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# Fundamental Managerial Accounting Concepts

Textbook Fundamental Managerial Accounting Concepts 3rd Edition

1. Mindy Norton Company reported the following information for 2004:

Sales
\$500,000

Average Operating Assets
\$300,000

Desired ROI
10%

Net Income
\$ 45,000

Based on this information, calculate the company's residual income for 2004

2. LeBron Company is considering two new machines that should produce considerable cost savings in its assembly operations. The cost of each machine is \$15,000 and neither is expected to have a salvage value at the end of a 4-year useful life. LeBron's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life. The annual after-tax cash savings for each machine are provided in the following table:
Annual After-tax Cash Savings
Year Machine A Machine B
1 \$5,000 \$8,000
2 5,000 6,000
3 5,000 4,000
4 5,000 2,000
Total \$20,000 \$20,000

a. Compute the payback period for each machine using the incremental approach.
b. Compute the unadjusted rate of return based on average investment for each machine. The machines will be depreciated on a straight-line basis.
c. Compute the net present value for each machine.
d. Which machine would you recommend? Explain your reasoning.
e. Compute the internal rate of return for Machine A.

3. Describe the decision rules management should use for accepting and rejecting capital projects (including mutually exclusive projects) under each of the following capital budgeting models: net present value model, internal rate of return model, payback period, and the unadjusted rate of return model. Your answer for this question should be between 200-300 words.

4. Three competing manufacturing companies provided the following estimated costs and operating data for 2003:
Austin Company Baldwin Company Crenshaw Company

Direct material \$400,000 \$400,000 \$400,000
Direct labor \$800,000 \$800,000 \$800,000

Direct labor hours 200,000 200,000 200,000

The three companies use different allocation bases for allocating overhead costs to work in process:

Company Allocation Base
Austin Direct Labor Hours
Baldwin Direct Material Costs
Crenshaw Direct Labor Costs

All three companies use a cost plus pricing approach and set their prices at 25% above cost.

a. Compute the predetermined overhead rate that would be used by each company to allocate overhead costs to work in process.
b. Suppose all three companies bid on a job that is expected to consist of the following:

Direct material \$30,000
Direct labor \$50,000
Direct labor hours 12,000

How much would each company bid on the job?
c. What lesson should be learned from this exercise?

5. The Kwiatkowski Company estimates that its production workers will produce 100,000 units during the upcoming period and that overhead costs will amount to \$500,000.

a. Calculate the predetermined overhead rate based on expected production.

b. Assume that actual output totaled only 90,000 units. How much overhead cost was allocated to work in process?

c. Also assume the actual overhead cost incurred was \$540,000. By how much was overhead over-applied or under-applied during the period? (Be sure to indicate whether over-or-under-applied.)

6. Describe the differences between the liquidity ratios, solvency ratios and profitability ratios. Identify examples of each type of ratio as well. Your answer for this question should be between 200-300 words.

7. The income statement and supplemental information for Xtra Company are provided below:

Xtra Company
Income Statement
Year ended, December 31, 2003

Revenues:
Sales \$171,750
Interest Revenue 6,000 \$177,750
Expenses:
Cost of goods sold \$18,900
Depreciation 21,750
Salaries 4,860
Interest expense 1,500
Income tax expense 6,750 \$ 62,010
Net Income \$115,740

Supplemental information:

a. acquired equipment of \$87,000 by paying cash of \$75,750 and issuing a note payable for the difference
b. Beginning cash balance \$15,020, Increase in cash \$86,490
c. Collections from customers were \$5,250 more than sales
d. Interest revenue, interest expense, and income tax expense equal their cash amounts
e. Issued stock for cash , \$22, 500
f. Payment of dividends \$8,250
g. Payment of long-term note payable \$11,250
h. Payments to employees were 750 more than salary expense
i. Payments to suppliers were \$6,750 less than the sum of cost of goods sold plus advertising expense
j. Sold land for \$10,500

Prepare the company's statement of cash flows. Use the direct method of reporting cash flow from operating activities.