Two years ago, in conjunction with revitalization efforts regarding the downtown area of Metro City, you and your partner purchased a local eatery. Though moribund at the time, you were able (through your hard work and dedicated efforts) to resurrect the establishment. In fact, the last few months appear to have been quite successful from a financial standpoint. However, your establishment now faces a new competitor—an eatery located only several blocks away from yours. You and your partner are now evaluating strategic options as to how to deal with this new competition. Your facility is capable of serving 200 meals a day. (Because your clientele consists almost exclusively of college-age students, the basic menu is the same for lunch and dinner. Currently, your business does not serve breakfast.) You and your partner have finally taken time to study the financial records carefully. Your investigation yields the following information: 1. The primary variable cost is food (i.e., the total food cost varies in response to changes in the number of meals served). 2. Fixed operating expenses (salaries, depreciation, etc.) average approximately $1,100 per day. 3. The average number of meals served per day over the past three months was 175. In response to the above information, and in an attempt to fully recover your costs, you and your partner are contemplating a price increase. Required: 1. Compute the fixed cost per meal using the current capacity used and the fixed cost per meal using capacity available. 2. Given the competitive situation, what is the likely result of the decision to raise prices? Explain. 3. Suggest and defend an alternative approach for allocating budgeted fixed operating costs to each meal.
> Brief Exercises 7-17 through 7-20 require the following information about a joint production process for three products, with a total joint production cost of $100,000. There are no separable processing costs for any of the three products. Assume that
> Name a firm or organization you know of that you are reasonably sure uses cost management and explain why it does so. Does it use cost leadership or differentiation, and why?
> Lowman Gourmet Products produces a wide variety of gourmet coffees (sold in pounds of roasted beans), jams, jellies, and condiments such as spicy mustard sauce. The firm has a reputation as a high-quality source of these products. Lowman sells the produc
> An organization’s service and administrative costs can be substantial, and some or all of these costs usually are allocated to cost objects. Thus, the allocation of service and administrative costs can have a significant impact on product cost and pricin
> In the chapter, we illustrated the use of the life-cycle concept for both the cost and sales life cycles of a company’s product lines. It can also be useful to extend the cost life cycle to the service department. In Chapter 7, we were interested in the
> Johnson Electronics manufactures a power supply used in a variety of electronics products, including printers, modems, and routers. The demand for the part is 8,400 units per week. The production of the power supply requires six different manufacturing o
> Waymouth Manufacturing operates a contract manufacturing plant located in Dublin, Ireland. The plant provides a variety of electronics products and components to consumer goods manufacturers around the world. Cycle time is a critical success factor for W
> Rick’s is a popular restaurant for fine dining. The owner and chef, Rick Goetz, is pleased with his success and is now considering expanding his existing restaurant or perhaps opening a second restaurant. Before making his decision, Ric
> Take-a-Break Travel Company offers spring break travel packages to college students. Two of its packages, a 7-day, 6-night trip to Cancun and a 5-day, 4-night trip to Jamaica, have the following characteristics: The Cancun trip sells for $1,750, and th
> Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models – one (A-25) principally used for fine eyewear and the other (A-10) for lenses used in binoculars, cameras, and similar
> MaxiDrive manufactures a wide variety of parts for recreational boating, including a gear and driveshaft part for high-powered outboard boat engines. Original equipment manufacturers such as Mercury and Honda purchase the components for use in large, pow
> Gunnell Inc. is considering two mutually exclusive 10-year investments. The initial cash outlays and expected net after-tax cash flows are shown below. Required: 1. Using Excel, calculate the NPV and IRR of each project. Assume Gunnell Inc. uses a disc
> Brief Exercises 7-17 through 7-20 require the following information about a joint production process for three products, with a total joint production cost of $100,000. There are no separable processing costs for any of the three products. What percent
> VacuTech manufactures sophisticated instruments for testing microcircuits. Each instrument sells for $3,500; variable manufacturing cost per unit (all cash) equals $2,450. An essential component of the company’s manufacturing process is a sealed vacuum c
> A computer chip manufacturer spent $2,500,000 to develop a special-purpose molding machine. The machine has been used for one year and is expected to be obsolete after an additional 3 years. The company uses straight-line (SLN) depreciation for this mach
> Assume a situation in which a company has an existing asset, A, that has a current net book value (original cost less accumulated depreciation to date) of $300,000. This asset has a useful life of 3 additional years. Its estimated disposal (sales) value
> Assume that it is January 1, 2022, and that the Mendoza Company is considering the replacement of a machine that has been used for the past 3 years in a special project for the company. This project is expected to continue for an additional 5 years (i.e.
