Problem 25-5A (55 minutes)
Part 1
Product G
Product B
Selling price per unit …………………………………………..…
$120
$160
Variable costs per unit ………………………………………..…
40
90
Contribution margin per unit ……………………………….…
$ 80
$ 70
Machine hours to produce 1 unit …………………………..
0.4
1.0
Contribution per machine hour
(or contribution/[hours per unit]) …………………………
$200
$ 70
Part 2
Sales Mix Recommendation. To the extent allowed by production and
market constraints, the company should produce as much of Product G as
possible. With a single shift yielding 176 hours per month (8 x 22), the
company can produce these units of Product G:
Contribution Margin at Recommended Sales Mix
Problem 25-5A (Continued)
Part 3
Sales Mix Recommendation with Second Shift. If the second shift is added,
the maximum possible output of G will double
However, this level of output exceeds the company’s market constraint of
600 units of G per month. This means the company should produce 600
units of Product G, and commit the remainder of the productive capacity to
Product B. This is computed as follows
Units of Product G ………………………………………………………
Hours per unit ……………………………………………………….
0.4
Hours used for Product G ……………………………………..……
240
hours
Hours available for Product B (352 hrs – 240 hrs) ………….……
112
hours
The output of Product B with 112 production hours is
Contribution Margin at This Sales Mix
Units
Contr./unit
Total
From G …………………………………………………….…
600
$80
$48,000
From B …………………………………………………….…
112
70
7,840
Less extra shift costs ……………………………….…..
(15,000)
Total contribution margin …………………………..
$40,840
Problem 25-5A (Continued)
Part 4
Sales Mix Recommendation. By incurring additional marketing cost, the
Units of Product G ………………………………………………………
Hours per unit ……………………………………………………….
0.4
Hours used for Product G ……………………………………..……
280
hours
Hours available for Product B (352 hrs – 280 hrs) ………………
72
hours
The output of Product B with 72 production hours is
Contribution Margin at This Sales Mix
Units
Contr./unit
Total
From G ………………………………………………………….
700
$80
$56,000
From B ………………………………………………………….
72
70
5,040
Less extra shift costs …………………………………….
(15,000)
Less extra marketing costs …………………………..
(12,000)
Total contribution margin ……………………………...
$34,040
Management decision. This contribution margin of $34,040 is less than the
1 hr. per unit
Fundamental Accounting Principles, 21st Edition
1496
Problem 25-6A (60 minutes)
Part 1
ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
Total
Eliminated
Continuing
Expenses
Expenses
Expenses
Cost of goods sold ……………………………………….
$469,000
$207,000
$262,000
Direct expenses
Advertising ……………………………………..………….
29,000
12,000
17,000
Store supplies used …………………………..
7,800
3,800
4,000
Depreciation—Store equipment ……….………….
8,300
8,300
Allocated expenses
Sales salaries* …………………………………………….
104,000
52,000
52,000
Rent expense…………………………………..………….
14,160
14,160
Bad debts expense …………………………..
18,000
8,100
9,900
Office salary* …………………………………..………….
31,200
31,200
Insurance expense* …………………………..
3,100
770
2,330
Miscellaneous office expenses* ……….………….
4,000
400
3,600
Total expenses ………………………………….………….
$688,560
$284,070
$404,490
*Computation notes. Closing Department 200 will eliminate 70% of its insurance
Problem 25-6A (Continued)
Part 2
ELEGANT DECOR COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department 200
Sales ………………………………………………………………………………………..….
$436,000
Cost of goods sold …………………………………………………………………..….
262,000
Gross profit from sales …………………………………………………………….….
174,000
Operating expenses
Advertising …………………………………………………………………………….….
17,000
Store supplies used ……………………………………………………………….….
4,000
Depreciation of store equipment …………………………………………….….
8,300
Sales salaries …………………………………………………………………………….
67,600*
Rent expense …………………………………………………………………………….
14,160
Bad debts expense …………………………………………………………………….
9,900
Office salary …………………………………………………………………………..….
15,600*
Insurance expense …………………………………………………………………….
2,330
Miscellaneous office expenses ……………………………………………….….
3,600
Total operating expenses …………………………………………………………….
