc., did not pay dividends on its $6.50, $50 par value, cumulative preferred stock during 2009 or 2010. Since 2005, 22,000 shares of this stock have been outstanding. Maliha, Inc., has been profitable in 2011 and is considering a cash dividend o
> The balance sheet caption for common stock is the following: Common stock, $5 par value, 2,000,000 shares authorized, 1,400,000 shares issued, 1,250,000 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . $ ? Required: a. Calculate the dol
> Kohl Co. provides warranties for many of its products. The January 1, 2010, balance of the Estimated Warranty Liability account was $70,400. Based on an analysis of warranty claims during the past several years, this year’s warranty provision was establi
> Two acquaintances have approached you about investing in business activities in which each is involved. Julie is seeking $560 and Sam needs $620. One year from now your original investment will be returned, along with $50 income from Julie or $53 income
> Prepare an answer sheet with the column headings shown here. For each of the following transactions or adjustments, indicate the effect of the transaction or adjustment on the appropriate balance sheet category and on net income by entering for each acco
> Crichton Publications uses the accounting rate of return method to evaluate proposed capital investments. The company’s desired rate of return (its cost of capital) is 18%. The project being evaluated involves a new product that will have a three-year li
> The following capital expenditure projects have been proposed for management’s consideration at Heard, Inc., for the upcoming budget year: Required: a. Calculate the net present value of projects B, C, and D, using 14% as the cost of
> Information about four investment proposals is summarized here: Required: Calculate the present value ratio of each proposal and indicate which proposal is the most desirable investment. Proposal Investment Required Net Present Value $60,000 24,000
> Duncan Company is considering the investment of $140,000 in a new machine. It is estimated that the new machine will generate additional cash flow of $21,000 per year for each year of its 12-year life and will have a salvage value of $15,000 at the end o
> The segmented income statement for XYZ Company for the year ended December 31, 2010, follows: The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to contin
> MMV Inc. opened a chain of businesses several years ago that provide quick oil changes and other minor services in conjunction with a convenience operation consisting of a soup, sandwich, and snack bar. The strategy was that as customers brought autos in
> Following are the current asset and current liability sections of the balance sheets for Freedom, Inc., at January 31, 2011 and 2010 (in millions): Required: a. Calculate the working capital and current ratio at each balance sheet date. Round your curr
> Hull Motors, Inc. (HMI), produces small gasoline-powered motors for use in lawn mowers. The company has been growing steadily over the past five years and is operating at full capacity. HMI recently completed the addition of new plant and equipment at a
> The Delmar Beverage Co. produces a premium root beer that is sold throughout its chain of restaurants in the Midwest. The company is currently producing 4,000 gallons of root beer per day, which represents 80% of its manufacturing capacity. The root beer
> Eddie Lander Tie Co. manufactures neckties and scarves. Two overhead application bases are used; some overhead is applied on the basis of raw material cost at a rate of 120% of material cost, and the balance of the overhead is applied at the rate of $8.0
> Lake Regional Hospital is considering the acquisition of a new diagnostic scanning machine. The investment required to get the machine operational will be $2,082,560. The machine will be capable of performing 6,000 scanning procedures per year, but based
> The Good wrench Garage is considering an investment in a new tune-up computer. The cost of the computer is $48,000. A cost analyst has calculated the discounted present value of the expected cash flows from the computer to be $52,650, based on the firm’s
> A task force of capital budgeting analysts at Seger Ltd. collected the following data concerning the drilling and production of known petroleum reserves at an offshore location: Investment in rigging equipment and related personnel costs requir
> South Bay Manufacturing Ltd. is considering the investment of $230,000 in a new machine. The machine will generate cash flow of $40,000 per year for each year of its eight-year life and will have a salvage value of $26,000 at the end of its life. The com
> National Leasing is evaluating the cost of capital to use in its capital budgeting process. Over the recent past, the company has averaged a return on equity of 12% and a return on investment of 9%. The company can currently borrow short-term money for 6
> Capital budgeting analysis involves the use of many estimates. Required: For each of the following estimation errors, state whether the net present value of the project will be too high or too low: a. The investment is too high. b. The cost of capital i
> Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions. Table 6-4: Required: a. Staley Co.’s common stock is expected to have a dividend of $6 per share for each of the next 12 years, and it is esti
> Using data from the financial statements of Intel Corporation in the appendix, calculate a. ROI for 2008. Round your percentage answer to one decimal place. b. ROE for 2008. Round your percentage answer to one decimal place. c. Working capital at Decemb
> An investor has asked for your help with the following time value of money applications. Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions. Table 6-4: Required: a. What is the present value of $50,000 to be rece
> Lamp Art Co. makes specialty table lamps. Manufacturing overhead is applied to production on a direct labor hour’s basis. During November, the first month of the company’s fiscal year, $173,250 of manufacturing overhead was applied to Work in Process Inv
> ABC Company produces Product X, Product Y, and Product Z. All three products require processing on specialized finishing machines. The capacity of these machines is 3,600 hours per month. ABC Company wishes to determine the product mix that should be ach
> Product S has a contribution margin of $150 per unit and requires three hours of machine time. Product T requires four hours of machine time and provides $200 of contribution margin per unit. Required: If the capacity of machine time is limited to 600 h
> Sycamore Company uses a certain part in its manufacturing process that it buys from an outside supplier for $29 per part plus another $4 for shipping and other purchasing-related costs. The company will need 14,400 of these parts in the next year and is
> Eldon Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Eldon. The supplier will charge Eldon $620 per en
> Rainbow Cruises operates a week-long cruise tour through the Hawaiian Islands. Passengers currently pay $1,800 for a two-person cabin, which is an all-inclusive price that includes food, beverages, and entertainment. The current cost to Rainbow per two-p
> Canton Company, a manufacturer of digital cameras, is considering entry into the digital binocular market. Canton Company currently does not produce binoculars of any style, so this venture would require a careful analysis of relevant manufacturing costs
> AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock show that manufacturing costs total $29.00 per lock. An analysis of this amount indicates that $16.75 of the total cost has a variable cost behavior
> Circuit Masters, Inc. (CMI), is presently operating at 80% of capacity and manufacturing 120,000 units of a patented electronic component. The cost structure of the component is as follows: Raw materials . . . . . . . . . . . . . . . . . . . . . . . . .
> Mizzou Mining Company mines an iron ore called Alpha. During the month of December, 400,000 tons of Alpha were mined and processed at a cost of $742,500. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes
> Management of Rivers Co. anticipates that its year-end balance sheet will show current assets of $12,639 and current liabilities of $7,480. Management is considering paying $3,850 of accounts payable before year-end even though payment isn’t due until la
> Checker, Inc., produces automobile bumpers. Overhead is applied on the basis of machine hours required for cutting and fabricating. A predetermined overhead application rate of $18.50 per machine hour was established for 2010. Required: a. If 12,000 mac
> Write a paragraph describing your perceptions of what accounting is all about and the work that accountants do.
> National Chemical Company manufactures a chemical compound that is sold for $58 per gallon. A new variant of the chemical has been discovered, and if the basic compound were processed into the new variant, the selling price would be $72 per gallon. Natio
> Attending college involves incurring many costs. Give an example of a college cost that could be assigned to each of the following classifications. Explain your reason for assigning each cost to the classification. a. Sunk cost. b. Discretionary cost. c
> Assume that you have decided to drive your car to Florida for the spring break. A classmate learns about your plans and asks about riding along with you. Explain how you would apply each of the following cost concepts to the task of determining how much,
> Jinny Buffett recently retired as a flight attendant and is interested in opening a fitness center and health spa exclusively for women in Grand Cayman, where she resides. After careful study, she is somewhat puzzled as to how to proceed. In her words, “
> Pioneer State Bank developed a standard for teller staffing that provided for one teller to handle 12 customers per hour. During April, the bank averaged 57 customers per hour and had six tellers on duty at all times. (Relief tellers filled in during lun
> The Foster Insurance Company developed standard times for processing claims. When a claim was received at the processing center, it was first reviewed and classified as simple or complex. The standard time for processing was: Simple claim . . . . . . .