> Gravina Company is planning to spend $6,000 for a machine that it will depreciate on a straight-line basis over 10 years with no salvage value. The machine will generate additional cash revenues of $1,200 a year. Gravina will incur no additional costs ex
> Dorothy & George Company is planning to acquire a new machine at a total cost of $30,600. The machine’s estimated life is 6 years and its estimated salvage value is $600. The company estimates that annual cash savings from using this machine will be $8,0
> Steadman Company is considering an investment in a new machine for an independent five-year project. The machine’s cost is $500,000 with no salvage value at the end of five years. Net cash inflows from the project are expected to be $14
> a. Project A costs $5,000 and will generate annual after-tax net cash inflows of $1,800 for 5 years. What is the payback period (in years, rounded to 2 decimal places) for this investment under the assumption that the cash inflows occur evenly throughout
> J. Morgan of SparkPlug Inc. has been approached to take over a production facility from B.R. Machine Company. The acquisition will cost $1,500,000, and the after-tax net cash inflows are expected to be $275,000 per year for 12 years. SparkPlug currently
> MaxiCare Corporation, a not-for-profit organization, specializes in health care for senior citizens. Management is considering whether to expand operations by opening a new chain of care centers in the inner city of large metropolitan areas. For a new fa
> Brief Exercises 7-17 through 7-20 require the following information about a joint production process for three products, with a total joint production cost of $100,000. There are no separable processing costs for any of the three products. What percent
> Griffey & Son operates a plant in Cincinnati and is considering opening a new facility in Seattle. The initial outlay will be $3,500,000 and should produce after-tax net cash inflows of $600,000 per year for 15 years. Due to the effects of the ocean air
> a. It is said that the Indian who sold Manhattan for $24 was a sharp salesman. If he had put his $24 away at 6% compounded semiannually, it would now be worth more than $9 billion, and he could buy most of the now-improved land back! Assume that this sel
> Lou Lewis, the president of Lewisville Company, has asked you to give him an analysis of the best use of a warehouse the company owns. Note: The company has a 40% effective tax rate. a. Lewisville Company is currently leasing the warehouse to another com
> Rockyford Company must replace some machinery that has zero book value and a current market value of $1,800. One possibility is to invest in new machinery costing $40,000. This new machinery would produce estimated annual pretax cash operating savings of
> Please refer to footnote 14 and the data referenced in the footnote. Required: 1. Follow the directions given in footnote 21 to calculate the NPV of the referenced investment project. 2. Repeat the procedure using a discount rate (WACC) of 10% and the f
> eEgg is considering the purchase of a new distributed network computer system to help handle its warehouse inventories. The system costs $60,000 to purchase and install and $30,000 to operate each year. The system is estimated to be useful for 4 years. M
> Below is information regarding the capital structure of Micro Advantage Inc. On the basis of this information, you are asked to respond to the following three questions: Required: 1. Micro Advantage issued a $5,000,000 par value, 20-year bond a year ago
> Assume that you are about to sell property (a vacant parcel of real estate) you own but otherwise have no use for. The net-of-sales-commission selling price for the property is $500,000. You are willing to finance this transaction over a 20-year period a
> Freedom Corporation acquired a fixed asset for $100,000. Its estimated life at time of purchase was 4 years, with no estimated salvage value. Assume a discount rate of 8% and an income tax rate of 40%. Required: 1. What is the incremental present value
> This exercise parallels the machine purchase decision for the Mendoza Company discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash reven
> Brief Exercises 7-15 and 7-16 require the following information: What percentage of S2’s costs is allocated to P1 and to P2 under the direct method?
