Question 1 - Curtis Salter, the president of Kasimer Computer Services, needs your help. He wonders about the potential effects on the firm's net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal year 2015.
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Standard rate and variable costs
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Service rate per hour
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$75.00
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Labor cost
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40.00
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Overhead cost
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7.20
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Selling, general, and administrative cost
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4.30
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Expected fixed costs
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Facility maintenance
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$400,000
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Selling, general, and administrative
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150,000
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a. Prepare the pro forma income statement that would appear in the master budget if the firm expects to provide 30,000 hours of services in 2015.
b. A marketing consultant suggests to Mr. Salter that the service rate may affect the number of service hours that the firm can achieve. According to the consultant's analysis, if Kasimer charges customers $70 per hour, the firm can achieve 38,000 hours of services. Prepare a flexible budget using the consultant's assumption.
c. The same consultant also suggests that if the firm raises its rate to $80 per hour, the number of service hours will decline to 25,000. Prepare a flexible budget using the new assumption.
Question 2 - Lloyd Publications established the following standard price and costs for a hardcover picture book that the company produces.
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Standard price and variable cost
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Sales price
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$45.00
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Materials cost
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9.00
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Labor cost
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4.50
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Overhead cost
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6.30
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Selling, general, and administrative costs
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7.20
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Planned fixed costs
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Manufacturing overhead
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$135,000
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Selling, general, and administrative
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54,000
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Lloyd planned to make and sell 30,000 copies of the book.
Required -
a. - d. Prepare the pro forma income statement that would appear in the master budget and also flexible budget income statements, assuming production volumes of 29,000 and 31,000 units. Determine the sales and variable cost volume variances, assuming volume is actually 31,000 units. Indicate whether the variances are favorable (F) or unfavorable (U). (Select "None" if there is no effect (i.e., zero variance).)
Question 3 - Lloyd Publications established the following standard price and costs for a hardcover picture book that the company produces.
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Standard price and variable costs
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Sales price
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$36.40
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Materials cost
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8.50
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Labor cost
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3.70
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Overhead cost
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6.10
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Selling, general, and administrative costs
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6.30
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Planned fixed costs
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Manufacturing overhead
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$127,000
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Selling, general, and administrative
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45,000
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Assume that Lloyd actually produced and sold 27,000 books. The actual sales price and costs incurred follow.
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Actual price and variable costs
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Sales price
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$35.40
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Materials cost
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8.70
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Labor cost
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3.60
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Overhead cost
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6.15
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Selling, general, and administrative costs
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6.10
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Actual fixed costs
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Manufacturing overhead
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$112,000
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Selling, general, and administrative
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51,000
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Required - a. & b. Determine the flexible budget variances and also indicate the effect of each ariance by selecting favorable (F) or unfavorable (U).
Question 4 - Austen Educational Services had budgeted its training service charge at $78 per hour. The company planned to provide 24,000 hours of training services during 2015. By lowering the service charge to $63 per hour, the company was able to increase the actual number of hours to 25,400.
Required -
a. Determine the sales volume variance and indicate the effect of the variance by selecting favorable (F) or unfavorable (U). (Select "None" if there is no effect (i.e., zero variance).)
b. Determine the flexible budget variance and indicate the effect of the variance by selecting favorable (F) or unfavorable (U). (Select "None" if there is no effect (i.e., zero variance).)
Question 5 - Helton Corporation's balance sheet indicates that the company has $270,000 invested in operating assets. During 2014, Helton earned operating income of $53,000 on $567,000 of sales.
Required -
a. Compute Helton's profit margin for 2014.
b. Compute Helton's turnover for 2014.
c. Compute Helton's return on investment for 2014.
d. Re-compute Helton's ROI under each of the following independent assumptions.
(1) Sales increase from $567,000 to $757,000, thereby resulting in an increase in operating income from $53,000 to $72,000.
(2) Sales remain constant, but Helton reduces expenses, resulting in an increase in operating income from $53,000 to $56,000.
(3) Helton is able to reduce its invested capital from $270,000 to $203,000 without affecting operating income.
Question 6 - Cole Corporation operates three investment centers. The following financial statements apply to the investment center named Morrison Division.
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MORRISON DIVISION Income Statement For the Year Ended December 31, 2014
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Sales revenue
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$135,000
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Cost of goods sold
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78,500
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Gross margin
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56,500
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Operating expenses
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Selling expenses
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(5,000)
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Depreciation expense
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(8,000)
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Operating income
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43,500
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Nonoperating item
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Loss of sale of land
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(15,000)
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Net income
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$28,500
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MORRISON DIVISION Balance Sheet As of December 31, 2014
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Assets
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Cash
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$18,580
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Accounts receivable
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42,266
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Merchandise inventory
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37,578
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Equipment less accum. dep.
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90,258
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Nonoperating assets
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9,000
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Total assets
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$197,682
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Liabilities
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Accounts payable
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$9,637
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Notes payable
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72,000
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Stockholders' equity
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Common stock
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80,000
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Retained earnings
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36,045
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Total liab. and stk. equity
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$197,682
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Required
a. Calculate the ROI for Morrison.
Cole has a desired ROI of 10 percent. Headquarters has $96,000 of funds to assign to its investment centers. The manager of the Morrison Division has an opportunity to invest the funds at an ROI of 12 percent. The other two divisions have investment opportunities that yield only 11 percent.
b. Calculate the new ROI for Morrison division, if the investment opportunity is adopted by Morrison.
c. Based on the original data calculate the residual income.