BUS2003 Practice Final Exam

These questions are representative of the types of questions you may find on the final exam,
but in total are longer than the actual final exam.
QUESTION ONE
Bellow Division of Sound Corporation is currently operating at a loss. Bellow makes radios that
are sold to retail stores. The senior management of Sound Corporation is considering closing the
Bellow Division. Bellow’s statement of operations for the last year follows:
Bellow Division
Statement of Operations
for the past year
Revenues (80,000 units)
Operating expenses:
Variable costs
Traceable fixed costs
Allocated corporate overhead
Operating income (loss)

$ 5,300,000
4,095,000
1,500,000
800,000

6,395,000
$(1,095,000)

Recently, Sound Corporation acquired the Boom Speaker Company which manufactures
speakers that are sold to radio manufacturers.
In an effort to save the division from closing, the manager of the Bellow Division has asked that
the new Boom Speaker Division supply it with 80,000 speakers. The Bellow Division currently
purchases the speakers from outside suppliers for $28 each.
Boom Speaker produces and externally sells 400,000 speakers per year which represents 80% of
its operating capacity. At this production level the standard cost to produce one speaker is as
follows:
Direct materials
Direct labour
Overhead
Total unit cost

$ 8.00
6.00
3.00
$17.00

The standard direct labour rate is $12.00 per hour. The variable overhead rate is $2.00 per direct
labour hour and the fixed overhead rate is $4.00 per direct labour hour. Boom sells the speakers
for $32 each.
Required:
1. Calculate the minimum and maximum transfer prices. Show all your computations. (2 ½
marks)
Page 1 of 24

2. Should the transfer take place? Calculate the effect on Sound’s operating income if the
transfer takes place. Show all your computations. (3 marks)
3. Of the allocated corporate overhead, 10% is caused by the presence of Bellow and will be
avoided if Bellow is closed.
i.
Assume the transfer takes place. Should the Bellow Division still be
closed? Show all your calculations. (4 marks)
4. Assume the transfer does not take place. Should the Bellow Division be closed? Show
all your calculations. (2 marks)
5. Assume Bellow Division has unlimited demand for its radios. What is the maximum
number of speakers that should be transferred from Boom Speaker Division? Show all
your computations. (3 ½ marks)
QUESTION ONE Solution (15 marks)
Part 1. (2 ½ marks)
Minimum transfer price:
Direct materials
Direct labour
Variable overhead
Minimum transfer price

50% x 2.00 =

Maximum transfer price

8.00
6.00
1.00
15.00

½ mark
½ mark
1 mark

28.00

½ mark

Part 2. (3 marks)
With transfer:
Cost of units transferred
Without transfer:
External purchase cost of units

80,000 x 15 (cfwd) =

1,200,000

1 mark cfwd

80,000 x 28 =

2,240,000

1 mark

Savings (increase in operating income) with transfer

1,040,000

Or:
Saving (increase in operating income) with transfer = (28 - 15) x 80,000 = 1,040,000
1 mark cfwd

1 mark

Page 2 of 24

No mark awarded if a quantitative analysis is not completed.000 units.000 80.000/80%) – 400.000) 1 mark If the transfer does not take place Bellow Division should be closed because it decreases Sound’s operating income by $375.00 32.000 cfwd = Traceable fixed costs avoidable allocated corporate overhead 10% x 800. (1 mark. No mark awarded if a quantitative analysis is not completed) Part 3.000 1.000 665.300. Part 4.000 ½ mark 1 mark ½ mark 1 mark If the transfer takes place Bellow Division should not be closed because it contributes $665. 1 mark Page 3 of 24 .000 = Segment margin 5. cfwd with quantitative analysis. the transfer should take place. cfwd with quantitative analysis. (3 ½ marks) Minimum transfer price if Boom has no idle capacity: Variable cost from part 1 Lost contribution margin: $32 – 15 = Minimum transfer price 15.00 17.095.000 to Sound’s operating income. Boom will want to charge $32 but Bellow could use an outside supplier for $28. Part 3.000 (375.000 ) 720.00 1 mark cfwd 1 mark cfwd Maximum transfer price 28. a total of (400. (ii) (2 marks) Calculation of Bellow’s Segment Margin if the transfer does not take place: Operating income (loss) Add back unavoidable corporate overhead 90% x 800.00 ½ mark As soon as regular sales are displaced. cfwd with quantitative analysis.000 = 100.000 = Segment margin (1. (i) (4 marks) Revenues Variable costs 4.095.055.000 . which would be cheaper for both Bellow and the corporation.500.040. No mark awarded if a quantitative analysis is not completed. Only the current idle capacity of Boom should be used to produce units for transfer. 1 mark.000.Yes. 1 mark.000 3.1.