> Each of the following situations is independent: a. Make or Buy Terry Inc. manufactures machine parts for aircraft engines. CEO Bucky Walters is considering an offer from a subcontractor to provide 2,000 units of product OP89 for $120,000. If Terry does
> Sandalwood Company produces various lines of high-end carpeting in its Asheville, North Carolina, plant. This question pertains to two different grades of carpet in its Symphony line: commercial and residential. The former sells for $16 per square yard,
> Cantel Company produces cleaning compounds for both commercial and household customers. Some of these products are produced as part of a joint manufacturing process. For example, GR37, a coarse cleaning powder meant for commercial sale, costs $1.60 a pou
> Barbour Corporation, located in Buffalo, New York, is a retailer of high-tech products and is known for its excellent quality and innovation. Recently, the firm conducted a relevant cost analysis of one of its product lines that has only two products, T-
> Vista Company manufactures electronic equipment. In 2021, it purchased from an outside supplier the special switches used in each of its products. The supplier charged Vista $2 per switch. As an alternative, Vista’s CEO considered purch
> Earth Baby, Inc. (EBI) recently celebrated its tenth anniversary. The company produces organic baby products for health-conscious parents. These products include food, clothing, and toys. Earth Baby has recently introduced a new line of premium organic b
> Sharman Athletic Gear, Inc. (SAG) is considering a special order for 15,000 baseball caps with the logo of East Texas University (ETU) to be purchased by the ETU alumni association. The ETU alumni association is planning to use the caps as gifts and to s
> Alton Inc. is working at full production capacity producing 20,000 units of a unique product. Manufacturing costs per unit for the product are as follows: Direct materials ………………………….. $ 9 Direct labor ………………………………….. 8 Manufacturing overhead ………………. 10
> Grant Industries, a manufacturer of electronic parts, has recently received an invitation to bid on a special order for 20,000 units of one of its most popular products. Grant currently manufactures 40,000 units of this product in its Loveland, Ohio, pla
> Consumers (including businesses and local governments) interested in using solar power generally have an option to purchase or lease the solar panels. To adequately address the questions below, you will have to first do some research on the Internet. Ple
> There is no spoilage, the beginning WIP Inventory is 6,000 units, and the ending WIP Inventory is 4,000 units for the second department in a two-department process. What is the number of units transferred in to the second department if good output of the
> Midwest Industries produces and distributes industrial chemicals in its Belco Division, which is located in Michigan’s upper peninsula. Belco’s earnings increased sharply in 2022, and bonuses were paid to the management staff for the first time in three
> Bob Bingham is the controller of Atlantis Laboratories, a manufacturer and distributor of generic prescription pharmaceuticals. He is currently preparing the annual budget and reviewing the current business plan. The firm’s business unit managers prepare
> Refer to text Exhibit 10.19 (the ABB for KWS). As the management accountant for KWS, you have been asked to evaluate the possibility of implementing a continuous-improvement (i.e., kaizen) budgeting system. Assume that budgeted cost-driver usage data in
> You are given the following budgeted and actual data for the Grey Company for each of the months January through June of the current year. In December of the prior year, sales were forecasted as follows: January, 100 units; February, 95 units; March, 100
> The company for which you work recently implemented time-driven activity-based costing (TDABC) in conjunction with its enterprise resource planning (ERP) system. Management is pleased with the revised product and customer cost information that the TDABC
> OFC Company (Exercise 10-41) has decided to implement a continuous-improvement program to enhance operational efficiency. After a careful study, management and employees agree that the firm will be able to reduce cost rates for batch-level activities by
> OFC Company of Kansas City prints business forms and other specialty paper products, such as writing paper, envelopes, note cards, and greeting cards. Its Business Services division offers inventory management services and desktop delivery on request. Th
> Refer to the AccuTax Inc. example in the chapter. One of the partners is planning to retire at the end of the year. May Higgins, the sole remaining partner, plans to add a manager at an annual salary of $90,000. She expects the manager to work, on averag
> Catholic Charities Regional Agency serves several contiguous counties in Ohio. The finance committee of its Board of Directors monitors financial activity for the agency. This oversight includes decisions regarding the investment of excess funds and the
