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# Finance & Managerial Accounting

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1. We have three possible projects and we can invest in only one project. Suppose our weighted cost of capital is 7% and each project requires an investment of \$10,000. Using payback, NPV and IRR decide which project we should select and explain why.

Project Year 1 Year 2 Year 3 Year 4
A \$9,000 42,000 \$1,000 \$0
B 4,000 4,000 4,000 12,000
C 0 10,000 4,000 11,000

2. For many years Futura Company has purchased the starters that it installs in its standard line of farm tractors. Due to a reduction in output, the company has idle capacity that could be used to produce the starters. The chief engineer has recommended against the move, however, pointing out that the cost to produce the starters would be greater than the current \$8.40 per unit purchase price.

Per Unit Total
Direct materials \$3.10
Direct labor 2.70
Supervision 1.50 \$60,000
Depreciation 1.00 40,000
Rent 0.30 12,000
Total production cost \$9.20

A supervisor would have to be hired to oversee production of the starters. However, the company has sufficient idle tools and machinery that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is \$80,000 per period. Depreciation is due to obsolescence rather than wear and tear. Prepare computations showing how much profits will increase or decrease as a result of making the starters.

3. Compare and contrast the direct and the indirect method of creating a statement of cash flows.
See attached file for full problem description.

#### Solution Preview

1. We have three possible projects and we can invest in only one project. Suppose our weighted cost of capital is 7% and each project requires an investment of \$10,000. Using payback, NPV and IRR decide which project we should select and explain why.

Project Year 1 Year 2 Year 3 Year 4
A \$9,000 42,000 \$1,000 \$0
B 4,000 4,000 4,000 12,000
C 0 10,000 4,000 11,000

Payback period is the time taken to recover the initial investment. The initial investment is \$10,000
Project A - We recover \$9,000 in year 1, leaving \$1,000 to be recovered in year 2. Time taken in year 2 to recover 1,000 is 1,000/42,000= 0.02 years. The payback period is 1.02 years.
Project B - We recover 8,000 in 2 years and the remaining 2,000 is recovered in year 3. Time taken in year 3 is 2,000/4,000=0.5 years. The payback period is 2.5 years
Project C - 10,000 is recovered in year 2 so the payback period is 2 years

Using Payback the project selected will be A

IRR - IRR is the rate that will make the present value of inflows equal to the initial investment. IRR can be found using trial and error method or using the IRR function in excel. Using excel (see the attached file), the IRR for the various projects comes to
IRR
Project A 155.8%
Project B 37.1%
Project C 37.0%

Using IRR the project selected is A

NPV - In NPV ...

#### Solution Summary

The solution has problems relating to capital budgeting, make or buy and statement of cash flows

\$2.19

## Financial & Managerial Accounting for MBAs

See the attachment.

Question 1
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The total monthly operating costs of Smoothie Universe are:

\$2,000 + \$0.30X, where X = 12 ounce servings

Calculate the average cost per serving at each of the following monthly volumes: 1,500; 2,000; 3,000; and 5,000, and determine the monthly volume at which the average cost per serving is \$0.50.

Question 2
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Classify the total costs of each of the following as variable, fixed, mixed, or step. Sales volume is the cost driver.

a. Salary of machine operator who is paid based on number of units produced on the machine
b. Keyboards purchased from a subcontract supplier in a computer assembly plant
c. Property taxes
d. Salaries of quality inspectors when each inspector can evaluate a maximum of 500 units per day
e. Annual salary for the vice president of manufacturing
f. Electric power in a factory
g. Raw materials used in production
h. Water consumed by the plant, which is based on a flat fee plus actual consumption
i. Overhead costs in the factory for incidental components such as small screws and rivets.
j. Fire insurance on factory building

Question 3 Save

Classify each of the following costs as variable, fixed, mixed, or step by writing an X under one of the following headings (Sales volume is the cost driver).
Variable Fixed Mixed Step
1. Total selling and administrative costs
2. Salaries of supervisors of five employees
3. Raw materials used in production
4. Power consumption in a restaurant
5. Cost of goods sold in a bookstore
6. Salaries of employees who handle 20 claims per month
7. Pulpwood in a paper mill
8. Salaries of two secretaries in the corporate office
9. Total current manufacturing costs
10. The cost of an automobile rented on the basis of a daily charge plus \$.30 per mile

Question 4
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Fuino Company manufactures and sells specialty items. The following representative direct labor-hours and production costs are provided for a four-month period:
Month Hrs. Direct Labor Production Costs
January 1,500 \$15,000
February 2,000 17,500
March 2,500 20,000
April 2,000 15,000
Total 8,000 \$67,500

a = fixed production costs per month
b = variable production costs per direct labor hour
n = number of months
X = direct labor-hours per month
Y = total monthly production costs
Σ = Summation

Using the symbols above, indicate the cost estimation equation based on number of direct labor hours per month, and calculate total monthly production costs for May using the high-low method, during which hours of direct labor are expected to be 2,300 hours.

