1. Activity-Based Costing of Suppliers
Davis Fabricators buys metal for manufacturing from two suppliers, Alpha Metals and First Parts. If the metal is delivered late, the shipment to the customer is delayed. Delayed shipments lead to contractual penalties that call for Davis to reimburse a portion of the purchase price to the customer.
During the past quarter, the purchasing and delivery data for the two suppliers showed the following:
|
Alpha |
First |
Total |
| Total purchases (tons) |
11,000 |
5,500 |
16,500 |
| Average purchase price |
$10.00 |
$16.00 |
$12.00 |
| Number of deliveries |
80 |
20 |
100 |
| Percentage of late deliveries |
25% |
5% |
21% |
The accounting department recorded $32,670 as the cost of late deliveries to customers.
Required: Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the past. What is the effective price for metal from the two companies when late deliveries are considered?
2. Trading-Off Costs of Quality
Nuke-It-Now manufactures microwave ovens. The following represents the financial information from one of its manufacturing plants for two years.
|
Year 1 |
Year 2 |
| Sales Costs |
$3,490,000 |
$3,890,000 |
| Redesign process |
$31,000 |
$36,500 |
| Discard defective units |
36,100 |
42,900 |
| Training on equipment |
241,000 |
203,000 |
| Warranty claims |
134,000 |
179,000 |
| Contract cancellations |
209,000 |
154,000 |
| Rework |
66,000 |
102,000 |
| Preventive maintenance |
142,000 |
114,000 |
| Product liability claims |
300,000 |
173,000 |
| Final inspection |
194,000 |
201,000 |
Required: Construct a cost of quality report for year 1 and year 2.
3. Estimate Sales Revenues
Starlite Company manufactures office products. Last year, it sold 20,000 electric staplers for $25 per unit. The company estimates that this volume represents a 25 percent share of the current electric stapler market. The market is expected to increase by 10 percent next year. Marketing specialists have determined that as a result of new competition, the company's market share will fall to 20 percent (of this larger market). Due to changes in prices, the new price for the electric staplers will be $26 per unit. This new price is expected to be in line with the competition and have no effect on the volume estimates.
Required: Estimate Starlite's sales revenues from electric staplers for the coming year.
4. Prepare Budgeted Financial Statements
Rhodes, Inc., is a fast-growing start-up firm that manufactures bicycles. The following income statement is available for July:
| Revenues (210 units @ $520 per unit) |
$109,200 |
| Less |
|
| Manufacturing costs |
|
| Variable costs |
15,300 |
| Depreciation (fixed) |
16,200 |
| Marketing and administrative costs |
|
| Fixed costs (cash) |
37,500 |
| Depreciation (fixed) |
13,700 |
| Total costs |
$82,700 |
| Operating profits |
$26,500 |
Sales volume is expected to increase by 20 percent in August, but the sales price is expected to fall 10 percent. Variable manufacturing costs are expected to increase by 3 percent per unit in August. In addition to these cost changes, variable manufacturing costs also will change with sales volume. Marketing and administrative cash costs are expected to increase by 5 percent.
Rhodes operates on a cash basis and maintains no inventories. Depreciation is fixed and should remain unchanged over the next three years.
Required: Prepare a budgeted income statement for August.
5. Sensitivity Analysis
Bay Area Limos operates transportation services to Bay City airport. The price of service is fixed at a flat rate for each trip and most costs of providing the service are fixed for each trip. Betty Smith, the owner, forecasts income by estimating two factors that fluctuate with the economy: the fuel cost associated with the trip and the number of customers who would take trips. Looking at next year, Betty develops the following estimates of contribution margin (price less variable costs, including fuel) for the estimated number of customers. For simplicity, she assumes that the fuel costs (therefore the contribution margin per ride) and the number of customers are independent.
| Contribution Margin |
| Scenario |
Per-Ride(Price-Variable cost |
Number of customer |
| Excellent |
$45 |
4,600 |
| Fair |
35 |
3,000 |
| Poor |
20 |
2,300 |
In addition to the costs of a ride, Betty estimates that other service costs are $54,000 plus $4 for each customer (ride) in excess of 3,000 rides. Annual administrative and marketing costs are estimated to be $23,000 plus 10 percent of the contribution margin.
