CPUCOLLEGE

SCHOOL OF GRADUATE STUDIES

MBA PROGRAM

ACCOUNTING AND FINANCE FOR MANAGERS

GROUP ASSIGNMENT - I

GENERAL DIRECTIONS
 This Assignment Contains 5 [Five]Independent Workout Questions AND One

Ethical Case.

 Read the Instructions for Each Part and Answer the Questions Accordingly.

 The Use of Red Pen and Pencil is Strictly Prohibited.

 Clear and Neat Work Will Have a Positive Impact on Your Assignment Result.

 This Assignment Will Have a Maximum Value of 40 % of the Total Marks.

PROBLEM #1: ABC System [10 marks]

Dololo Company makes a single product - a fire resistant commercial filing cabinet- that it sells to office
furniture distributors here in Addis. The company has a simple ABC system that it uses for internal
decision making. The company has two overhead departments whose costs are listed below:
 

Manufacturing overhead $500,000

Selling and administrative overhead 300,000
Total overhead costs $800,000

The company'sactivity based costingsystem has the following activity cost pools and activity measures:
 

Activity Cost Pool Activity Measures

Assembling units Number of units
Processing orders Number of orders
Supporting customers Number of customers
Other Not applicable

Costs assigned to the "other" activity cost pool have no activity measure; they consist of the costs of
unused capacity and organization-sustaining costs - neither of which is assigned to products, orders or
customers.

Dololo Company distributes the costs of manufacturing overhead and of selling and administrative
overhead to the activity cost pools based on employee interviews, the results of which are reported below:
 

Distribution of Resource Consumption Across Activity Cost Pools

  Assembling Processing Supporting Other Total
Units Orders Customers
Manufacturing overhead 50% 35% 5% 10% 100%
Selling and administrative 10% 45% 25% 20% 100%
overhead
Total activity 1,000 units 250 orders 100 -- --
customers

Required:

1. Performthefirst stage allocationof overhead costs to theactivity cost pools.

2. Compute activity rates for theactivity cost pools

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 3. Deluxe Martis one of the Dololo Company's customers. Last year Deluxe Mart orderedfiling
cabinetsfour different times. Deluxe Mart ordered a total of 80 cabinets during the year. Based on
the above data construct a table showing the overhead costs of these 80 units and four orders.
4. Compute the product and customer margin
5. Discuss the advantages and disadvantages of Activity-Based Costing system
6. Discuss some of the limitations of the traditional costing system.

PROBLEM #2: Financial Statement Analysis [10 marks]

Shown below are selected data from the financial statements of planet Company, a retain lighting store.

From the Balance Sheet:

Cash.................................................................................................... $ 40,000
Accounts receivable........................................................................... 165,000
Inventory............................................................................................ 215,000
Plant assets (net of accumulated depreciation).................................. 600,000
Current liabilities............................................................................... 185,000
Total stockholders’ equity.................................................................. 400,000
Total assets......................................................................................... 1,200,000

From the Income Statement:

Net sales............................................................................................. $2,000,000
Cost of goods sold.............................................................................. 1,600,000
Operating expenses............................................................................ 300,000
Interest expense.................................................................................. 75,000
Income taxes expense........................................................................ 5,000
Net income......................................................................................... 20,000

From the Statement of Cash Flows:

Net cash provided by operating activities
(including interest paid of $68,000)................................................ $ 42,000
Net cash used in investing activities.................................................. (49,000)
Financing activities:
Amounts borrowed.................................................. $ 60,000
Repayment of amounts borrowed........................... (20,000)
Dividends paid........................................................ (25,000)
Net cash provided by financing activities.................................... 15,000
Net increase in cash during the year.................................................. $ 8,000

Required:
a. Explain how the interest expense shown in the income statement could be $75,000, when the
interest payment appearing in the statement of cash flows is only $68,000.
b. Work out the following (round to one decimal place):
i) Current ratio
ii) Quick ratio
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 iii) Working capital
iv) Debt ratio
c. Comment on these measurements and evaluate Planet’s short-term debit-paying ability.
d. Compute the following ratios (assume that the year-end amounts of total assets and total stockholders’
equity also represent the average amounts throughout the year):
i) Return on assets
ii) Return on equity
e. Comment on the company’s performance under these measurements. Sufficiently explain why
the return on assets and return on equity are so different.
f. Discuss (i) the apparent safety of long-term creditors’ claims and (ii) the prospects for Planet Co.
continuing its dividend payments at the present level.