80} 1 mark 1 mark Page 4 of 24 .760 = $1.80} 1 mark 1 mark = $10.000 450 7 $15.000 500 6 $16. the moulds are cleaned. The following information pertains to June 2007: Number of Scooters produced and sold Batch size (number of Scooters per batch) Cleaning labour hours per batch Cleaning labour cost per hour Static Budget Actual 60. the Scooter.QUESTION TWO Child Play Inc. Comment on the efficiency variance.{(45. for various manufacturers. Do not include “an incorrect standard” as a possible cause.000 ÷ 450) x 7 x $16.500 . Cleaning labour is paid on an hourly basis. (6 marks) QUESTION Two Solution (12 marks) Part 1. Your comments should include possible causes of the variance and who should be held accountable for the variance. Child Play produces Scooters in batches.260F 1 mark cfd Part 2. (3 marks) {(45. (3 marks) 3. (3 marks) {(45. Calculate the rate variance for total cleaning labour costs in June 2007. produces a special kind of plastic toy car which does not contain lead paint.80} .000 ÷ 450) x 7 x $16.80 45.000 ÷ 500) x 6 x $16. (3 marks) 2. Show all your calculations. Show all your calculations. The labour costs of cleaning the moulds can be traced directly to Scooters because of the unique mould required.000 ÷ 450) x 7 x $15} – {(45.00 Required: 1. Calculate the efficiency variance for total cleaning labour costs in June 2007. After each batch of Scooters is run.$11.

2. 1.688U 1 mark cfd Part 3.650. 1.$9. $846. How many units were produced in 2006? a. b. $564.000. inefficient scheduling (1 mark for at least one explanation) 2.000. c. Two machine-hours were budgeted per unit produced. In a given week. none of the above.000.072 = $2.940. For 2006. 970. b.760 .= $11. 1. the cleaning staff spent more time cleaning the moulds after each batch.060. A regular work week consists of 40 hours.000. e.000 and overhead was overapplied by $10. An assembly worker at a manufacturing company earns $12 per hour for regular work hours.000. c.500. inexperienced staff. 2. increasing the number of times the moulds require cleaning. moulds may be more difficult to clean than anticipated (1 mark for at least one explanation) QUESTION Three .000. poorly supervised staff.030. the assembler worked 47 hours. $480. f. The YWG Company used a budgeted manufacturing overhead rate of $0. Page 5 of 24 .000. d. resulting in higher cleaning labour costs (1 mark) • the manager responsible for supervising the cleaning staff should be held accountable for the variance (1 mark) • possible causes: poorly trained staff. $606. d. 2. resulting in higher cleaning labour costs (1 mark) • the manager responsible for scheduling production (batches) should be held accountable for the variance (1 mark) • possible causes: smaller orders. (6 marks) The unfavourable (cfd) variance was caused by two factors: 1. The amount charged to direct labour is: a.175 per machine-hour during 2006. The assembler gets time and a half or $18 per hour for overtime. actual manufacturing overhead incurred was $350. e. a smaller batch size increased the number of batches.MCQS 1.

600 After disposing the overhead variance. f. selected December 31. How many widgets does the sales manager have to sell to earn the vacation bonus? a. are $6 each. d.715. f.000 691. c. c. 9. $724. The convention organizers provide the advertising and guarantee a certain level of traffic in exchange for 15% of the profit earned at each booth. The manufacturing costs. all variable. which is considered material in amount. The company’s sales manager will earn a vacation bonus if she can earn a target profit of $150.200. Worley Company has over-applied overhead of $45.108 . 4. 2006 would be: a.200. $727. 10. $655.600 43. d. The company is planning on renting an exhibition booth for both display and selling purposes at the annual convention.200 129.3. e.450. Page 6 of 24 . b. 8.000 for its first year ended December 31.200 57.200.950. 7. Widget Company sells widgets for $20 each. 2006. balances from Worley’s accounting records are as follows: Revenue Cost of goods sold Raw materials inventory Work in process inventory Finished goods inventory $1. none of the above. $657.714 e. 10.000 for the sales operation at the convention. none of the above. 2006. the balance of cost of goods sold in the income statement for the year ended December 31.824. b. Before disposing of the over-applied overhead.200.500. $646.

