CHAPTER 11

A company is considering a proposal to invest $30,000 in a project that would provide the
following net cash flows:

   
(a) Compute the project's payback period.
(b) Compute the net present value of the project assuming a 10% discount rate with the following
factors: PV factors for $1 (yr 1: 0.9091; yr 2: 0.8264; yr 3:0 .7513; yr 4: 0.6830)
(c) Should the company invest in the machine? Why or why not? 

(a)    
Payback period = 2 years + (12,800/15,000) = 2.85 years
(b) NPV = ($6,500)(.9091) + (10,700)(.8264) + (15,000)(.7513) + (12,800)(.6830) - $30,000 =
$4,763.53
(c) The company should buy the machine because the NPV is positive and therefore, they will
earn more than the 10% needed.
CHAPTER 10

A company produces three different products that all require processing on the same machines.
There are only 27,000 machine hours available in each year. Production information for each
product is:

   
Required:
(1) Determine the preferred sales mix if there are no market constraints on any of the products.
(2) Determine the preferred sales mix if the demand is limited to 5,000 units for each product.
(3) Determine the preferred sales mix if the demand is limited to 3,000 units for each product. 

   
In general, the company should produce Product C first, then A, and finally B. Specifically:
(1) If no market constraints exist on any of the products, produce as much C as possible and none
of the other products.
27,000 available hours/4.5 hours per unit for C = 6,000 units of C.
Sales Mix: The company should therefore produce 6,000 units of C and none of the others.
(2) If the demand is limited to 5,000 units of each product, produce 5,000 units of C first. This
will use (5,000 x 4.5 hours per unit) = 22,500 hours.
Of the (27,000 - 22,500) = 4,500 hours left, produce as much A as possible:
4,500 available hours/2.5 hours per unit for A = 1,800 units of A.
Sales Mix: The company in this case should produce 5,000 units of C and 1,800 units of A.
(3) If the demand is limited to 3,000 units of each product, produce 3,000 units of C first. This
will use (3,000 x 4.5 hours per unit) = 13,500 hours.
Of the (27,000 - 13,500) = 13,500 hours left, produce 3,000 units of A. This will use an
additional (3,000 x 2.5) = 7,500 hours.
This leaves (13,500 - 7,500) = 6,000 hours. These hours can be used to produce (6,000 hours per
unit/4 hours per unit for B) = 1,500 units of B.
Sales Mix: In this case, the company should produce 3,000 units of C, 3,000 units of A, and
1,500 units of B.
Fleming Company had the following results of operations for the past year:

   
A foreign company (whose sales will not affect Fleming's regular sales) offers to buy 2,000 units
at $5.00 per unit. In addition to variable manufacturing costs, there would be shipping costs of
$1,200 in total on these units. Should Fleming take this order? Explain. 

   
Thus, since operating income will increase, Fleming should take the order so long as it does not
affect regular sales
CHAPTER 9

Burien, Inc. operates a retail store with two departments, A and B. Its departmental income
statement for the current year follows:

   
Burien allocates building depreciation, maintenance, and utilities on the basis of square footage.
Office expenses are allocated on the basis of sales.
Management is considering an expansion to a three-department operation. The proposed
Department C would generate $120,000 in additional sales and have a 17.5% contribution to
overhead. The company owns its building. Opening Department C would redistribute the square
footage to each department as follows: A, 19,040; B, 21,760 sq. ft.; C, 13,600. Increases in
indirect expenses would include: maintenance, $500; utilities, $3,800; and office expenses,
$1,200.
Complete the following departmental income statements, showing projected results of operations
for the three sales departments. (Round amounts to the nearest whole dollar.)
   

   

   
* $3,300 + $500 = $3.800
** $12,520 + $3,800 = $16,320
*** $3,800 + $1,200 = $5,000

 
CHAPTER 8

This information comes from the records of Dina Co. for the current period:

   

Calculate the direct materials price and quantity variances, direct labor rate and efficiency
variances. In each case, state whether the variance is favorable or unfavorable.

Direct Material:

   
Direct labor:

   
**25,000 units x 2 hours/unit = 50,000 hours

  
CHAPTER 7

Tappet Corporation is preparing its master budget for the quarter ending March 31. It sells a single product
for $25 a unit. Budget sales are 40% cash and 60% on credit. All credit sales are collected in the month
following the sales. Budgeted sales for the next four months follow:

   
At December 31, the balance in accounts receivable is $10,000, which represents the uncollected portion of
December sales. The company desires merchandise inventory equal to 30% of the next month's sales in
units. The December 31 balance of merchandise inventory is 340 units, and inventory cost is $10 per unit.
Forty percent of the purchases are paid in the month of purchase and 60% are paid in the following month.
At December 31, the balance of Accounts Payable is $8,000, which represents the unpaid portion of
December's purchases. Operating expenses are paid in the month incurred and consist of:
Sales commissions (10% of sales)
Freight (2% of sales)
Office salaries ($2,400 per month)
Rent ($4,800 per month)
Depreciation expense is $4,000 per month.
The income tax rate is 40%, and income taxes will be paid on April 1. A minimum cash balance of $10,000
is required, and the cash balance at December 31 is $10,200. Loans are obtained at the end of a month in
which a cash shortage occurs. Interest is 1% per month, based on the beginning of the month loan balance,
and must be paid each month. If an excess of cash exists, loan repayments are made at the end of the month.
At December 31, the loan balance is $0.
Prepare a master budget (round all dollar amounts to the nearest whole dollar) for each of the months of
January, February, and March that includes the:
Sales budget
Merchandise purchases budget
Cash budget, including information on the loan balance
   
   

   
 1. Ecology Co. sells a biodegradable product called Dissol and has predicted the following sales for the
first four months of the current year:

   

Selling price is $50 per unit.

