Provide responses for each question. Show all your work.
1. A Company purchased equipment for $20,000. Management estimates that the equipment will have a useful life of five years and salvage value of $5,000. Calculate a) net book value of the equipment at the end of the third year using the straight-line method of depreciation; and b) depreciation expense for the second year using the double-declining balance method of depreciation.
2. Analyze accounts receivable and the allowance for doubtful accounts for the following company, and draw some inferences:
2012 2011
Sales $6,700 $7,500
Accounts receivable, net 202 320
Allowance for doubtful accounts 3 12
3. Analyze the following common size balance sheet:
2012 2011
Current assets:
Cash 3% 5%
Accounts receivable 20 18
Inventory 35 30
Total current assets 58 53
Property, plant and equipment 30 40
Other assets 12 7
Total assets 100% 100%
Current liabilities:
Accounts payable 25% 20%
Short-term debt 38 33
Total current liabilities 63 53
Long-term debt 22 17
Total liabilities 85 70
Stockholders' equity:
Common stock and paid in capital 14 20
Retained earnings 1 10
15 30
Total liabilities and stockholders' equity 100% 100%
4. Consider the following information:
Net income $200
Purchase of property and plant 90
Depreciation expense 50
Payment of cash dividends 25
Cash dividends received on shares recorded as
equity investments 15
Increase in cash loaned to another company 30
Increase in long-term debt 110
Decrease in inventories 10
Decrease in accounts payable 20
Repurchase of company's shares from a
major stockholder for cash 100
Calculate cash flow from (used by) operating, investing, and financing activities.
5. Consider the following information:
Current assets $150,000
Current liabilities 50,000
Accounts receivable, net 80,000
Inventories 40,000
Accounts payable 25,000
Net sales 425,000
Cost of goods sold 258,000
Calculate the company's cash conversion cycle.
6. Beijing Limited has three divisions: North, Central and South. The following results were for the year ending December 31, 2012:
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North
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Central
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South
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Sales
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$600,000
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$750,000
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$500,000
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Variable manufacturing costs
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240,000
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315,000
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|
150,000
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Variable selling and administrative costs
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132,000
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|
135,000
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130,000
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Contribution margin
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228,000
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300,000
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220,000
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Avoidable fixed costs
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150,000
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180,000
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135,000
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Unavoidable fixed costs
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125,000
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85,000
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40,000
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Operating income (loss)
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($47,000)
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$35,000
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$45,000
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The Vice-President of Operations is concerned about the North Division's performance and considering whether it should be closed. If the North Division is closed, sales in the Central and South Divisions will drop by 10%. By how much will the company's overall operating income change if the North Division is closed?
7. Light Manufacturing produces a single product that sells for $16. Variable (flexible) costs per unit equal $11.20. The company expects the total fixed (capacity-related) costs to be $7,200 for the next month at the projected sales level of 20,000 units. In an attempt to improve performance, management is considering a number of alternatives. Suppose Light management believes that a 10% reduction in the selling price will result in a 30% increase in sales. If this proposed reduction in selling price is implemented, what will be the change in profit?
8. Able Inc. is considering replacing its existing photocopier with a new one. The new system offers considerable operational savings. Information about the existing and new systems is as follows:
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Existing
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New
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Original cost
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$12,000
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$15,000
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Annual operating expenses
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3,500
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2,500
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Accumulated depreciation at present
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7,000
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0
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Current salvage value
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2,000
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15,000
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Remaining life
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5 years
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5 years
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Salvage value in 5 years
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0
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5,000
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Annual depreciation
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2,000
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3,000
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Should Able Inc. replace the existing photocopier with the new system?
9. Smith Manufacturing Ltd. applies manufacturing overhead costs to products at a predetermined rate of $100 per direct labor hour. One customer has requested a bid on a special order of 2,000 units of a product. Estimates for this order are: direct materials $100,000; direct labor of 1,000 labor hours @ $25 per hour. What is the bid price for one unit of this special order, including Smith's standard mark-up of 20%?
10. Ball TV Ltd. currently sells small televisions for $180 per unit. This product has variable costs of $140. Another company is bringing a competing television to market that will sell for $170. Ball management believes it must lower its price to the same amount to compete in the market. Ball's Marketing division believes that the new entrant will also cause Ball's sales in this market segment to decrease by 10%. Ball's sales are currently 100,000 televisions per year. What is the target cost per unit if the company wants to maintain its same profit margin in total dollars before the change, and the Marketing division is correct?
11. Do-Right Industries developed the following standard costs for direct materials and direct labor to produce gadgets:
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Standard quantity
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Standard price
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Direct materials
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0.60 kg.
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$25 per kg.
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Direct labor
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0.20 hours
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$18 per hour
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During May, Do-Right produced and sold 8,000 gadgets using 5,000 kg. of direct materials at an average cost per kg. of $22.50, and 1,560 direct labor hours at an average wage of $18.20 per hour. What are the direct material and direct labour price and quantity variances for May and what are possible causes of these?
12. Complete the following flexible budget and suggest one possible explanation for each of the variances.
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Master Budget
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Flexible budget
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Actual Results
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Variance
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Sales volume (in units)
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20,000
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|
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18,500
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Sales Revenue
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$1,050,000
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$972,000
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Variable costs
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500,000
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|
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477,000
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|
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Contribution margin
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550,000
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|
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495,000
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|
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Capacity-related (fixed) costs
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380,000
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|
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385,000
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|
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Operating profit
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$170,000
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$110,000
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