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Special Order, Production, Variances, Residual Income, ROI

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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