PROBLEM #3:Break-even Analysis [10 marks]

Azorean Hospital operates a general hospital but rents space to separately owned entities rendering
specialized services such as pediatrics and psychiatry. Azorean charges each separate entity for patients’
services (meals and laundry) and for administrative services (billings and collections). Space and bed
rentals are fixed charges for the year, based on bed capacity rented to each entity. Azorean charged the
following costs to Pediatrics for the year ended June 30, 2019:

Patient Services Bed Capacity

Variable Fixed
Dietary $ 600,000
Janitorial $70,000
Laundry 300,000
Laboratory 450,000
Pharmacy 350,000
Repairs and Maintenance 30,000
General and Administrative 1,300,000
Rent 1,500,000
Billings and Collections 300,000
Total $2,000,000 $2,900,000

In addition to these charges from Azorean Hospital, Pediatrics incurred the following personnel costs:

________________________________________________

AnnualSalaries*____
Supervising nurses …………………………….. $100,000
Nurses …………………………………………………. 200,000
Assistants…………………………………………….. 180,000
Total ……………………………………………………. $480,000

*These salaries are fixed within the ranges of annual patient-days considered in this problem.

During the year ended June 30, 2019, Pediatrics charged each patient $300 per day, had a capacity of 60
beds, and had revenues of $6,000,000 for 365 days. Pediatrics operated at 100 percent capacity on 90
days during this period. It is estimated that during these
4 90 days, the demand exceeded 80 beds. Azorean
has 20 additional beds available for rent for the year ending June 30, 2020. This additional rental would
proportionately increase Pediatrics' annual fixed charges based on bed capacity.

Required:

a) Calculate the minimum number of patient-days required for Pediatrics to break even for the year
ending June 30, 2020, if the additional beds are not rented. Patient demand is unknown, but
assumes that revenue per patient-day, cost per patient-day, cost per bed, and salary rates for the
year ending June 30, 2020, remain the same as for the year ended June 30, 2019.

b) Assume Pediatrics rents the extra 20-bed capacity from Azorean. Determine the net increase or
decrease in earnings by preparing a schedule of increases in revenues and costs for the year
ending June 30, 2020. Assume that patient demand, revenue per patient-day, cost per patient-day,
cost per bed, and salary rates remain the same as for the year ended June 30, 2019.

QUESTION #4: Ethical Case[20 marks]

Helen Bedru is the assistant controller of Cotton Cravat Co., a subsidiary of HG automotive, which
manufactures tailpipes, mufflers, and catalytic converters at several plants throughout Ethiopia. Because
of pressure for lower selling prices, Cotton Cravat Co. has had disappointing financial performance in
recent years. Indeed, Helen is aware of rumblings from corporate headquarters threatening to close the
plant.

One of Helen's responsibilities is to present the plant's financial plans for the coming year to the corporate
officers and board of directors. In preparing for the presentation, Helen was intrigued to note that the
focal point of the budget presentation was a profit-volume graph projecting an increase in profits and a
reduction in the break-even point.

Curious as to how the improvement would be accomplished, Helen ultimately spoke with KiruvelMesfin,
the plant manager. Kiruvel indicated that a planned increase in productivity would reduce variable costs
and increase the contribution margin ratio.
When asked how the productivity increase would be accomplished, Kiruvel made a vague reference to
increasing the speed of the assembly line. Helen commented that speeding up the assembly line could
lead to labor problems because the speed of the line was set by union contract. Kiruvel responded that he
was afraid that if the speedup were opened to negotiation, the union would make a big "stink" that could
result in the plant being closed. He indicated that the speedup was the "only way to save the plant, our
jobs, and the jobs of all plant employees." Besides, he did not believe employees would notice a 2 or 3
percent increase in speed. Kiruvel concluded the meeting observing, "You need to emphasize the results
we will accomplish next year, not the details of how we will accomplish those results. Top management
does not want to be bored with details. If we accomplish what we propose in the budget, we will be in for
a big bonus."

