Exam 3 MBA 631 Spring 22

MBA 631
Spring 2022
Take Home Mid-Term 3
Part 1
Part 1 of the mid-term will be available on Canvas at 6:00pm on Monday. The online test is
worth 60 points and should consist of 30 questions. The questions will be a mix of concept
question and computational questions. You will need a calculator for the exam. Once you have
completed a question, you may not go back to that question. You will have 90 minutes to
complete the exam. A timer may not be displayed so you will have to keep track of the time
yourself. Therefore, use your time wisely.
Part 2
A. Take home exam. It is worth 28 points. This part is due Monday by 6:00pm.
Your answers to the essay questions should be concise. For the problems you must show your
work. You may submit your answers using either Word or Excel. Make sure your label your
answers.
B. Case Study (12 points) The case study should be submitted separately through the link
provided on Canvas. It is also due Monday by 6:00pm.
This study source was downloaded by 100000872168717 from CourseHero.com on 09-19-2023 22:38:40 GMT -05:00
https://www.coursehero.com/file/167081719/Exam-3-MBA-631-Spring-22docx/
1. (8 points) Pretty Lady is an upscale boutique that operates various stores throughout
Florida. The company, which has three divisions (Miami, Naples, and Tampa), reported
the following information for the year just ended (in thousands):
Pretty Lady also reported $600 of common fixed expenses that top management wants to
allocate to the divisions on the basis of sales revenue. As the company's chief executive
officer notes, "Each division helped to incur a portion of these costs and, as a result, each
should absorb its fair share." The firm has adopted various responsibility accounting
procedures to evaluate division personnel.
Required:
A. Compute the company's total sales revenue.
Company total sales revenue =
$9,000 + $6,000 + $5,000 = $20,000

B. Calculate the amount of variable operating expense incurred by the Naples
Division.
Amount of variable operating expense incurred by the Naples Division =
$6,000 - $4,400 = $1,600

C. Calculate the fixed costs controllable by Miami's management.
Fixed costs controllable by Miami’s management =
$6,400 - $1,500 = $4,900

D. Calculate the fixed costs traceable to the Tampa Division but controllable by
others.
Fixed costs traceable to the Tampa Division but controllable by others =
$1,000 - $200 = $800

E. Pretty Lady desires to promote a division manager to the corporate office to
oversee selected operations. In determining which individual to promote, should
Pretty Lady's top management focus on the profit margin controllable by the
division manager or the overall divisional profit margin? Briefly explain.
Pretty Lady desires to promote a division manager to the corporate office to

oversee select operations. In determining which individual to promote, Pretty Lady’s top
management should focus on the profit margin controllable by the division manager. The
company has adopted various responsibility accounting procedures, which are based on
the idea of holding personnel accounting items under their control.
F. If the company follows the desires of top management, how much of the common
fixed expenses would be allocated to the Tampa Division?
Fixed cost allocated Tampa =
$600 / $20,000 * $5,000 = $150

G. Do cost allocations such as those in part "F" typically appear on a segmented
income statement?
No, segmented income statement does not show the common cost allocation, a
segmented income statement shows direct fixed cost of segment only. The common cost
are deducted from the total segment margin to arrive at net income.
2. (6 points) Lee-Vie Company has met all production requirements for the current month
and has an opportunity to manufacture additional units with its excess capacity. Unit
selling prices and unit costs for three product lines follow.
Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead
is applied on the basis of machine hours. There is sufficient demand for the additional
manufacture of all products.
Required:
A. If Lee-Vie has excess machine capacity and can add more labor as needed (i.e.,
neither machine capacity nor labor is a constraint), which product is the most
attractive to produce?
Plain Regular Super

Selling price $40 $55 $65
Direct material $12 $16 $22
Direct labor $10 $15 $20
Variable overhead $8 $12 $16
Total variable cost $30 $43 $58
Unit contribution margin $10 $12 $7
Contribution margin ratio 25% 22% 11%
(contribution / sales)
It is better to produce Plain as contribution margin ratio because it is the highest.
B. If Lee-Vie has excess machine capacity but a limited amount of labor time
available, which product or products should be manufactured in the excess
capacity?
Plain Regular Super

