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    Special Order, Production, Variances, Residual Income, ROI

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    1. Evaluating a special order
    Miyamoto Jewelers is considering a special order for 10 handcrafted gold bracelets to be given as gifts to members of a wedding party. The normal selling price of a gold bracelet is $389.95 and its unit product cost is $264 as shown below.
    Direct Materials ............................................$143.00
    Direct Labor.................................................... 86.00
    Manufacturing Overhead............................. 35.00
    Unit Product Cost..........................................$264.00
    Most of the manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $7 of the overhead is variable with respect to the number of bracelets produced. The customer who is interested in the special bracelet order would like special filigree applied to the bracelets. This filigree would require additional material costing $6 per bracelet and would also require acquisition of a special tool costing $465 that would have no other use once the special order is completed. This order would have no effect on the company's regular sales and the order could be fulfilled using the company's existing capacity without affecting any other order.
    Required:
    What effect would accepting this order have on the company's net operating income if a special price of $349.95 is offered per bracelet for this order? Should the special order be accepted at this price?

    2. Uncertain Future Cash Flows
    Union Bay Plastics is investigating the purchase of automated equipment that would save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $750,000 and is expected to have a 10-year useful lift with no salvage value. The company's required rate of return is 15% on all equipment purchases. This equipment would provide intangible benefits such as greater flexibility and higher-quality output that are difficult to estimate and yet are quite significant.
    Required:
    (Ignore income taxes)
    What dollar value per year would the intangible benefits have to have in order to make the equipment an acceptable investment?

    3. Production Budget
    Chrystal Telecom has budgeted the sales of its innovative mobile phone over the next four months as follows:
    Sales in Units
    July.................................................................................30,000
    August............................................................................45,000
    September....................................................................60,000
    October.........................................................................50,000
    The company is now in the process of preparing a production budget for the third quarter. Past experience has shown that end-of-month finished goods inventories must equal 10% of the next month's sales. The inventory at the end of Jun was 3,000 units.
    Required:
    Prepare a production budget for the third quarter showing the number of units to be produced each month and for the quarter in total.

    4. Manufacturing Overhead Budget
    The direct labor budget of Krispin Corporation for the upcoming fiscal year includes the following budgeted direct labor-hours.
    1st quarter 2nd quarter 3rd quarter 4th quarter
    Budgeted direct labor-hours.......... 5,000 4,800 5,200 5,400
    The company's variable manufacturing overhead rate is $1.75 per direct labor-hour and the company's fixed manufacturing overhead is $35,000 per quarter. The only noncash item included in fixed manufacturing overhead is depreciation, which is $15,000 per quarter.
    Required:
    1. Construct the company's manufacturing overhead budget for the upcoming fiscal year.
    2. Compute the company's manufacturing overhead rate (including both variable and fixed manufacturing overhead) for the upcoming fiscal year. Round off to the nearest whole cent.

    6. Prepare a Report Showing Activity Variances
    Air Meals is a company that prepares in-flight meals for airlines in its kitchen located next to the local airport. The company's planning budget for December appears below:
    Air Meals
    Planning Budget
    For the Month Ended December 31
    Budgeted meals (q) .............................................................. 20,000
    Revenue ($3.80 q) ................................................................ $76,000
    Expenses:
    Raw Materials (2.30q) ........................................................ 46,000
    Wages and Salaries ($6,400 + $0.25q) ............................. 11,400
    Utilities (2,100 + $0.05q) .................................................... 3,100
    Facility Rent ($3,800) .......................................................... 3,800
    Insurance ($2,600) ............................................................... 2,600
    Miscellaneous ($700 + $0.10q) .......................................... 2,700
    Total expenses ......................................................................... 69,600
    Net operating income ............................................................. $ 6,400
    In December, 21,000 meals were actually served. The company's flexible budget for this level of activity follows:
    Air Meals
    Flexible Budget
    For the Month Ended December 31
    Budgeted meals (q) .............................................................. 21,000
    Revenue ($3.80 q) ................................................................ $79,800
    Expenses:
    Raw Materials (2.30q) ........................................................ 48,300
    Wages and Salaries ($6,400 + $0.25q) ............................. 11,650
    Utilities ($2,100 + $0.50q) ................................................. 3,150
    Facility Rent ($3,800) ......................................................... 3,800
    Insurance ($2,600) ............................................................... 2,600
    Miscellaneous ($700 + $0.10q) .......................................... 2,800
    Total expenses ......................................................................... 72,300
    Net operating income ............................................................. $ 7,500
    Required:
    1. Prepare a report showing the company's activity variances for December.
    2. Which of the activity variances should be of concern to management? Explain

    7. Residual Income
    Midlands Design Ltd. Of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £400,000 on sales of £2,000,000. The company's average operating assets for the year were £2,200,000 and its minimum required rate of return was 16%. (The currency in the United Kingdom is the pound, denoted by £)
    Required:
    Compute the company's residual income for the year.

    8. Effects of Changes in Sales, Expenses, and Assets on ROI
    BusServ.com Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below:
    Sales .......................................................... $8,000,000
    Net operating income ............................ $800,000
    Average operating assets ...................... $3,200,000
    Required:
    Consider each question below independently. Carry out all computations to two decimal places.
    1. Compute the company's return on investment (ROI).
    2. The entrepreneur who founded the company is convinced that sales will increase next year by 150% and that net operating income will increase by 400%, with no increase in average operating assets. What would the company's ROI?
    3. The Chief Financial Officer of the company believes a more realistic scenario would be a $2 million increase in sales, requiring an $800,000 increase in average operating assets, with a resulting $250,000 increase in net operating income. What would be the company's ROI in this scenario?

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