Required: Compute the total contribution, costs and operating profit for each of the scenario and each group of customer.Exercise
6. Prepare Flexible Budget
Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:
|
Actual (based on actual of 425,000 units) |
Master Budget (based on budgeted 400,000 units |
| Sales revenue |
$2,970,000 |
$3,600,000 |
| Less |
|
|
| Variable costs |
|
|
| Blank flash drives |
900,000 |
880,000 |
| Direct labor |
237,500 |
210,000 |
| Variable overhead |
353,500 |
390,000 |
| Variable marketing and administrative |
307,500 |
300,000 |
| Total variable costs |
$1,798,500 |
$1,780,000 |
| Contribution margin |
$1,171,500 |
$1,820,000 |
| Less |
|
|
| Fixed costs |
|
|
| Manufacturing overhead |
573,000 |
625,000 |
| Marketing |
175,000 |
175,000 |
| Administrative |
99,000 |
112,500 |
| Total fixed costs |
$847,000 |
$912,500 |
| Operating profits |
$324,500 |
$907,500 |
Required: Prepare a flexible budget for Data-2-Go.
7. Sales Activity Variance
Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:
|
Actual (based on actual of 425,000 units) |
Master Budget (based on budgeted 400,000 units |
| Sales revenue |
$2,905,00 |
$3,280,000 |
| Less |
|
|
| Variable costs |
|
|
| Blank flash drives |
900,000 |
880,000 |
| Direct labor |
247,500 |
210,000 |
| Variable overhead |
358,500 |
390,000 |
| Variable marketing and administrative |
305,000 |
300,000 |
| Total variable costs |
$18,111,000 |
$1,780,000 |
| Contribution margin |
$1,094,000 |
$1,500,000 |
| Less |
|
|
| Fixed costs |
|
|
| Manufacturing overhead |
586,000 |
575,000 |
| Marketing |
175,000 |
175,000 |
| Administrative |
98,000 |
110,000 |
| Total fixed costs |
$859,000 |
$860,000 |
| Operating profits |
$235,000 |
$640,000 |
Required: Prepare a sales activity variance analysis for Data-2-Go.
8. Variable Cost Variances
The following data reflect the current month's activity for Sills, Inc.:
| Actual total direct labor |
$158,640 |
| Actual hours worked |
12,000 |
| Standard labor-hours allowed for actual output (flexible budget) |
13,500 |
| Direct labor price variance |
$3,840 U |
| Actual variable overhead |
$38,200 |
| Standard variable overhead rate per standard direct labor-hour |
$3.30 |
Variable overhead is applied based on standard direct labor-hours allowed.
Required: Compute the labor and variable overhead price and efficiency variances.
9. Manufacturing Cycle Time and Efficiency
Lancaster Metals has the following average times (in hours):
|
Transporting product
|
0.25
|
|
Manufacturing product
|
1.00
|
|
Inspecting product
|
0.25
|
|
Storing inventory
|
2.50
|
Required: Calculate the manufacturing cycle efficiency.
10. Present Value Analysis in Nonprofit Organizations
The Johnson Research Organization, a nonprofit organization that does not pay taxes, is considering buying laboratory equipment with an estimated life of 7 years so it will not have to use outsiders' laboratories for certain types of work. The following are all of the cash flows affected by the decision:
|
Investment (outflow at time 0)
|
$6,450,000
|
|
Periodic operating cash flows:
|
|
|
Annual cash savings because outside laboratories
|
|
|
are not used
|
1,430,000
|
|
Additional cash outflow for people and supplies to operate
|
|
|
the equipment
|
230,000
|
|
Salvage value after seven years, which is the estimated
|
|
|
life of this project
|
430,000
|
|
Discount rate
|
8%
|
Required: Calculate the net present value of this decision. Should the organization buy the equipment?