and its fixed manufacturing overhead costs are $5 per unit. c.30 per unit and the fixed manufacturing overhead cost is $0. $72.000 fixed plus $3 per machine hour.5. What is the flexible budget amount for operating income (loss) if 20. 7. $78.000 machine hours.000. Inc. f.000.000. b. The direct material cost is $0. Expected production per month is 40.000. Given these facts. $168. d. 27. e. 42. b. $136. e.60 per unit.000 units. 32.000 fixed plus $6 per machine hour. its variable production costs are $10 per unit. $180. 8. d. d. has $240.000 worth of an obsolete line of testing equipment.000.600 units.000 units are produced and sold? a. $(500).500.500 per month. However.000 units. $304. $5. 6.500. g. $37.000 fixed plus $9 per machine hour. a manufacturer of medical testing equipment. c. $17. At the end of the year. Central Medical Supply. the company had 30. a horizontal line drawn from the total budgeted cost line intersects the vertical axis at $180. $29. A packaging company produces cardboard boxes in an automated process. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64.000 units in its ending inventory. None of the above.000. d. Fixed and variable costs may be expressed as: a. None of the above.000 fixed plus $3 per machine hour. $240. what must have been the number of units in inventory at the beginning of the year? a. f. Tripac offered to purchase the obsolete equipment as is for $88..500. the market value would then be $136.000.000.800 units. $60.000.000.000. b. At zero machine hours the total budgeted cost line intersects the vertical axis at $60.400 units. At 20. $90.000 higher under variable costing than under absorption costing. Every year.85 and administrative fixed costs are $7. What is the opportunity cost if Central accepts Tripac’s offer? a. Contribution margin per unit is $1. b. c. $60. $88.000. c. The company's operating income for the year was $12.000. 28. e. Page 7 of 24 .

If Crank is evaluated on the basis of return on investment it will: a.296.000.000. $90.400). f. $435. b. ($278. c. 11. A company pays cash to purchase an investment that will generate interest income of $50. The 2006 income statement for Crank Division follows: Sales Cost of goods sold Gross margin Selling & administrative expenses Operating income $3. b.282. $80. none of the above.650. c. $180.4%.000 at the end of 2006. Crank has an investment opportunity that would yield an estimated return of 13%. d.000 1. All investments in operating assets are expected to earn a minimum required rate of return of 12%.120. ($144. reject the investment opportunity because it will decrease its current return on investment of 15%.800 $ 187. accept the investment opportunity because it yields a return greater than the minimum required rate of return. f.000 fixed plus $6 per machine hour. reject the investment opportunity because it will decrease its current return on investment of 14. Return on investment will: Page 8 of 24 . 10.470.000). reject the investment opportunity because it will decrease its current return on investment of 15.000 per year. d. g. e.200 The division’s operating assets employed were $1. A company provides the following information: Sales Net income Return on investment Tax rate Minimum required return $14.000 1.05%.e.000 The company’s residual income is: a. 9. $480. which represents an 8% increase over the previous year-end balance.000 1.000 14% 40% $480.000. none of the above.000.000 $336.000 fixed plus $6 per machine hour.

The kiln could be operated for more than 2. 12. The contribution margin per unit will not change and the contribution margin ratio will decrease. increase because the turnover will increase. The contribution margin per unit will decrease and the contribution margin ratio will decrease. e. What is the minimum acceptable selling price for this new product? Page 9 of 24 . d.a. c. A company manufactures and sells a single product that has a positive contribution margin. The contribution margin per unit will not change and the contribution margin ratio will not change. $59. 14. d. then what would be the effect on the contribution margin per unit and the contribution margin ratio? a. Use the following information for questions 13 to 14: Baked Brick Company has a bottleneck in the production process. e. e. c. Data concerning the company’s four main products appear below: Standard Brick Revenue per pallet Contribution margin per pallet Annual demand (pallets) Hours required in the kiln per pallet $756 $472 90 8 Quality Economy Brick Brick $1.000 hours per year. none of the above. d. $80. $79. $94.000 hours per year by running it after normal working hours. b. increase because the margin and turnover will increase. c. b. None of the above. increase because the margin will increase. f. decrease because turnover will decrease. Up to how much per hour should the company be willing to pay in incremental costs to operate the kiln additional hours? a. The kiln has a total capacity of 2. Baked Brick Company is considering introducing a new product whose variable cost would be $820 per pallet and that would require 10 hours in the kiln per pallet. If the selling price and variable expenses both decrease by 5% and fixed expenses do not change. $88. The contribution margin per unit will decrease and the contribution margin ratio will not change.356 $632 110 8 $589 $376 100 4 Antique Brick $857 $440 120 5 13. decrease because the margin will decrease. b.