Ending inventory for each month should be 20% of the next month's sales, and the December 31 inventory is
consistent with that policy. The purchase price is $30 per unit.

Prepare sales and purchases budgets for the first quarter?

2. Sweeny Co. is preparing a cash budget for the second quarter of the coming year. The following data
have been forecasted:

Additional data:

(1) Sales are 40% cash and 60% credit. The collection pattern for credit sales is 50% in the month following the
sale and 50% in the month thereafter. Total sales in March were $125,000.
(2) Purchases are all on credit, with 40% paid in the month of purchase and the balance paid in the following
month.
(3) Operating expenses are paid in the month they are incurred.
(4) A minimum cash balance of $40,000 is required at the end of each month.
(5) Loans are used to maintain the minimum cash balance. At the end of each month, interest of 1% per month is
paid on the outstanding loan balance as of the beginning of the month. Repayments are made whenever excess
cash is available.

Prepare Cash Budget for May

Required: Calculate the following items for May

(a) Cash collections from customers. ($145,500)
(b) Cash payments made for merchandise purchases. ($109,160)
(c) Cash paid for other operating expenses, including interest. ($21,640)
(d) What is the preliminary cash balance for May 31? ($54,700)
(e) What loan activity will take place at the end of May? ($14,700)
(f) What is the ending cash balance?  ($40,000)
 
3. A company has a standard of 2 hours of direct labor per unit produced and $18 per hour for the labor
rate.
During last period, the company used 9,500 hours of direct labor at a $152,000 total cost to produce
4,000 units.

Compute the direct labor rate and efficiency variances.  Indicate whether each variance is
favorable or unfavorable

4. Assume Martin Guitar Company has a standard of 3 hours of direct labor per unit produced and $20 per
hour for the labor rate.
During last period, the company used 24,000 hours of direct labor at a $456,000 total cost to produce
6,000 units.

Compute the direct labor rate and efficiency variances. Compute the direct labor rate and
efficiency variances.  Indicate whether each variance is favorable or unfavorable

5. The standard materials cost to produce one unit of Product K is 7 pounds of material at a standard price
of $32 per pound.
In manufacturing 8,000 units, 54,000 pounds of material were used at a cost of $30 per pound.
What is the total direct material cost variance (price and quantity variance)?  Compute the
direct labor rate and efficiency variances.  Indicate whether each variance is favorable or
unfavorable

6.
7. A company produces three different products that all require processing on the same machines. There
are only 27,000 machine hours available in each year. Production information for each product is:

   
Required:
(1) Determine the preferred sales mix if there are no market constraints on any of the products.
(2) Determine the preferred sales mix if the demand is limited to 5,000 units for each product.
(3) Determine the preferred sales mix if the demand is limited to 3,000 units for each product.

8. A company produces three different products that all require processing on the same machines. There
are only 17,000 machine hours available in each year. Production information for each product is:

   
Required:
(1) Determine the preferred sales mix if there are no market constraints on any of the products.
(2) Determine the preferred sales mix if the demand is limited to 7,000 units for each product.
(3) Determine the preferred sales mix if the demand is limited to 8,000 units for each product. 

9. A company produced 7,000 defective portable CD players. The CD players cost $20 each to be manufactured.

A salvage company will purchase the defective units as they are for $15 each.
The production manager reports that the defects can be corrected for $10 per unit, enabling the company to sell
them at the regular price of $40 per unit.
At the same time the repair operations would not allow the company to produce and sell 6,000 units of new CD
players that could be sold at the regular price of $40 per unit (the cost of production would be the same $20)

Make calculations and prepare an analysis that shows which action should be taken. 

10. A company produced 6,000 defective portable CD players. The CD players cost $20 each to be manufactured.

A salvage company will purchase the defective units as they are for $15 each.
The production manager reports that the defects can be corrected for $9 per unit, enabling the company to
sell them at the regular price of $25 per unit.
At the same time the repair operations would not allow the company to produce and sell 1,500 units of new
CD players that could be sold at the regular price of $25 per unit (the cost of production would be the same
$20)

Make calculations and prepare an analysis that shows which action should be taken. 

11. A company is considering the purchase of a new piece of equipment for $90,000. Predicted annual cash
inflows from this investment are $36).,000 (year 1), $30,000 (year 2), $18,000 (year 3), $12,000 (year 4) and
$6,000 (year 5
 Calculate a payback period.
12. Co. is analyzing two projects for the future. Assume that only one project can be selected.

   
If the company is using the payback period method and it requires a payback of three years or less, which project
should be selected?

13. A given project requires a $30,000 investment and is expected to generate end-of-period annual cash inflows as
follows:

   
Assuming a discount rate of 10%, what is the net present value of this investment?
   

14. A given project requires a $28,000 investment and is expected to generate end-of-period annual cash inflows as
follows:

   
Assuming a discount rate of 10%, what is the net present value of this investment?

15. Saxon Manufacturing is considering purchasing two machines. Each machine costs $9,000 and will produce cash
flows as follows:

   
Saxon Manufacturing uses the net present value method to make the decision, and it requires a 15% annual return
on its investments. Which machine should Saxon purchase?

16. Holder Manufacturing is considering purchasing two machines. Each machine costs $8,000 and will produce cash
flows as follows:

   
Holder Manufacturing uses the net present value method to make the decision, and it requires a 15% annual
return on its investments. Which machine should Holder purchase? 

17. A company is considering a 5-year project. It plans to invest $80,000 now and it forecasts cash inflows for each
year of $22,857. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine
whether it should accept this project.