142,490
Net income ……………………………………………………………………………….….
$ 31,510
* Administrative salary reassignment
Total
Sales
Office
Salaries
Salaries
Salary
Salesclerks ………………………………………………..……..
$52,000
$52,000
Administrative worker ……………………………………………….
31,200
$31,200
Reassign admin. worker to sales …………………………..
0
15,600
(15,600)
Revised salaries ……………………………………………………….
$83,200
$67,600
$15,600
Fundamental Accounting Principles, 21st Edition
1498
Problem 25-6A (Continued)
Part 3
ELEGANT DECOR COMPANY
Reconciliation of Combined Income With Forecasted Income
Combined net income …………………………………………………………….…
$ 37,440
Less Dept. 200’s lost sales ……………………………………………………….
(290,000)
Plus Dept. 200’s eliminated expenses ……………………………………..…
284,070
Forecasted net income ………………………………………………………………
$ 31,510
ANALYSIS
Department 200’s avoidable expenses of $284,070 are $5,930 less than its
PROBLEM SET B
Problem 25-1B (50 minutes)
Part 1
Part 2
Net
Net Cash
Income
Flow
Expected annual sales of new product ………………..…
$1,150,000
$1,150,000
Expected annual costs of new product
Direct materials ………………………………………………..…
300,000
300,000
Direct labor ……………………………………………………….
420,000
420,000
Overhead excluding depr. on new asset ………………
210,000
210,000
Depreciation on new asset ……………………………….…
70,000
Selling and administrative expenses ……………………
100,000
100,000
Income before taxes ………………………………………………
50,000
Income taxes (30%) …………………………………………….…
15,000
15,000
Net income ………………………………………………………….…
$ 35,000
Net cash flow* …………………………………………………….…
$ 105,000
*Alternatively, annual net cash flow can be computed as:
Net income + Depreciation = $35,000 + $70,000 = $105,000
Problem 25-1B (Continued)
Part 3
Part 4
Accounting rate of return = = 21.88%
$35,000
$160,000*
$105,000
Problem 25-2B (55 minutes)
Part 1
PROJECT A
Net income ………………………………………………………………………………..…
$39,900
Depreciation expense* …………………………………………………………………
60,000
Net cash flow …………………………………………………………………………….…
$99,900
PROJECT B
Net income ………………………………………………………………………………..…
$ 25,900
Depreciation expense* …………………………………………………………………
80,000
Net cash flow …………………………………………………………………………….…
$105,900
3 years
Part 2
PROJECT A
Payback Period = = 2.4 years
PROJECT B
$240,000
$105,900
4 years
$240,000
$ 99,900
Fundamental Accounting Principles, 21st Edition
1502
Problem 25-2B (Continued)
Part 3
PROJECT A
Accounting rate of return = = 33.3%
*Average investment
Asset cost ………………………………………….
$240,000
Average (Cost/2) ………………………………...
$120,000
PROJECT B
*Average investment
Asset cost ………………………………………….
$240,000
Average (Cost/2) ………………………………...
$120,000
$39,900
$120,000*
$120,000*
Problem 25-2B (Continued)
Part 4
PROJECT A
Present Value of Net Cash Flows
Present
Present
Value of
Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Years 1-4 ……………………………………………….
$99,900
3.3121
$330,879
Amount invested ……………………………………
(240,000)
Net present value …………………………………..
$ 90,879
PROJECT B
Present Value of Net Cash Flows
Present
Present
Value of
Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Years 1-3 ……………………………………………….
$105,900
2.5771
$272,915
Amount invested ……………………………………
(240,000)
Net present value …………………………………..
$ 32,915
Part 5
Recommendation to management is to pursue Project A. This is because
although both projects have a positive net present value, Project A has a
Fundamental Accounting Principles, 21st Edition
1504
Problem 25-3B (60 minutes)
Part 1
RESULTS USING STRAIGHT-LINE DEPRECIATION
(a)
Income
Before
Deprec.