Selling price $40 $55 $65
Direct material $12 $16 $22
Direct labor $10 $15 $20
Variable overhead $8 $12 $16
Total variable cost $30 $43 $58
Unit contribution margin $10 $12 $7
Direct labor hours /0.50 /0.75 /1.00
required (DL$ / $20)
Contribution margin per $20 $16 $7
direct labor hour
When labor is in short supply, plain should be manufactured because it has the
highest contribution margin per direct labor hour.
3. (8 points) Eagle Airways Company is planning a project that is expected to last for six years
and generate annual net cash inflows of $75,000. The project will require the purchase of a
$280,000 machine, which is expected to have a salvage value of $10,000 at the end of the six-
year period. The machine will require a $50,000 overhaul at the end of the fourth year. The
company presently has a 12% minimum desired rate of return.
Based on this information, an accountant prepared the following analysis:
The accountant recommends that the project be rejected because it does not meet the company's
minimum desired rate of return. Ignore income taxes.
Required:
A. What criticism(s) would you make of the accountant's evaluation?
The accountant is focusing on income rather than cash flows. The cash flows should be
discounted to reflect the time value of money, and depreciation should be omitted because of the
absence of taxes.
B. Use the net-present-value method and determine whether the project should be
accepted.
Purchase Price ($280,000) * 1.0 ($280,000)
Annual net cash inflows $75,000 * 4.111 308,325
Overhaul ($50,000) * 0.636 (31,800)
Salvage value $10,000 * 0.507 5,070
= $1,595
The project should be accepted because the net present value is positive
C. Based on your answer in requirement "B," is the internal rate of return greater or less
than 12%? Explain.
The net present value is positive using a discount rate of 12%. Thus, the internal rate of
return is greater than 12%.
4. (6 points) Gamma Division of Vaughn Corporation produces electric motors, 20% of which
are sold to Vaughan's Omega Division and 80% to outside customers. Vaughn treats its divisions
as profit centers and allows division managers to choose whether to sell to or buy from internal
divisions. Corporate policy requires that all interdivisional sales and purchases be transferred at
variable cost. Gamma Division's estimated sales and standard cost data for the year ended
December 31, based on a capacity of 60,000 units, are as follows:
Gamma has an opportunity to sell the 12,000 units shown above to an outside customer at $80
per unit. Omega can purchase the units it needs from an outside supplier for $92 each.
Required:
A. Assuming that Gamma desires to maximize operating income, should it take on the new
customer and discontinue sales to Omega? Why? (Note: Answer this question from
Gamma's perspective.)
Profit from Sale to Outside Customer:
Omega Outside Customer Calculation
Sales $660,000 $960,000 $300,000
Less: Variable Costs $660,000 660,000 -
Contribution margin $0 300,000 300,000
Less: Fixed Costs 175,000 175,000 -
Operating Income (loss) ($175,000) 125,000 300,000
Unit Sales 12,000 12,000 -
Yes, gamma should discontinue sale to Omega and should sell to outside customer. It will
increase its operating income by $300,000
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MBA 631

Company total sales revenue =

$9,000 + $6,000 + $5,000 = $20,000

Amount of variable operating expense incurred by the Naples Division =

$6,000 - $4,400 = $1,600

Fixed costs controllable by Miami’s management =

$6,400 - $1,500 = $4,900

Fixed costs traceable to the Tampa Division but controllable by others =

$1,000 - $200 = $800

Pretty Lady desires to promote a division manager to the corporate office to

Fixed cost allocated Tampa =

$600 / $20,000 * $5,000 = $150

Plain Regular Super

It is better to produce Plain as contribution margin ratio because it is the highest.

Plain Regular Super

Purchase Price ($280,000) * 1.0 ($280,000)

Annual net cash inflows $75,000 * 4.111 308,325

Overhaul ($50,000) * 0.636 (31,800)

Salvage value $10,000 * 0.507 5,070

Profit from Sale to Outside Customer:

Omega Outside Customer Calculation

Sales $660,000 $960,000 $300,000

Less: Variable Costs $660,000 660,000 -

Contribution margin $0 300,000 300,000

Less: Fixed Costs 175,000 175,000 -

Operating Income (loss) ($175,000) 125,000 300,000

Unit Sales 12,000 12,000 -

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