Exercise 20-3
Leno Company manufactures toasters. For the first 8 months of 2014, the company reported the
following operating results while operating at 75% of plant capacity:
Sales (350,000 units)
$4,375,000
Cost of goods sold
2,600,000
Gross profit
1,775,000
Operating expenses
840,000
Net income
$935,000
Cost of goods sold was 70% variable and 30% fixed; operating expenses were 75% variable and
25% fixed.
In September, Leno Company receives a special order for 15,000 toasters at $7.60 each from
Centro Company of Ciudad Juarez. Acceptance of the order would result in an additional $3,000
of shipping costs but no increase in fixed operating expenses.
Your answer is partially correct. Try again.
Prepare an incremental analysis for the special order. (Round computations for per unit cost
to 4 decimal places, e.g. 15.2500 and all other computations and final answers to the
nearest whole dollar, e.g. 5,725. Enter negative amounts using either a negative sign
preceding the number e.g. -45 or parentheses e.g. (45).)
Reject
Order
Revenues
$
Accept
Order
$
$
Cost of goods sold
78000
Operating expenses
30000
Net income
$
$
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Your answer is correct.
Should Leno Company accept the special order?
Leno should
accept
Net Income
Increase
(Decrease)
the special order.
$
114000
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Exercise 20-5
Schopp Inc. has been manufacturing its own shades for its table lamps. The company is currently
operating at 100% of capacity, and variable manufacturing overhead is charged to production at
the rate of 70% of direct labor cost. The direct materials and direct labor cost per unit to make
the lamp shades are $4 and $5, respectively. Normal production is 30,000 table lamps per year.
A supplier offers to make the lamp shades at a price of $12.75 per unit. If Schopp Inc. accepts
the supplier’s offer, all variable manufacturing costs will be eliminated, but the $45,000 of fixed
manufacturing overhead currently being charged to the lamp shades will have to be absorbed by
other products.
Your answer is partially correct. Try again.
Prepare the incremental analysis for the decision to make or buy the lamp shades. (Enter
negative amounts using either a negative sign preceding the number e.g. -45 or
parentheses e.g. (45).)
Make
Direct materials
Buy
Net Income
Increase (Decrease)
$
$
$
$
$
$
Direct labor
Variable overhead costs
Fixed manufacturing costs
Purchase price
Total annual cost
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Your answer is correct.
Should Schopp Inc. buy the lamp shades?
No
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Your answer is partially correct. Try again.
Would your answer be different in (b) if the productive capacity released by not making the
lamp shades could be used to produce income of $25,000?
(Round all entries to whole dollar amounts)
Yes
, income would
increase
by $
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Exercise 20-10
Stahl Inc. produces three separate products from a common process costing $100,000. Each of
the products can be sold at the split-off point or can be processed further and then sold for a
higher price. Shown below are cost and selling price data for a recent period.
Sales Value at
Split-Off Point
Cost to
Process Further
$100,000
Sales Value after
Further Processing
Product 10
$60,000
$190,000
Product 12
15,000
30,000
35,000
Product 14
55,000
150,000
215,000
Your answer is incorrect. Try again.
Determine total net income if all products are sold at the split-off point.
Net income
LINK TO TEXT
$
Your answer is incorrect. Try again.
Determine total net income if all products are sold after further processing.
Net income
$
LINK TO TEXT
Your answer is partially correct. Try again.
Calculate incremental profit/(loss) and determine which products should be sold at the split-off
point and which should be processed further. (Enter negative amounts using either a
negative sign preceding the number e.g. -45 or parentheses e.g. (45).)
Product
Incremental profit (loss)
Product 10
Product 12
Product 14
Decision
$
Should be processed further
$
Should be sold at the split-off point
$
Should be processed further
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Your answer is incorrect. Try again.
Determine total net income using the results from previous part.
Net income
$
Is the net income different from that determined in part (b)?
, net income is
by $
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Exercise 20-14
Your answer is partially correct. Try again.
Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so
good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the
volume of sales invoices. Management is considering updating its computer with a faster model
that would eliminate all of the overtime processing.
Current Machine
New Machine
Original purchase cost
$15,000
Accumulated depreciation
$ 6,000
Estimated annual operating costs
$25,000
$20,000
5 years
5 years
Useful life
$25,000
_
If sold now, the current machine would have a salvage value of $6,000. If operated for the
remainder of its useful life, the current machine would have zero salvage value. The new machine
is expected to have zero salvage value after 5 years.
Prepare an incremental analysis. (Enter negative amounts using either a negative sign
preceding the number e.g. -45 or parentheses e.g. (45).)