000.900. Given this information. b. Data concerning these products appear below: Allocated joint processing costs Costs of further processing Sales value after further processing Product X Product Y Total $22. None of the above. $80.300 54. Based on this information. The break-even point is $400. At the break-even point. which of the following statements is true? a. b. c. $820. $879. c. None of the above.410. $60. 17. The company's variable expense per unit is $9.292.320 25. what is the operating income? a. Page 10 of 24 .000. None of the above. $52. $54. $1.600 40. Each product may be sold at the split-off point or processed further.800 $19. d. d.000 a year. 15.900. The company's contribution margin ratio is 40%. The company's break-even point is 24.a.300. a company reported $750.000. c. $19. The total sales value at the split-off point is $40. $28. Joint processing costs up to the split-off point total $42.000 The minimum amount the company should accept for Product Y if it is to be sold at the split-off point is: a.900 95.320. c.200. e. f. d. 16. A company has a margin of safety percentage of 20%. e. b.200 $42.000.000. Iris Company makes two products from a common input. $56.000 units) and an operating income of $25.000 and the variable costs are 40% of sales.680 11.000. d. $1.000 units. $27. g. b.600.000 36. The company allocates these costs to the joint products on the basis of their total sales values at the split-off point. $25. The company's variable expenses are 60% of sales. e. e.000 in sales (25. $48. the company's total contribution margin equals $500. Last year.500. $ 0.

Beginning inventory in August was $400. 0. b 3. a 8. Management also wants to have $500 in inventory at the end of the month to prepare for the fall season. a 2.Question Three Solution 1. b 11. has budgeted cost of goods sold for August of $1. 3 marks Page 11 of 24 . c 10. e 7. c 15. a 12.$400 = $1100. Required: What dollar amount of plastic flowers should be purchased to meet the above objectives? 2 marks Solution $1. c 17. b 13. c 5. f 4.5 marks per item b) Lighting Inc. c 6.000 Inventory on December 31 of the current year is expected to be 20. c 16.000 140. d Question Four: The following are independent of each other: a) Flowers Inc.000 units. The quantity of finished goods inventory at the end of each quarter was to equal seven percent of the next quarter's budgeted units to be sold. c 9.000 for plastic flowers.000 120.000 + $500 . Required: Calculate the units to be produced during the third quarter.000 160.'s sales budget showed the following projections for the coming year: Quarter First Second Third Fourth Units 100. a 14.000 520.

9.0 00 $146.000 x 7% = Units to be produced 140.000 + $300 .200 .5 marks for sales.000 on hand at the beginning of August.$200 = $6.100 .000 for flea collars. and to cover part of anticipated back-to-school sales in September they expect to have $15.0 00 1 mark for BI.000 of software on hand at the end of August. Required: What dollar amount of flea collars should be purchased to meet the above objectives? 2 marks Solution $6. Required: What was the budgeted cost of goods sold for August? 3 marks Solution Beginning inventory Purchases Total available Ending inventory Cost of goods sold $ 6.000 $131.400 0.800 141.Solution: Units of sales Desired ending inventory 160.000 + 11. 0.200 151.5 marks for total c) Lovely Pet Store has budgeted cost of goods sold for May of $6. 1 mark for EI.0 00 15. 1 mark for BI. 0. Beginning inventory in May was $200. EI and purchases Question Five: Page 12 of 24 .000.The store had software costing $6.5 marks per item d) Allmakes Software budgeted August purchases of new software at $140. Management also wants to have $300 in inventory at the end of the month to prepare for the summer season.000 +140.000 x 7% = Total units needed Beginning inventory 140.