Question 5
5 points Save
Identify each of the following costs as fixed-committed or fixed-discretionary by writing an "X" under one of the following headings:
Fixed-Committed Fixed-Discretionary
1. Cost of entertainment at the Christmas banquet
2. Research and development staff salaries
3. Cost of placing an ad in a magazine
4. Rent on an exhibition at a trade show
5. Depreciation on manufacturing equipment
6. Depreciation on the president's yacht
7. Interest on bonds payable
8. Exclusivity fee paid by a franchise
9. Charitable contributions
10. Employee training

Briefly discuss the planning, organizing, and controlling functions of management.

Nike Inc. has a fiscal year end of May 31. On May 31, 2007, Nike Inc. reported \$10,688.3 million in assets and \$7,025.4 million in equity. During fiscal 2008, Nike's assets increased by \$1,754.4 million while its equity increased by \$799.9 million.
What were Nike's total liabilities at May 31, 2007 and May 31, 2008?

Question 13
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Use Southwest Airlines 2008 financial statement information, below to answer the following:
a. Calculate Southwest Airlines' return on assets (ROA) for the year ending December 31, 2008.
b. Disaggregate Southwest Airlines' ROA into profit margin (PM) and asset turnover (AT). Explain what each ratio measures.

In addition to the four financial statements, list three sources of financial information available to external stakeholders?

Oklahoma Manufacturing had the following data for 2009 and 2010.
2009 2010
Revenues \$13,526 \$12,394
Operating expenses (11,574) (10,893)
Operating income \$ 1,952 \$ 1,501

Using the high-low method, estimate Oklahoma's variable cost ratio, and calculate its contribution margin ratio, total fixed costs, and break-even point in sales dollars.

Prey Corporation's income statement is presented below.
Sales \$20,000
Less variable costs - 14,000
Contribution margin \$ 6,000
Less fixed costs - 4,000
Net income \$ 2,000

Calculate Prey's operating leverage.

Question 17
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During the most recent fiscal period, Kajing LTD had a contribution margin of \$50,000 and operating profit of \$20,000 on sales of \$80,000.
Calculate Kajing's (a) operating leverage and (b) the amount of its profit for next year assuming sales increase to \$96,000.

The Potsdam Manufacturing Company produces four different tables: models R1, R2, R3, and R4. A limitation of 2,000 machine-hours per week prevents Potsdam Manufacturing Company from meeting the sales demands for its products. The product information is as follows:
R1 R2 R3 R4
Unit selling price \$800 \$500 \$250 \$500
Unit variable costs - 600 - 250 - 200 - 300
Unit contribution margin \$200 \$250 \$ 50 \$200
Machine-hours per unit 20 40 20 40

Assume the maximum weekly demand for each product is as follows:
Product Demand
R1 80 units
R2 20 units
R3 70 units
R4 10 units

Under these circumstances, how many units of each product should the company produce per week to maximize short-run profits?

Question 1 Save
The total monthly operating costs of Smoothie Universe are:

\$2,000 + \$0.30X, where X = 12 ounce servings

Calculate the average cost per serving at each of the following monthly volumes: 1,500; 2,000; 3,000; and 5,000, and determine the monthly volume at which the average cost per serving is \$0.50.

Question 29 Save
The Buffalo Corporation's management is evaluating a special order from a regular customer. The customer has offered to purchase 6,000 units of a Buffalo Corporation product at a price that would provide a contribution margin of \$5 per unit. Buffalo's management wants to accept the offer because so doing would allow them to keep its current work force fully employed. Otherwise, Buffalo will lay-off 20 workers home for a week, depriving the workers of their weekly \$500 wages. Accepting the offer will tie up approximately 1,000 square feet of a building leased at an annual cost of \$60 per square foot. At the present time, Buffalo Corporation has no alternative use for this portion of the facilities. Based on just the information presented above, how much is the Buffalo Corporation's opportunity costs associated with accepting this special order from the supplier?

Question 28 Save
The Widrick manufactures 10,000 rolls of cable each period. The cable is used as an input for producing several other products that Widrick manufactures. The full manufacturing costs for a batch of 100 rolls of cable are:
Direct materials \$270
Direct labor 200
Total \$920

The fixed manufacturing overhead is comprised of depreciation expenses related to prior investments in facilities and equipment that are used in the manufacturing of the cable. These assets have no other use than for the manufacturing of the cable. An outside supplier has offered to sell Widrick the 10,000 rolls of cable necessary to meet production needs this period for a lump-sum of \$75,000. If Widrick accepts this outside supplier's offer, how much better or worse off will the company be?

Question 27 Save
The Metal Can Company has 100,000 obsolete cans in inventory at a cost of \$5,000. The cans can be cut in half to make candle holders for \$1,000. The candle holders can be sold for \$1,500 in total. If the cans are scrapped, they could be sold for \$200. Which alternative should the Metal Can Company accept and what is the relevant profit from the alternative?