Retain
Machine
Operating costs
Replace
Machine
Net Income
Increase
(Decrease)
$
$
$
$
$
$
New machine cost
Salvage value (old)
Total
Should the current machine be replaced?
The current machine should be
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replaced
.
Exercise 20-16
Cawley Company makes three models of tasers. Information on the three products is given
below.
Tingler
Sales
Shocker
Stunner
$300,000 $500,000 $200,000
Variable expenses
150,000
200,000
145,000
Contribution margin
150,000
300,000
55,000
Fixed expenses
120,000
230,000
95,000
Net income
$ 30,000 $ 70,000 $ (40,000)
Fixed expenses consist of $300,000 of common costs allocated to the three products based on
relative sales, and additional fixed expenses of $30,000 (Tingler), $80,000 (Shocker), and
$35,000 (Stunner). The common costs will be incurred regardless of how many models are
produced. The other fixed expenses would be eliminated if a model is phased out.
James Watt, an executive with the company, feels the Stunner line should be discontinued to
increase the company’s net income.
Compute current net income for Cawley Company.
Net income
$
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Compute net income by product line and in total for Cawley Company if the company
discontinues the Stunner product line. (Hint: Allocate the $300,000 common costs to the two
remaining product lines based on their relative sales.) (Round answers to the nearest whole
dollar, e.g. 5,275.)
Tingler Net Income
$
Shocker Net Income
$
Total Net Income
$
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Problem 21-1A
Glendo Farm Supply Company manufactures and sells a pesticide called Snare. The following
data are available for preparing budgets for Snare for the first 2 quarters of 2014.
1. Sales: Quarter 1, 30,000 bags; quarter 2, 42,000 bags. Selling price is $60 per bag.
Direct materials: each bag of Snare requires 4 pounds of Gumm at a cost of $3.80 per
2.
pound and 6 pounds of Tarr at $1.5 per pound.
3. Desired inventory levels:
Type of Inventory
January 1
April 1
July 1
Snare (bags)
8,000
15,000
18,000
Gumm (pounds)
9,000
10,000
13,000
14,000
20,000
25,000
Tarr (pounds)
4. Direct labor: direct labor time is 15 minutes per bag at an hourly rate of $16 per hour.
Selling and administrative expenses are expected to be 15% of sales plus $175,000 per
5.
quarter.
6. Income taxes are expected to be 30% of income from operations.
Your assistant has prepared two budgets: (1) The manufacturing overhead budget shows
expected costs to be 150% of direct labor cost. (2) The direct materials budget for Tarr shows
the cost of Tarr purchases to be $297,000 in quarter 1 and $439,500 in quarter 2.
Your answer is correct.
Prepare the sales budget.
GLENDO FARM SUPPLY COMPANY
Sales Budget
For the Six Months Ending June 30, 2014
Quarter
Expected unit sales
Unit selling price
Total sales
1
2
30000
42000
Six
Months
72000
$
60
$
60
$
60
$
1800000
$
2520000
$
4320000
Prepare the production budget.
GLENDO FARM SUPPLY COMPANY
Production Budget
For the Six Months Ending June 30, 2014
Quarter
Expected Unit Sales
1
2
30000
42000
Six
Months
Add
:
Desired Ending Finished Goods Units
Total Required Units
Less
15000
18000
45000
60000
8000
15000
37000
45000
:
Beginning Finished Goods Units
Required Production Units
LINK TO TEXT
82000
LINK TO VIDEO
Your answer is partially correct. Try again.
Prepare the direct materials budget.
GLENDO FARM SUPPLY COMPANY
Direct Materials Budget—Gumm
For the Six Months Ending June 30, 2014
Quarter
Units to be Produced
Direct Materials per Unit
Total Pounds Needed for Production
Add
2
37000
45000
4
4
148000
180000
10000
13000
158000
193000
9000
10000
:
Desired Ending Direct Materials
Total Materials Required
Less
1
:
Beginning Direct Materials
Six
Months
Direct Materials Purchases
149000
183000
$
Cost per Pound
3.80
Total Cost of Direct Materials Purchases
566200
$
3.80
$
$
695400
$
1261600
Prepare the direct labor budget. (Enter Direct labor time per unit in proportion to hours,
e.g. for 45 minutes the proportion will be 0.75)
GLENDO FARM SUPPLY COMPANY
Direct Labor Budget
For the Six Months Ending June 30, 2014
Quarter
1
Units to be Produced
Direct Labor Time per Unit
Total Required Direct Labor Hours
37000
45000
0.25
0.25
9250
11250
$
Direct Labor Cost per Hour
16
$
16
$
Total Direct Labor Cost
148000
$
180000
Prepare the selling and administrative budget.