e.100 27. if the firm uses variable costing. Additional information is as follows: Price $500 per filing cabinet Variable production cost $170 per filing cabinet Fixed production costs $8.800 Contribution margin Fixed costs: Production $8. Estimate operating income for a month in which 100 filing cabinets are manufactured and 90 are sold.000 4. What is the cost assigned to ending inventory under each of the above costing methods? Explain the differences between the two ending inventory valuations (do not perform a computation for this answer). c. Use the proper variable costing income statement format.500 Gross Margin 22. Variable costing Revenue Variable costs: Production: Selling $45. b. Use the proper absorption costing income statement format.000 Selling and administrative3. Absorption costing Fixed overhead allocation rate = $8.800 Fixed 3.300 1.500 Selling and administrative: Variable $1.000 $15. Question Five Solution: a.000 per month Required: a.900 11. Assume no beginning inventory. if the firm uses absorption costing and actual costing.000 Operating income $16.000 Cost of goods sold: 22.000/100 = $80 per unit Revenue $45.Finish-It-Yourself Furniture Company manufactures replicas of antique oak filing cabinets. Estimate operating income for a month in which 100 filing cabinets are manufactured and 90 are sold.000 per month Variable selling and administration $20 per filing cabinet Fixed selling and administration $3. which type of costing income statement would you recommend for evaluating manager performance? Justify your choice. Assume no beginning inventory.000 17.800 Page 13 of 24 . If the manager of Finish-It-Yourself Furniture Company is given a bonus based on income. Reconcile the operating incomes between variable costing and absorption costing.900 b. d.

Inventory under variable costing is (10 x $170) = $1. they could argue in favour of variable costing because it removed the inventory effects of fixed overhead and discourages inappropriate building-up of inventory. Question Six Flick Company uses a standard cost system.500 Inventory valuation under variable costing includes only variable costs. but they need to provide reasonable justification for their choice. the company produced 11.900 and under absorption costing is $17. $800 of fixed overhead cost is kept off the income statement and is instead reported in the balance sheet for absorption costing.700 c. The income under variable costing is $16. Or.700 = $800). whereas fixed overhead is fully expensed as a period cost under variable costing.$1. Or. is $2. they could argue in favour of throughput costing because it encourages managers to seek ways to reduce labour and variable overhead costs. Last year. d.Operating income $17.000 direct labour hours. Manufacturing overhead is applied to units of product on the basis of direct labour hours. whereas under absorption costing it includes an allocation of fixed production costs.500 .700 Inventory under absorption costing is 10 x ($170 + $80) = $2. Required: a) What is the denominator level of activity? (2 marks) b) What were the standard hours allowed for the output last year? (1 mark) c) What was the variable overhead spending variance? (3 marks) d) What was the variable overhead efficiency variance? (2 marks) e) What was the fixed overhead budget variance? (2 marks) f) What was the fixed overhead volume variance? (3 marks) Page 14 of 24 . Student answers to this question will vary. e.700.000 for fixed overhead.000 for fixed overhead. The standards call for two direct labour hours per unit of output produced. The company's total budgeted variable and fixed manufacturing overhead costs at the denominator level of activity are $20.500 units of product and worked 22.000 for variable overhead and $30.50 per direct labour hour. Actual costs were $22. The difference ($800) is the same as the difference between ending inventory valuations ($2. including both fixed and variable components. they could argue that managers should be compensated using absorption costing because it is the same method used to report to outsiders under GAAP or that this method provides the best matching of revenues against costs.500 for variable overhead and $31. The predetermined overhead rate. For example.

000 .000 favourable * 2 DLHs per unit x 11.000 unfavourable f) Computation of the fixed overhead volume variance: Volume variance = Fixed portion of predetermined overhead rate x (Denominator hours . the components division is producing a tiny motor that is often used to run fans to cool equipment.000 Denominator level of activity = $50.Question Six Solution a) Total overhead at the denominator level of activity $50.(AH x SR) = ($22. The variable cost of making the motors is $15 per unit.$30.00) .500) .500 units = 23.(SH x SR) = (22.000 / 20.500 units X 2 DLH per unit 23.Standard hours allowed) = $1.000 units.000 DLHs b) Actual output Standard DLH per unit Standard DLHs allowed 11.000 / 20.000 DLH) = $4.00*) = $500 unfavourable (2 marks) * $20.000 DLHs e) Computation of the fixed overhead budget variance: Budget variance = Actual fixed overhead .000 DLHs = $1. Page 15 of 24 . and the market price is $28.500 favourable (2 marks) *$30.000 DLH = $1.000 DLHs x $1.23.50 = 20. Production is 100. diversified organization is decentralized and has a number of different divisions.(22.000 DLHs x $1.000 / $2.000 DLHs* x $1. The large.00 (1 mark) d) Computation of variable overhead efficiency variance: Spending variance = (AH x SR) .50 (1 mark) Question Seven: Norex Corporation is a manufacturer of electronic equipment.000 DLH . The components division makes electronic components that can be sold either internally to the equipment division or sold to outside customers.000 = $1.(23.000 DLHs c) Computation of variable overhead spending variance: Spending variance = (AH x AR) .00) = $1.50* (20. Currently. the fixed cost is $5.Flexible budget fixed overhead = $31.