Required:
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What advice do you have for Helen Bedru?Support your response with sufficient and sound reasoning.
.
QUESTION #5: CVP Analysis and Decision Making[10 marks]

Addis Press Ltd is considering launching a new monthly magazine at a selling price of Br. 15 per copy.
Sales of the magazine are expected to be 500,000 copies per month, but it is possible that the actual sales
could differ quite significantly from this estimate.

Two different methods of producing the magazine are being considered and neither would involve any
additional capital expenditure. The estimated production costs for each of the two methods of
manufacture, together with the additional marketing and distribution costs of selling the new magazine,
are summarized below:

______________________________________________________________

__________Method A Method B_______

Variable cost per unit Br. 0.55per copy Br. 0.50per copy

Specific fixed costs 80,000 per month 120,000 per month

Semi-variable costs:

The following estimates have been obtained:

350,000 copies; Br. 55,000 per month Br. 47,500permonth

450,000 copies: Br. 65,000 per month Br.52,500per month

650,000 copies: Br. 85,000 per month Br. 62,500per month

______________________________________________________________

It may be assumed that the fixed cost content of the semi-variable costs will remain constant throughout
the range of activity shown.

The Co. currently sells a magazine covering related topics to those that will be included in the new
publication and consequently it is anticipated that sales of this existing magazine will be adversely
affected. It is estimated that for every ten copies sold for the new publication, sales of the existing
magazine will be dropped by one copy.

Sales and cost data of the existing magazine are shown below:

______________________________________________________
Sales 220,000 copies per month
Selling price Br. 0.85 per copy
Variable cost Br. 0.35 per copy
Specific fixed cost Br. 80,000
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 ______________________________________________________

Required:

a) Compute, for each production method, the net increase in company profits which will result from
the introduction of the new magazine, at each of the following levels of activity:
500,000 copies per month
400,000 copies per month
600,000 copies per month
b) Compute, for each production method, the amount by which sales volume of the new magazine
could decline from the anticipated 500,000 copies per month, before the company makes no
additional profit from the introduction of the new publication.
c) What inferences or conclusions (if any) can be drawn from your calculations above?

QUESTION #6: CVP analysis, and Break-Even Computation [10 marks]

KontaCo makes and sells a single product. The current selling price is Br.16.25 per unit. Variable
expenses are Br.9.55 per unit, and fixed expenses total Br.26,750 per month.

Required:
(Unless otherwise stated, consider each requirement separately.)
a) Calculate the break-even point, expressed in terms of total sales dollars and sales volume.
b) Calculate the monthly operating income (or loss) at a sales volume of 5,550 units per month.
c) Calculate monthly operating income (or loss) if a Br.2.50 per unit reduction in selling price
results in a volume increase to 8,700 units per month.
d) What questions would have to be answered about the cost–volume–profit analysis simplifying
assumptions before adopting the price-cut strategy of Part (c)?
e) Calculate monthly operating income (or loss) that would result from a Br.1.60 per unit price
increase and a Br.6450 per month increase in advertising expenses, both relative to the original
data. Assume a sales volume of 5,750 units per month.
f) Management is considering a change in the sales force compensation plan. Currently, each of the
firm’s two salespersons is paid a salary of Br.2,670 per month. Calculate the monthly operating
income (or loss) that would result from changing the compensation plan to a salary of Br.450 per
month, plus a commission of $0.85 per unit, assuming a sales volume of:
(i) 5,950 units per month.
(ii) 7,100 units per month.
g) Assuming that the sales volume of 6 000 units per month achieved in Part (f) could also be
achieved by increasing advertising by Br.1,250 per month instead of changing the sales force
compensation plan, which strategy would you recommend? Sufficiently explain your response.

♣END OF PAPER! ♣