> The standards for one case of Spring fever Tonic are: Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 lbs. @ $5.00/lb. =$30 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 hrs
> Silverstone’s production budget for March called for making 200,000 units of a single product. The firm’s production standards allow one-quarter of a machine hour per unit produced. The fixed overhead budget for March was $108,000. Silverstone uses an ab
> Milano Corporation has three operating divisions and requires a 12% return on all investments. Selected information is presented here: Required: a. Calculate the missing amounts for each division. b. Comment on the relative performance of each division
> Deckhand Accessories, Inc., manufactures women’s boating shoes. Manufacturing overhead is assigned to production on a machine-hour basis. For 2010, it was estimated that manufacturing overhead would total $974,400 and that 67,200 machine hours would be u
> The Central Division of American, Inc., has operating income of $19,200 on sales revenue of $160,000. Divisional operating assets are $100,000, and management of American has determined that a minimum return of 16% should be expected from all investments
> a. Firm D has net income of $83,700, sales of $2,790,000, and average total assets of $1,395,000. Calculate the firm’s margin, turnover, and ROI. b. Firm E has net income of $150,000, sales of $2,500,000, and ROI of 15%. Calculate the firm’s turnover and
> Vogel Co. produces three models of heating and air conditioning thermostat components. The following table summarizes data about each model: Required: a. Criticize the preceding presentation. On what basis does the $30,000 of company fixed expenses app
> The president of Truman, Inc., attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year’s traditional model income statement be revised, and she receive
> Fiber works Company is a manufacturer of fiberglass toy boats. The company has recently implemented a standard cost system and has designed the system to isolate variances as soon as possible. During the month of August, the following results were report
> Birchwood, Inc., manufactures end tables, armchairs, and other wood furniture products from high-quality materials. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlli
> Coastal Industries has established direct labor performance standards for its maintenance and repair shop. However, some of the labor records were destroyed during a recent fire. The actual hours worked during March were 4,000, and the total direct labor
> Ackerman’s Garage uses standards to plan and control labor time and expense. The standard time for an engine tune-up is 3 hours, and the standard labor rate is $25 per hour. Last week, 42 tune-ups were completed. The labor efficiency variance was 14 hour
> For the stamping department of a manufacturing firm, the standard cost for direct labor is $12 per hour, and the production standard calls for 1,000 stampings per hour. During June, 168 hours were required for actual production of 148,000 stampings. Actu
> Following is a partially completed performance report for a recent week for direct labor in the binding department of a book publisher: The original budget is based on the expectation that 8,000 books would be bound; the standard is 20 books per hour a
> Clay Co. produces ceramic coffee mugs and pencil holders. Manufacturing overhead is assigned to production using an application rate based on direct labor hours. Required: a. For 2010, the company’s cost accountant estimated that total overhead costs in
> The cost formula for the maintenance department of Rainbow, Ltd., is $12,600 per month plus $4.50 per machine hour used by the production department. Required: a. Calculate the maintenance cost that would be budgeted for a month in which 15,200 machine
> The Consortium for Advanced Manufacturing—International (CAM-I) is an international consortium of companies, consultancies, and academics that have elected to work cooperatively in a precompetitive environment to solve problems common to the group. Its s
> a. Firm A has a margin of 12%, sales of $600,000, and ROI of 18%. Calculate the firm’s average total assets. b. Firm B has net income of $78,000, turnover of 1.3, and average total assets of $950,000. Calculate the firm’s sales, margin, and ROI. Round yo
> York Co. uses a standard cost system. When raw materials are purchased, the standard cost of the raw materials purchased is recorded as an increase in the Raw Materials Inventory account. When raw materials are used, the standard cost of the materials al
> During the year ended May 31, 2009, Teller Register Co. reported favorable raw material usage and direct labor and variable overhead efficiency variances that totaled $114,312. Price and rate variances were negligible. Total standard cost of goods manufa
> Williamson, Inc., manufactures quality replacement parts for the auto industry. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling the direct material price varianc
> Assume that you are the production manager of a small branch plant of a large manufacturing firm. The central accounting control department sends you monthly performance reports showing the flexed budget amount, actual cost and variances for raw material
> If a company uses a standard cost system, should all variances be calculated with the same frequency (e.g., monthly) and should they always be expressed in dollar amounts? Explain your answer and include in it the reason for calculating variances.