b.000 + 0 = $650. and the transfer price would be the variable cost plus the opportunity cost of zero. there is no market for additional units produced. Page 16 of 24 . c.300. If the transfer price is set using the opportunity cost for the components division. what transfer price would be most appropriate? Explain your reasoning.000 + $13 x 50. Recommend a transfer price policy to Norex that could potentially solve any problems of suboptimal decision-making. the equipment division sells 50. Would the managers of the components division be willing to sell any units to the equipment division? Explain. What is the contribution margin for Norex if the motors are sold externally? What is the contribution margin for the components division if the motors are sold externally? 2.000 = $850. Using the general rule that the transfer price should be equal to the variable cost plus any opportunity cost results in a price at $28 per unit because now the opportunity cost is the contribution margin foregone by selling the unit internally. Using the general rule that the transfer price should equal the variable cost plus any opportunity cost results in a price of $15 per unit. Assume the components division has enough capacity to meet both internal and external demand. Calculate the opportunity cost of selling all of the motors externally. Because the components division has plenty of capacity to meet demand. the transfer price is set at variable cost. fully allocated cost. The managers are considering the following price options: variable cost. Top management is re-evaluating Norex’ transfer pricing policies. Now assume the selling price for fans is $40 per unit. Question Seven Solution: a.000. Currently. b.000 + $650. Components division CM = $13 x 50.000 fans.The equipment division uses the motor when assembling small fans that are sold to computer manufacturers. the transfer price is variable cost plus contribution margin = market price. The additional variable cost for processing the motors into fans is $8 per unit. 1. Norex and components division contribution margin = $13 x 100.000 = $1. and market price. and the components division could sell all of the units it produces externally. So. If the transfer price is set using the opportunity cost for the components division. 4. Assume the components division is operating at full capacity and could sell more units to the outside market. What is the contribution margin for Norex if the motors are sold internally? What is the contribution margin for the components division if the motors are sold internally? 3. Norex contribution margin = $17 x 50. Transfer price questions 1.500.000. Required: a. 5. 2.000. c. what transfer price would be most appropriate? Explain your reasoning.000 = $1.

Determine the division with the highest residual income.000 – (12% x $2.000 = 15% Division C = $600. ROI can easily be compared among divisions. while ROI does not. so students may give this response. The WACC is also used as a required rate of return.000) = $254. e.3.000 .800 Division C = $600. d.000 Current assets 80.600.000 = 36% b.000) – (12% x $1. Required: a.000) – (12% x $2.200.880.400. ROI: Division C is highest Division A = $800.000/$3. whereas RI and EVA are not easily compared because size has an influence. The dual rate method would be best. 4.000/$1.000) = $398.380. EVA: Division C is highest Division A = (70% x $800. RI and EVA incorporate a required rate of return.000 300.000 = 24% Division B = $400.400 c.000 200.000 Current liabilities 400. so that seller is credited for the market price (its opportunity cost) and buyer is charged the variable cost.000 60.000) – (12% x 2. b.680.000) 5.000 80. whereas ROI is a percentage. RI: Division A is highest Division A = $800.000 – (12% x $1. In this problem. Show your calculations.200) Division C = (70% x $600. c.000 ($1. Show your calculations. Why is it better to use multiple measures for evaluating manager performance rather than a single measure such as ROI or EVA? Question Eight Solution: a.000/$2. The opportunity cost is $200.280. and its after-tax weighted-average cost of capital (WACC) for each segment is 12%. Question Eight: Following is information for the Krishnan Company’s three business divisions: Division A Division B Division C Pretax operating income $800. ROI is subject to greater accounting Page 17 of 24 .000) = $214.000 – (12% x $3.000 2. Determine the division with the highest ROI.000 $600.400 Division B = (70% x $400. RI and EVA provide information about the dollar amount of return.460.$1.300. Managers of the components division will not be willing to sell internally at variable cost.000 Long-term assets 3.660. Compare and contrast these three performance measures and their influence on managers. when they can get market price if all units are sold externally.680. Determine the segment with the highest EVA.600.000) = $(15. market price or negotiated prices would also work.500. Division B = $400.000 1. Show your calculations.660.400 d.280.000) = $406.000) = $80.000 Krishnan’s tax rate for the divisions is 30%.000 $400.