(b)
Straight–
Line
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……….………………
$12,000
$3,000
$ 9,000
$3,600
$8,400
Year 2 ……….………………
12,000
6,000
6,000
2,400
9,600
Year 3 ……….………………
12,000
6,000
6,000
2,400
9,600
Year 4 ……….………………
12,000
6,000
6,000
2,400
9,600
Year 5 ……….………………
12,000
6,000
6,000
2,400
9,600
Year 6 ……….………………
12,000
3,000
9,000
3,600
8,400
Part 2
RESULTS USING MACRS DEPRECIATION
(a)
Income
Before
Deprec.
(b)
MACRS
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……….………………
$12,000
$6,000
$ 6,000
$2,400
$ 9,600
Year 2 ……….………………
12,000
9,600
2,400
960
11,040
Year 3 ……….………………
12,000
5,760
6,240
2,496
9,504
Year 4 ……….………………
12,000
3,456
8,544
3,418
8,582
Year 5 ……….………………
12,000
3,456
8,544
3,418
8,582
Year 6 ……….………………
12,000
1,728
10,272
4,109
7,891
Problem 25-3B (Continued)
Part 3
NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION
Present
Present
Net Cash
Value of
Value of Net
Flows
1 at 10%
Cash Flows
Year 1 …………………………………………………..
$ 8,400
0.9091
$ 7,636
Year 2 …………………………………………………..
9,600
0.8264
7,933
Year 3 …………………………………………………..
9,600
0.7513
7,212
Year 4 …………………………………………………..
9,600
0.6830
6,557
Year 5 …………………………………………………..
9,600
0.6209
5,961
Year 6 …………………………………………………..
8,400
0.5645
4,742
Totals …………………………..………………………
$55,200
$40,041
Amount invested …………………………………..
(30,000)
Net present value ………………………………….
$10,041
Part 4
NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION
Present
Present
Net Cash
Value of
Value of Net
Flows
1 at 10%
Cash Flows
Year 1 …………………………………………………..
$ 9,600
0.9091
$ 8,727
Year 2 …………………………………………………..
11,040
0.8264
9,123
Year 3 …………………………………………………..
9,504
0.7513
7,140
Year 4 …………………………………………………..
8,582
0.6830
5,862
Year 5 …………………………………………………..
8,582
0.6209
5,329
Year 6 …………………………………………………..
7,891
0.5645
4,454
Totals …………………………..………………………
$55,199
$40,635
Amount invested …………………………………..
(30,000)
Net present value ………………………………….
$10,635
Part 5
Analysis: The net present value using MACRS depreciation is greater than the
Fundamental Accounting Principles, 21st Edition
1506
Problem 25-4B (45 minutes)
WINDMIRE COMPANY
COMPARATIVE INCOME STATEMENTS
(1)
(2)
(3)
Normal
New
Volume
Business
Combined
Sales …………………………………………………...
$1,200,000
$172,000
$1,372,000
Costs and expenses
Direct materials ………………………………....
384,000
64,000
448,000
Direct labor ………………………………………..
96,000
24,000
120,000
Overhead …………………………..……………...
288,000
36,000
324,000
Selling expenses ………………………………..
120,000
120,000
Administrative expenses …………………...
80,000
4,000
84,000
Total costs and expenses …………………....
968,000
128,000
1,096,000
Operating income ………………………………..
$ 232,000
$ 44,000
$ 276,000
Supporting computations
Normal direct material cost ……………………………………..………
$384,000
Units of output ………………………………………………………..………
300,000
Cost per unit …………………………………………………………..………
$ 1.28
New business volume …………………………..…………………………
50,000
New business direct material cost ……………………………………
$ 64,000
Normal direct labor cost …………………………..……………..………
$ 96,000
Units of output ………………………………………………………..………
300,000
Cost per unit …………………………………………………………..………
$ 0.32
Overtime per unit (50%) …………………………………………..………
0.16
New business direct labor cost per unit …………………………..
$ 0.48
New business volume …………………………..…………………………
50,000
New business direct labor cost ………………………………..………
$ 24,000
Total overhead ………………………………………………………..………
$288,000
Fixed overhead (25%) ……………………………………………..………
72,000
Variable overhead …………………………………………………..…..
$216,000
Units of output ………………………………………………………..………
300,000
Cost per unit …………………………………………………………..………
$ 0.72
New business volume …………………………..…………………………
50,000
New business variable overhead cost …………………………..
$ 36,000