GLENDO FARM SUPPLY COMPANY
Selling and Administrative Expense Budget
For the Six Months Ending June 30, 2014
Quarter
Budgeted sales in units
Variable
$
Fixed
Total
1
2
45000
60000
180000
$
160000
$
252000
Six
Months
439500
$
160000
$
Six
Months
2
432000
320000
$
$
328000
LINK TO TEXT
LINK TO VIDEO
Your answer is partially correct. Try again.
Prepare the budgeted income statement.
GLENDO FARM SUPPLY COMPANY
Budgeted Income Statement
For the Six Months Ending June 30, 2014
Sales
$
4320000
Cost of Goods Sold
Gross Profit
Selling and Administrative Expenses
998000
Income from Operations
Income Tax Expense
Net Income/ (Loss)
$
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LINK TO VIDEO
Exercise 24-2
Doug’s Custom Construction Company is considering three new projects, each requiring an
equipment investment of $26,220. Each project will last for 3 years and produce the following
net annual cash flows.
Year
AA
BB
CC
1
$11,178
$14,559
$18,078
2
14,352
14,559
13,938
3
Total
20,838
14,559
15,318
$46,368
$43,677
$47,334
The equipment’s salvage value is zero, and Doug uses straight-line depreciation. Doug will not
accept any project with a cash payback period over 2 years. Doug’s required rate of return is
12%.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table
provided.)
Your answer is partially correct. Try again.
Compute each project’s payback period. (Round answers to 2 decimal places, e.g. 15.25.)
AA
years
BB
years
CC
years
Which is the most desirable project?
The most desirable project based on payback period is
Project CC
Which is the least desirable project?
The least desirable project based on payback period is
Project AA
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Your answer is partially correct. Try again.
Compute the net present value of each project. (Enter negative amounts using either a
negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answers
to the nearest whole dollar, e.g. 5,275.)
AA
BB
CC
Which is the most desirable project based on net present value?
Project CC
The most desirable project based on net present value is
.
Which is the least desirable project based on net present value?
Project BB
The least desirable project based on net present value is
.
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Exercise 24-4
Your answer is partially correct. Try again.
BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would
make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates
regarding each machine are provided below.
Machine A
Machine B
Original cost
$78,290
$180,700
Estimated life
8 years
8 years
Salvage value
0
0
$19,660
$39,860
$5,040
$10,100
Estimated annual cash inflows
Estimated annual cash outflows
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table
provided.)
Calculate the net present value and profitability index of each machine. Assume a 9% discount
rate. (If the net present value is negative, use either a negative sign preceding the
number eg -45 or parentheses eg (45). Round answer for present value to 0 decimal
places, e.g. 125 and profitability index to 2 decimal places, e.g. 10.50.)
Machine A
Net present value
Profitability index
Machine B
Which machine should be purchased?
Machine A
should be purchased.
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Exercise 24-7
Ueker Company is considering three capital expenditure projects. Relevant data for the projects
are as follows.
Investment
Annual
Income
Life of
Project
22A
$244,640
$17,190
6 years
23A
273,590
20,770
9 years
24A
280,400
18,470
7 years
Project
Annual income is constant over the life of the project. Each project is expected to have zero
salvage value at the end of the project. Ueker Company uses the straight-line method of
depreciation.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table
provided.)
Your answer is incorrect. Try again.
Determine the internal rate of return for each project. (Round answers 0 decimal places,
e.g. 10.)
Project
22A
23A
24A
Internal Rate of
Return
%
%
%
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Your answer is correct.
If Ueker Company’s required rate of return is 11%, which project(s) are acceptable?
The following project(s) are acceptable
22A and 23A
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Exercise 24-10
Vilas Company is considering a capital investment of $191,700 in additional productive facilities.
The new machinery is expected to have a useful life of 5 years with no salvage value.
Depreciation is by the straight-line method. During the life of the investment, annual net income
and net annual cash flows are expected to be $14,570 and $49,790, respectively. Vilas has a
12% cost of capital rate, which is the required rate of return on the investment.
Click here to view the factor table.
(For calculation purposes, use 5 decimal places as displayed in the factor table
provided.)
Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)
Cash payback period
years
Compute the annual rate of return on the proposed capital expenditure. (Round answer to 1
decimal place, e.g. 20.5.)
Annual rate of return
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%
Using the discounted cash flow technique, compute the net present value. (If the net present
value is negative, use either a negative sign preceding the number e.g. -45 or
parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125.)
Net present value
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