> The abnormal spoilage is 300 units and the cost per equivalent unit is $2 for direct materials and $3 for conversion. The inspection point is at the end of processing. There are 600 units in ending Workin- Process and normal spoilage is 200 units. What i
> Tri-county Social Service Agency is a not-for-profit organization in the Midwest. Use the following information to complete the cash budget for the year ending December 31. Â * The Board of Trustees requires that Tri-county maintain a minimum
> As part of the process of preparing the master budget for the coming year, you’ve been asked to perform What-If analyses, in the form of scenarios, on the original planning assumptions regarding product A produced by your company. The following are the b
> You are currently trying to decide between two cost structures for your business: one that has a greater proportion of short-term fixed costs and another that is more heavily weighted to variable costs. Estimated revenue and cost data for each alternativ
> As the management accountant for the Tyson Company you have been asked to construct a financial planning model for collection of accounts receivable and then to perform a what-if analysis in terms of the assumption regarding estimated uncollectible accou
> You have been recruited by a former classmate, Susanna Wu, to join the finance team of a company that she founded recently. The company produces a unique product-line of hypo-allergenic cosmetics and relies for its success on an aggressive marketing prog
> Papst Company is preparing its cash budget for the month of May. The following information is available concerning its accounts receivable (based on sales made to customers on open account): Actual credit sales for March …………………………………………………. $130,000 Ac
> D. Tomlinson Retail seeks your assistance in developing cash and other budget information for May, June, and July. The company has the following guidelines in budget preparations, and expects to have the following balances at the end of April: Cash &aci
> Information pertaining to Noskey Corporation’s sales revenue follows: Management estimates 5 percent of credit sales to be uncollectible. Of collectible credit sales, 60 percent is collected in the month of sale and the remainder in t
> Yeopay Plumbing Supply accepts bank credit cards and offers established plumbers charge accounts with terms of 1/eom, n/45. Yeopay’s experience is that 25 percent of its sales are for cash and bank credit cards. The remaining 75 percent are on credit. Of
> Marsha Inc. has the following budgeted data for the coming year: Operating expenses include $20,000 depreciation for buildings and equipment. All purchases of materials are paid for in the period of purchase. The company requires a minimum cash balance
> Abnormal spoilage was 100 units and normal spoilage is 400 units. Beginning Work-in-Process Inventory consisted of 5,000 units; 20,000 units were started; and 22,000 units were completed this period. How many units were in ending Work-in-Process?
> You are a relatively recent hire to the Hartz & Co., a local manufacturer of plumbing supply products. You have been asked to prepare for a presentation to the company’s management a condensed statement of cash flows for the months of November and Decemb
> Bond Company budgets the following purchases of direct materials for the first quarter of the year: All purchases of direct materials are made on credit. On average, the company pays for 80 percent of its purchases in the month of acquisition and the r
> Timpco, a retailer, makes both cash and credit sales (i.e., sales on open account). Information regarding budgeted sales for the last quarter of the year is as follows: Past experience shows that 5 percent of credit sales are uncollectible. Of the cred
> White Corporation’s budget calls for the following sales for next year: Each unit of the product requires 3 pounds of direct materials. The company’s policy is to begin each quarter with an inventory of product equal
> It is typically beneficial for companies to take advantage of early- payment discounts allowed on purchases made on credit. To see why this is the case, determine the effective rate of interest associated with not taking advantage of the early-payment di
> Smith Company can produce two types of carpet cleaners, Brighter and Cleaner. Data on these two products are as follows: The number of machine hours to produce one unit of Brighter is 1, while the number of machine hours for each unit of Cleaner is 2.
> Lawn Master Company, a manufacturer of riding lawn mowers, has a projected income for the coming year as follows: Required: 1. Determine the breakeven point in sales dollars. 2. Determine the required sales in dollars to earn a before-tax profit of $8,
> Required 1. Using the data from 2022 in Exhibit 9.1, create an Excel spreadsheet to provide a sensitivity analysis of the effect on operating profit of potential changes in demand for HFI Inc., ranging from a 20 percent decrease to a 20 percent increase.
