1.

Comparative balance sheets for IOL limited for the years ending December 31, 2021 and 2020 are
shown below:
December 31
Assets 2021 2020
Current assets:
Cash $ 15,600 $ 14,200
Accounts receivable 19,800 17,500
Inventory 21,200 24,500
Prepaid expenses 3,100 4,800
Total current assets 59,700 61,000
Property, plant and equipment, net 285,300 266,000
Total assets $345,000 $327,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 14,500 $ 15,900
Other current liabilities 26,500 23,100
Total current liabilities 41,000 39,000
Long-term debt 216,000 204,000
Total liabilities 257,000 243,000
Stockholders’ equity:
Common stock 22,000 19,800
Retained earnings 66,000 64,200
Total stockholders’ equity 88,000 84,000
Total liabilities and stockholders’ equity $345,000 $327,000
Selected additional amounts for IOL limited follow for the years ending December 31, 2021 and
2020:
Year Ended December 31
2021 2020
Net sales $432,000 $398,000
Interest expense 12,900 12,000
Income tax expense 15,900 15,600
Net earnings 37,100 36,400

Calculate current, acid test, debt equity and times interest ratios for IOL limited for 2021 and 2020.
Evaluate the risk considerations related to borrowings and any changes between the two years
as it relates to Save-A-Penny’s ability to satisfy its obligations.

Answer
Current ratio: 2021: $59,700 ÷ $41,000 = 1.46
2020: $61,000 ÷ $39,000 = 1.56
Acid-test ratio: 2021: ($15,600 + $19,800) ÷ $41,000 = 0.86
2020: ($14,200 + $17,500) ÷ $39,000 = 0.81

Debt-to-equity ratio: 2021: $257,000 ÷ $88,000 = 2.92

2020: $243,000 ÷ $84,000 = 2.89

Times interest earned: 2021: ($12,900 + $15,900 + $37,100) ÷ $12,900 = 5.11

2020: ($12,000 + $15,600 + $36,400) ÷ $12,000 = 5.33

 2. Laurus limited produces flash drives. The selling price is $8 per drive. The variable cost of
production is $2.40 per unit and the fixed cost per month is $3,600.
a. Calculate the contribution margin associated with each flash drive.
b. In August, the company sold 200 more flash drives than planned. What is the expected
effect on profit of selling the additional drives?
c. Calculate the contribution margin ratio associated with one flash drive.
d. In October, the company had sales that were $2,400 higher than planned. What is the
expected effect on profit related to the additional sales?

Answer
a. $8.00 – $2.40 = $5.60
b. Profits will increase by $1,120 ($5.60 × 200)
c. [$8.00 – $2.40] ÷ $8.00 = 70.00%

d. Profits will increase by $1,680 (70.00% × $2,400)

3. Data concerning Sun Corporation's single product appear below:

Per Unit Percent of Sales

Selling price $170 100%
Variable expenses 51 30%
Contribution margin $119 70%

Fixed expenses are $753,000 per month. The company is currently selling 8,000 units per month.

Required:
The marketing manager would like to introduce sales commissions as an incentive for the sales
staff. The marketing manager has proposed a commission of $11 per unit. In exchange, the sales
staff would accept an overall decrease in their salaries of $73,000 per month. The marketing
manager predicts that introducing this sales incentive would increase monthly sales by 300 units.
What should be the overall effect on the company's monthly net operating income of this change?
Show your work!

New contribution margin ($119 per unit – $11

$108
per unit)
New unit monthly sales (8,000 units + 300
8,300
units)
New total contribution margin:
8,300 units × $108 per unit $896,400
Present total contribution margin:
8,000 units × $119 per unit 952,000
Change in total contribution margin (55,600)
Plus savings in salespersons’ salaries 73,000
Change in net operating income $17,400

4. The constraint at Fulena Inc. is an expensive milling machine. The three products listed below use this
constrained resource.

WP PG LC
Selling price per unit.......................... $72.96 $175.45 $60.70
Variable cost per unit........................ $56.40 $142.39 $47.20
Time on the constraint (minutes)....... 1.20 2.90 1.00

Required:
a. Rank the products in order of their current profitability from the most profitable to the least profitable. In
other words, rank the products in the order in which they should be emphasized. Show your work!
b. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable
product. Up to how much should the company be willing to pay to acquire more of the constrained
resource?
Answer:
a. WP PG LC
Selling price per unit................................................................ $72.96 $175.45 $60.70
Variable cost per unit.............................................................. 56.40 142.39 47.20
Contribution margin per unit.................................................... $16.56 $33.06 $13.50
Time on the constraint (minutes)............................................. 1.20 2.90 1.00
 Contribution margin per unit of the constrained resource........ $13.80 $11.40 $13.50
Ranking................................................................................... 1 3 2
Resulting ranking of products: WP, LC, PG

b. The company should be willing to pay up to $11.40 per minute to obtain more of the constrained
resource since this is the value to the company of using this constrained resource to make more of
product PG. By assumption, enough of the other two products will already have been produced to fully
satisfy demand.

5. Parliman Corporation is preparing its cash budget for August. The budgeted beginning cash balance is
$12,000. Budgeted cash receipts total $159,000 and budgeted cash disbursements total $162,000. The
desired ending cash balance is $20,000. The company can borrow up to $160,000 at any time from a
local bank, with interest not due until the following month.

Required:
Prepare the company's cash budget for August in good form.

Answer:
Beginning cash balance............................................................. $12,000
Add cash receipts....................................................................... 159,000
Total cash available.................................................................... 171,000
Less cash disbursements........................................................... 162,000
Excess (deficiency) of cash available over disbursements......... 9,000
Borrowings................................................................................. 11,000
Ending cash balance.................................................................. $20,000
6. John Hall is considering opening a hobby and craft store. He would invest $50,000 to purchase
equipment and furnishings and another $100,000 for inventories and other working capital needs.
Rent on the building used by the business will be $25,000 per year. In addition to building rent,
other annual cash outflows for operating costs will amount to $44,000. John estimates that the
annual cash inflow from the business will amount to $100,000. John plans to operate the business
for only six years. He estimates that the equipment and furnishings could be sold at that time for
about 10% of its original cost. Mark's discount rate is 16%. All cash flows, except for the initial
investment, would occur at the ends of the years.
Required:
Compute the net present value of this investment.

Annual cash inflows $100,000

Annual cash outflows:
Building rent $25,000
Other annual cash outflows 44,000 69,000
Annual net cash inflow $31,000

Year
Now 1-6 6
Initial investment ($50,000)
Working capital ($100,000) $100,000
Annual net cash flow $31,000
Salvage value $5,000
Total cash flows (a) ($150,000) $31,000 $105 ,000
Discount factor
1.000 3.685 0.410
(16%) (b)
Present value of cash
($150,000) $114,235 $43,050
flows (a) × (b)
Net present value $7,285