Financial perspective Customer perspective Internal business process perspective Learning and growth perspective Objectives Increased enrollment in school. No one single measure can capture all aspects of a manager’s performance.D. The college has recently developed a balanced scorecard for its operations and is encouraging departments to do the same. Performance Measures # of students enrolled Increased training and hiring of skilled instructors Aptitude of incoming hirees and dollars spent on training # of students who view courses as satisfactory # of empty seats in classrooms Question Nine Solution: Below are examples of balanced scorecard objectives and measures for the Accounting Department at Big City College. develop one objective and one performance measure that Hoshi might use in a first draft of a balanced scorecard for the Accounting Department (the academic unit. Multiple measures also reduce the likelihood that managers will focus on too narrow an aspect of operations.manipulation than the other two methods. Increased student satisfaction Increased capacity of classrooms. For each perspective. e. not the accounting function for the college). or other terminal perspective degree Page 18 of 24 . and all measures have both strengths and weaknesses. EVA allows development of a measure that is less subject to manipulation and results in more optimal decision-making. student answers will vary: Objective Performance Measure Financial Meet budget expectations Budget variances perspective Customer Provide classes that Average students perspective satisfy students evaluation ratings per class Internal business Reduce the number of Number of classes that process students that are waitare full during perspective listed registration Learning and Increase faculty quality Number of faculty with growth Ph. Question Nine: Hoshi is the chair of the Accounting Department at Big City College.

The company is now producing and selling 100. the Castings Division would have to cut back production of another casting: the NW2.000 special castings each year on a continuing basis. within which both the divisions' profits would increase as a result of agreeing to the transfer of 10.000 units of the NW2 each year. The company's Machine Products Division has asked the Castings Division to provide it with 10. and requires $25 per unit in variable production costs. The NW2 sells for $40 per unit. Boxing and shipping costs for the new special casting would be only $2 per unit. Required: a) What is the range of transfer prices. The Machine Products Division has a bid from an outside supplier of $30 per unit for the castings.000 castings per year from the Castings Division to the Machine Products Division? 5 marks b) Is it in the best interests of Geneva Corporation for this transfer to take place? Explain. Production and sales of this casting would drop by 10% if the new casting were produced. the transfer price must be less than the cost of buying the units from the outside supplier.$4) x 10. if any. which it presently is producing.Question Ten Geneva Corporation has a Castings Division that does casting work of various types. profits would increase as a result of the transfer providing that: Transfer price > Variable cost + Opportunity cost The opportunity cost is the contribution margin on the lost sales. The special castings would require $20 per unit in variable production costs. Transfer price < $30 (1 mark) Combining the two requirements. In order to have time and space to produce the new casting. Transfer price > ($20 + $2) + $11 = $33 (2 marks) From the viewpoint of the purchasing division. divided by the number of units transferred: Opportunity cost = [($40 .$25 . Boxing and shipping costs of the NW2 are $4 per unit. (1 mark) Page 19 of 24 .000 = $11 (1 mark) Therefore. 3 marks Question Ten Solution: a) From the perspective of the Castings Division.000] / 10. we find that no feasible range of transfer prices exists under current conditions.

Data concerning the selling prices and unit costs of the three products appear below: Fixed costs are applied to the products on the basis of direct labour hours.400 minutes of grinding machine time available this week. but the cost of purchasing them from the outside supplier is $30. Therefore. Demand for the three products exceeds the company's productive capacity. The grinding machine is the constraint. 4 marks b) If there is still unfilled demand for the product that the company should emphasize in part a) above. which in this case is grinding machine time. Inc. with only 2. up to how much should the company be willing to pay for an additional hour of grinding machine time? (2 marks) Question Eleven Solution: a) The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource. Required: a) Given the grinding machine constraint. which product should be emphasized? Support your answer with appropriate calculations. (1 mark) From the viewpoint of the entire company. produces three products. (1 mark) Page 20 of 24 . the company's profits decrease by $3 for each casting that is produced within the company rather than purchased in the outside market. (2 marks) Question Eleven Redner.b) No. the transfer should not take place. the cost of transferring the units within the company is $33. 1 mark for each CM/min calculation Product L should be emphasized because it has the greatest contribution margin per unit of the scarce resource.