> Today’s retailers are finding that online sales and service are a necessary ingredient of their overall marketing and selling strategy because of increased competition. In certain retail sectors, consumers are moving to the internet in large numbers for
> TastyKreme and Krispy Kake are both producers of baked goods, but each has followed a different production strategy. The differences in their strategies resulted in differences in their cost structure, as shown in the following table: Required: 1. Comp
> Weighted-average costs per equivalent unit are $2 for direct materials and $3 for conversion. There are no transferred-in costs and no spoilage. What is the cost of goods completed and transferred out if 10,000 units are completed and 1,000 units are in
> Units sold ………………………………………………………. 1,000 Price ……………………………………………………………….. $ 10 Sales ………………………………………………………… $10,000 Variable manufacturing costs ………………………… 4,000 Fixed manufacturing costs ……………………………… 2,000 Variable selling costs …………………………………….. 1,000 Fi
> The following sales and cost data (in thousands) are for two companies in the transportation industry: Required: 1. Calculate the degree of operating leverage (DOL) for each company. If sales increase from the present level, which company benefits more
> Harold McWilliams owns and manages a general merchandise store in a rural area of Virginia. Harold sells appliances, clothing, auto parts, and farming equipment, among a wide variety of other types of merchandise. Because of normal seasonal and cyclical
> Companies that have a high demand for making copies, both color and black and white, often choose to lease a high-end copier that provides fast and reliable service at a reasonable cost. The lease is usually for 3 to 5 years, and the cost to the user is
> Cohen Company produces and sells socks. Variable cost is $6 per pair, and fixed costs for the year total $75,000. The selling price is $10 per pair. Required: Calculate the following: 1. The breakeven point in units. 2. The breakeven point in sales doll
> For the most recent year, Triad Company had fixed costs of $240,000 and variable costs of 75% of total sales revenue, earned $70,000 of net income after taxes, and had an income tax rate of 35%. Required: Calculate the following: 1. Before-tax income. 2
> The Jurassic Classics has four employees on its sales team and uses a compensation that provides each person with a base salary of $40,000 per year and the opportunity to earn commission on sales. The current commission is 5% of gross sales, and sales fo
> The motivation for getting the MBA degree has many aspects—the prestige, greater opportunity for promotion, change of occupation, and increase in pay. To focus just on this last motivation, suppose that you are interested in getting an MBA and are studyi
> Questar Electronics, a producer of a wide range of consumer products, is facing increasing competitive pressures from foreign producers. In response, Questar is reexamining its overall management control system, including the way the company compensates
> Vista Company manufactures electronic equipment. It currently purchases the special switches used in each of its products from an outside supplier. The supplier charges Vista $2 per switch. Vista’s CEO is considering purchasing either m
> Beginning WIP is 2,000 units; 44,000 units completed, and ending WIP is 3,000 units, which are 100% complete for direct materials and 50% complete for conversion costs. The beginning WIP inventory is 100% complete for direct materials and 50% complete fo
> Connelly Inc., a manufacturer of quality electric ice cream makers, has experienced a steady growth in sales over the past few years. Since her business has grown, Jan Delany, the president, believes she needs an aggressive advertising campaign next year
> Albedo Inc. manufactures high-end replacement telescope lenses for amateur and professional astronomers that are seeking to upgrade the performance of their telescopes. You have just become employed as a staff accountant at Albedo and Jordan Coleman, the
> The Following table shows additional regression results presented by the researchers in the study described in Exercise 8-39. There are two regressions. The right hand column shows the results for all 57 patients. The left hand column shows the results f
> Interpreting Regression Results Recent research into the cost of various medical procedures has shown the impact of certain complications encountered in surgery on the total cost of patient’s stay in the hospital. The researchers used r
> For several years many utilities have been able to use regression analysis to forecast monthly utility usage by residential customers using weather forecasts, the number of holidays, the number of days in the month and other factors. For example, the Con
> The concept of learning curves has broad application in business, medicine, and many other fields. For example, the Gompertz Equation is a mathematical model that can be used to predict the number of deaths at a certain age. The Gompertz Equation is very
> Ethan Manufacturing Inc. produces floor mats for automobiles. The owner, Joseph Ethan, has asked you to assist in estimating maintenance costs. Together, you and Joseph determine that the single best cost driver for maintenance costs is machine hours. Th
> Horton Manufacturing Inc. produces blinds and other window treatments for residential homes and offices. The owner is concerned about the maintenance costs for the production machinery, as maintenance costs for the previous fiscal year were higher than h
> Wang Manufacturing uses regression analysis to predict manufacturing overhead costs based on direct labor hours and/or machine hours and has developed the three following regression equations: Required: Which regression would you choose and why?
> Lawson Advertising Agency is trying to persuade Kansas City Sailboards Company to spend more on advertising. The agency’s argument is that a constant and strong positive relationship exists between advertising and sales in the sailboard industry. Sue Law
> For problems 6-18 to 6-21, fill in the missing amount. Work-in-Process Inventory, November 1 45,000 units Work-in-Process Inventory, November 30 23,000 units Units started during November 57,000 units Units completed and transferred during Novembe