Question 26 5 points Save

A limitation of 2,000 machine-hours per week prevents Potsdam Manufacturing Company from meeting the sales demands for its products. The product information is as follows:
R1 R2 R3 R4
Unit selling price \$800 \$500 \$250 \$500
Unit variable costs - 600 - 250 - 200 - 300
Unit contribution margin \$200 \$250 \$50 \$200
Machine-hours per unit 20 40 20 40

Assuming unlimited demand for each product, determine what is the best short-run profit maximizing strategy?
The Curnutt Company uses a joint process to produce products A, B, C, and D. Each product may be sold at its split-off point or processed further. Joint processing costs for a single batch of joint products are \$30,000. Other relevant data are as follows:

Product Sales Value
of Processing Sales Value
of Final Product
A \$ 5,000 \$ 8,000 \$30,000
B 17,000 5,000 20,000
C 10,000 15,000 20,000
D 3,000 1,000 5,000
\$35,000 \$29,000 \$75,000

Calculate the effect on profits of processing Product A further beyond the split-off point.

Question 24 Save

Match the following principles of financial accounting to their definitions:
a. Financial statements are linked within and across time
(1) Revenue recognition principle
b. Revenue and expenses are recognized when a cash transaction is completed (2) Articulation of financial statements
c. Revenue is recognized when earned
(3) Cash basis accounting
d. Recognizes revenue when earned and expenses when incurred, even if no cash is received or paid (4) Accrual accounting

Question 23 Save

Raphael decided to open a lemonade stand on Saturdays. Match Raphael's business activities to the following balance sheet items.
(Note: each balance sheet item can only be used once).
a. Borrow \$100 from Dad to be repaid in two years. (1) Long-term liability
b. Buy tent from neighbor, at a garage sale. (2) Accounts payable
c. Buy lemons, sugar and (secret ingredient) grapefruit. (3) Accounts receivable
d. The items in (c) will not be paid for until next month. (4) Long-term asset
e. At the end of a hard working day, Raphael has \$250 in his pocket. (5) Inventory
f. Mr. Wisner, a potential customer had no cash with him. Raphael agrees
to let Mr. Wisner pay \$1 next Monday. (6) Cash

Question 22 Save
Indicate the order of appearance on the balance sheet of the liabilities and equity accounts listed on the left.
Liability / Equity Balance sheet order
Bonds payable
Retained earnings
Accounts payable
Contributed capital

Question 21 Save
Assume the Mountain Furniture Company sells two kinds of tables, oak and pine. At a 1:1 (one-to-one) unit sales mix in which Mountain sells one oak table for every pine table, the following revenue and cost information is available:
Oak Table Pine Table
Unit selling price \$1,200 \$400
Unit variable costs (300) (300)
Unit contribution margin \$ 900 \$100

Fixed costs per month: \$15,000

Assuming a 1:1 sales mix, calculate Mountain Furniture's current monthly average unit contribution margin, break-even sales volume, and number of units of Pine and Oak tables at break-even point.

Question 20 Save
If net income is \$25,000 and operating leverage is 3.00 at the end of the most recent period, a 15% increase in sale will increase net income by what percent and what dollar amount?

Question 19 Save
Jiork, Inc. had a contribution margin of \$23,000 on sales of \$40,000 and had fixed costs of \$14,000. Calculate its break-even point in sales dollars.

Question 18 Save
Hickory Manufacturing had the following data for 2009 and 2010:
2009 2010
Revenues \$27,052 \$24,788
Operating expenses (23,147) (21,785)
Operating income \$ 3,905 \$ 3,003

Using the high-low method, estimate Hickory's variable cost ratio, and calculate its contribution margin ratio, total fixed costs, and break-even point in sales dollars.

During the most recent fiscal period, Kajing LTD had a contribution margin of \$50,000 and operating profit of \$20,000 on sales of \$80,000.
Calculate Kajing's (a) operating leverage and (b) the amount of its profit for next year assuming sales increase to \$96,000.

Question 16 Save
Prey Corporation's

income statement is presented below.
Sales \$20,000
Less variable costs - 14,000
Contribution margin \$ 6,000
Less fixed costs - 4,000
Net income \$ 2,000

Calculate Prey's operating leverage.

Fuino Company manufactures and sells specialty items. The following representative direct labor-hours and production costs are provided for a four-month period:
Month Hrs. Direct Labor Production Costs
January 1,500 \$15,000
February 2,000 17,500
March 2,500 20,000
April 2,000 15,000
Total 8,000 \$67,500

a = fixed production costs per month
b = variable production costs per direct labor hour
n = number of months
X = direct labor-hours per month
Y = total monthly production costs
Σ = Summation

Using the symbols above, indicate the cost estimation equation based on number of direct labor hours per month, and calculate total monthly production costs for May using the high-low method, during which hours of direct labor are expected to be 2,300 hours.

Question 12 Save
Nike Inc. has a fiscal year end of May 31. On May 31, 2007, Nike Inc. reported \$10,688.3 million in assets and \$7,025.4 million in equity. During fiscal 2008, Nike's assets increased by \$1,754.4 million while its equity increased by \$799.9 million.
What were Nike's total liabilities at May 31, 2007 and May 31, 2008?

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