Exercise 1
The Cakebread Candy Company presents the following data for October:
Standards Per Batch Actual total
Material 1 pound at $2.50 per pound 49,000 Pounds
Labor 1.5 hours at $3.00 per Hour 70,000 Hours
Batches Produced 48,000 Batches
During the month, the firm purchased 49,000 pounds of materials for $127,500. Wages earned were $214,000. Compute the labor and materialvariances.
Refer to the information for the Cakebread Candy Company. Based on the information for the company, write a short report explaining the cause of the variances that you computed.
Exercise 2
Frame U, Inc., which produces picture frames, has the following master budget income statement for the month of December:
| Master Budget Based on 16,000 Units |
| Sales Revenue (16,000 at $20) |
$320,000 |
| Less: |
|
| Variable Manufacturing costs |
$176,000 (16,000 budgeted units at $11 per unit) |
| Variable marketing and administrative costs |
$16,000 (16,000 budgeted units at $1 per unit) |
| Contribution margin |
$128,000 |
| Less: |
|
| Fixed manufacturing costs |
$40,000 |
| Fixed marketing and administrative costs |
$70,000 |
| Operating profit |
$18,000 |
The company uses the following estimates to prepare the master budget:
Sales Price...................................................................................... $20 per Unit
Sales and Production Volume....................................................... 16,000 Units
Variable Manufacturing Costs ...................................................... $11 per Unit
Variable Marketing and Administrative Costs................................ $1 per Unit
Fixed Manufacturing Costs .................................................................. $40,000
Fixed Marketing and Administrative Costs........................................... $70,000
Assume that the actual results for December were as follows:
Actual
Sales Price............................................................................................. $22 per Unit
Sales and Production Volume.............................................................. 14,000 Units
Variable Manufacturing Costs .................................................................. $162,000
Variable Marketing and Administrative Costs............................................ $17,000
Fixed Manufacturing Costs ......................................................................... $42,000
Fixed Marketing and Administrative Costs.................................................. $68,000
Compare the master budget, flexible budget, and actual results for the month of July.
Exercise 3
Saints, Inc., has the following data available for two of its divisions for last year:
|
Rugby |
Cricket |
| Sales |
$230,000 |
$530,000 |
| Contribution margin |
90,000 |
220,000 |
| Operating income |
60,000 |
90,000 |
| Average operating assets |
180,000 |
380,000 |
| Average current liabilities |
20,000 |
20,000 |
| Weighted average cost of capital |
10% |
10% |
The tax rate for Saints, Inc., is 30 percent.
a. Compute the following for each division:
(1) Sales margin
(2) ROI
(3) EVA
b. Briefly discuss which division appears most successful and why.
c. Assume a prospective project for Division A has operating income of $10,000, average operating assets of $60,000, average current liabilities of $4,000, and has a positive net present value. Assume the manager of Division A is evaluated based on ROI for merit pay and promotion. Would that manager want to go ahead with this prospective project?
Would your answer change if the manager were evaluated based on EVA? If so, how and why would your answerchange?