000 units.500 is spent for advertising in 2009. 2008: Unit cost per clock: Variable costs: Direct manufacturing labour Direct materials Variable manufacturing. the time would be worth 60 x $5 = $300 per hour. Show all your computations. is facing increasing competition. a manufacturer of quality clocks. 21 minutes) Timer Limited.60 $30. If the additional $13.500 for advertising in 2009 will be necessary to attain the desired growth in revenue.000 units 40% Required: 1.500 is spent for advertising. selling & administrative overhead Fixed costs: Manufacturing Selling Administrative Total unit cost per clock Selling price per clock Expected sales volume in 2008 Income tax rate $9. (2 marks) QUESTION Twelve (13 marks. To prepare for next year’s marketing campaign.90 3. The president of the company believes an aggressive marketing campaign will be necessary next year to maintain the company’s present growth. (3 marks) 3.00 20. At a sales level of 22.50 8.50 2.40 4. Show all your computations.000 is desired? Show all your computations. (2 marks) 2. (4 marks) 4. Calculate the projected net income for 2008. what maximum amount can be spent on advertising if a 2009 net income of $72. the company’s controller has prepared the following data for the current year. (4 marks) QUESTION Twelve solution (13 marks) Part 1 (2 marks) Page 21 of 24 .00 1.60 3. The president believes an additional marketing cost of $13. what is the required 2009 revenue for 2009’s net income to equal 2008’s net income? How many units must be sold to meet the target net income? Show all your computations.b) If additional grinding machine time is used to produce more of Product L.20 16.10 $24. Calculate the breakeven point in revenues for 2009 if the additional $13.

000 units (1 mark) Part 4 (4 marks) Total contribution margin: 22.800 (1 – 40%) = 630.00 – 24.00 1 mark Total fixed costs: (8.200 1 mark 64.000 Page 22 of 24 .000 x (30.5) = 21.500+108.000: 72.000 1 mark 43.000 Question Thirteen: (15 marks) (20 minutes) A list of accounts for a manufacturing company for an accounting period is given below: Sales $39.500 + 64.500 = 175.000 1 mark 120.50 cfd = Less: Fixed expenses excluding advertising: 20.000 x 13.000 ÷ (1 .500 Part 3 (4 marks) 1 mark cfd 1 mark cfd 175.10 x 20.60) = 108.500 .00 – 16.40%) = Maximum amount of advertising 297.000 2 marks 15.000) + 13.000 1 mark 162.800 Part 2 (3 marks) 2 marks 175.Operating income: Income tax expense @ 40% Net income 20.50 30.000 45% 1 mark OR (175.000)/(30-16.000 30.000 x 8. = $390.10 = Operating income to achieve net income of 72.

000 5. ending Gross Margin Finished goods inventory.700 ? 4. ending.500 1.Cost of Goods Sold Purchases of direct materials Direct labour Finished goods inventory.000 2.000 2. beginning Work in process. (11 marks) b) Calculate adjusted cost of goods sold.000 2.000 12. ending Advertising expense Direct materials inventory. ending Direct materials used in production Direct labour Manufacturing overhead: Indirect labour Indirect materials Utilities 1.000 3.000 Page 23 of 24 .000 2.000 Any over or under applied overhead is closed out to cost of goods sold.000 3. beginning Add: Purchases Direct materials available for use Less: direct materials inventory. ending Indirect labour Sales commissions (10%) Indirect materials used Utilities expense.000 3.000 3.000 11. ending Accounts payable.000 5.900 3. beginning Work in process.800 1.000 9. factory Amortization on office equipment Amortization on factory equipment Over-applied manufacturing overhead ? 11.000 11.000 5. beginning Direct materials inventory. Required: a) Calculate the components of cost of goods manufactured.000 800 3. (1 mark) c) Calculate finished goods inventory.000 2.000 6.000 2.000 3. beginning Accounts payable. (3 marks) Question thirteen solution: a) Direct materials inventory.

000 30.700 COGS = 27.300 – 3.Amortization Over-applied overhead Total manufacturing overhead applied Total manufacturing costs Add: WIP. ending = 5.000 800 (3.300 Normal COGS = 27.000-11.500 Page 24 of 24 .000 3. beginning + COGM – normal COGS FG. ending = 8.800 – (27. ending = FG. beginning Less: WIP.300-3000) FG.000 + 27.300 c) FG.000 = 24.000) 27.800 b) COGS = Sales – GM COGS = 39.000 16. ending COGM 6.