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    Management Accounting for Continental Industries

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    I am having problems with the following 5 accounting problems. Can you help me? I have attached my information to assist you. Thank you in advance for your assistance!

    Answer the five questions. Question #5, can be submitted in an in an Excel file. All other responses should be contained in a single Word file. Maximum length of the Word document is 4 pages for two questions and 6 pages for three questions.

    1. Continental Industries is a diversified manufacturing company with a decentralized management structure. Each major division is treated as a profit center. One of the divisions is Westco, a chemical plant that produces a single product, P7. In recent years, the entire annual output of 400,000 tons of P7 has been sold to another division, Acme Chemical, which uses it as an ingredient in a variety of products. The transfer price is currently $2,100/ton. Variable cost to produce P7 is $600/ton. Westco's fixed costs are $540 million per year, resulting in a total cost of $1,950/ton. Of the fixed cost, 30% is depreciation on plant and equipment, and 25% is allocated corporate-level costs. Acme has found an outside supplier for P7 at a price of $1,550/ton. The president of Westco refuses to meet this price, as it is below cost. The president of Acme says she will purchase externally if Westco refuses to meet the market price. As CEO of Continental, discuss the factors that should be considered in resolving this dispute.

    2. XYZ Corporation operates a Marketing Research department. This department compiles information from published sources, and from its own consumer studies, to assist marketing personnel in forecasting product demand and making pricing and promotion decisions. A large marketing research firm has bid $260,000 per year for a three-year contract to perform the same services. For the most recent year, XYZ's controller determined the cost of operating the Marketing Research department to be $338,000:
    Salary and fringes:
    Senior researcher $71,000
    Staff researcher 50,000
    Clerical staff 72,000
    VP Marketing(1) 56,000
    Occupancy(2) 25,000
    Subscriptions and travel (3) 64,000
    (1) Represents 20% of cost of the VP, who is estimated to spend 20% of his time
    on marketing research issues
    (2) Occupancy costs are $25/sq ft: depreciation, $11; utilities, $10; maintenance, $4.
    Utilities are 70% variable; maintenance is an allocation of fixed costs. There are no plans for alternate use of the space.
    (3) Subscriptions and travel costs would be borne by outside research firm.
    a. Determine the cost differential to XYZ of outsourcing versus retaining this function.
    b. Discuss the factors that XYZ management should consider in making this decision.

    3. Allen and McConnell, Inc. (A & M) manufactures a variety of consumer products which they sell to retailers around the country. One of their products, Pogo, normally wholesales for $180/unit. Pogo is manufactured in a separate facility that currently operates at 7,000 units/mo below capacity. Pogo costs $136/unit to manufacture: $36 of direct materials, $25 of direct labor, and $75 of overhead (applied at 300% of direct labor). The overhead pool is 80% fixed and 20% variable. A new customer, Enormous Mart, has approached A & M about purchasing a large quantity of Pogo: 8,000 units/mo for each of the next six months. Enormous Mart has offered to pay $110/unit. Because of a small design modification, A & M will incur $50,000 in one-time set up costs, which will result in a reduction of $4/unit in raw materials costs. Because the order is negotiated through headquarters, the normal 10% sales commission will not be paid.
    a. Is the order profitable for A & M? Show your calculations.
    b. What other factors should A & M consider in deciding whether to accept the order?

    4. Acme Company manufactures a variety of industrial products which are sold throughout the country. Fred Riley has been manager the Eastern Branch of Acme Company for the past three years. Starting in year 2, he was able to qualify for a $50,000 annual bonus for meeting a target growth rate of 10% of gross sales. Income statements for Eastern for the three year period are given below. Amounts are in the $ thousands.

    Year 1 Year 2 Year 3
    Gross sales 20,300 22,400 24,800
    Returns and allowances 150 320 480
    Net sales 20,150 22,080 24,320
    COGS 13,100 15,020 17,170
    Gross margin 7,050 7,060 7,150

    Operating expense:
    Manager salary/bonus 100 150 150
    Other branch overhead 840 870 910
    Selling expense 840 1,020 1,190
    Advertising 530 750 910
    General and admin 4,060 4,480 4,960
    Total 6370 7270 8120

    Branch Income 680 -210 -970

    All advertising is local to the branch, and is controlled by the manager. Selling expense is all such expenses other than advertising, such as sales staff compensation and travel. General and administrative expense represents corporate overhead which is allocated at the rate of 20% of gross sales.
    1) Comment on the effectiveness of the bonus plan used by Acme.
    2) Because Eastern Branch is showing increasing losses, a senior vice president has suggested that the branch be closed. Comment.

    5. Question #5 is in an Excel file.

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    Solution Summary

    Files contains step by step solution and explanations of 5 Management Accounting problems.