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Title: Problem 25-4B
QA_Ori:
WINDMIRE COMPANY
COMPARATIVE INCOME STATEMENTS
(1) (2) (3)
Normal New
Volume Business Combined
Supporting computations
Normal direct material cost $384,000
Total overhead $288,000
Title: Problem 25-5B
QA_Ori:
Part 1
Product R Product T
Selling price per unit $ 60 $ 80
Part 2
Sales Mix Recommendation To the extent allowed by production and market
constraints, the company should produce as much of Product R as possible. With a
single shift yielding 176 hours per month (8 x 22), the company can produce these units
of Product R:
Contribution Margin at Recommended Sales Mix
Part 3
Sales Mix Recommendation with Second Shift If the second shift is added, the
maximum possible output of R will double:
Maximum possible output of R = = 880 units per mo.
However, this level of output exceeds the company’s market constraint of 550 units of
Product R per month. This means the company should produce 550 units of Product R,
and commit the remainder of the productive capacity to Product T. This is computed as
follows:
176 hrs. per mo.
0.4 hrs. per unit
352 hrs. per mo.
Units of Product R = 550 units per month
The output of Product T with 132 production hours is
Contribution Margin at This Sales Mix
Units Contr./unit Total
From R 550 $40 $22,000
Management decision This amount of $23,370 exceeds the contribution margin of
the second shift.
Part 4
Sales Mix Recommendation By incurring additional marketing cost, the company can
relax the market constraint for sales of Product R up to the point where 675 units can be
sold. This means the company can produce 675 units of Product R, and commit the
remainder of its productive capacity to Product T. These computations are:
Units of Product R = 675 units per month
Hours per unit 0.4
Hours used for Product R 270 hours
Hours available for Product T
(352 hrs less 270 hrs) 82 hours
The output of Product T with 82 production hours is
Units of Product T = = 82 units per month
Contribution Margin with This Sales Mix
1.0 hrs. per unit
82 hrs. per mo.
1.0 hr. per unit
Units Contr./unit Total
From R 675 $40 $27,000
Management decision This amount of $22,120 is less than the contribution margin of
management should not undertake this marketing strategy.
Title: Problem 25-6B
Part 1
ESME COMPANY
Analysis of Expenses under Elimination of Department Z
Total Eliminated Continuing
Expenses Expenses Expenses
Cost of goods sold $586,400 $125,100 $461,300
Direct expenses
Computation Notes Closing Department Z will eliminate 65% of its insurance expense
and 30% of its miscellaneous office expense. Sales salaries will be reduced by the
Part 2
ESME COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department Z
Sales $700,000
Cost of goods sold 461,300
Gross profit from sales 238,700
Operating expenses
Advertising 27,000
* Office salary reassignment
Total Sales Office
Salarie
s
Salarie
s
Salary
Sales clerks $46,80
0
$46,80
0
0
0
Part 3
ESME COMPANY
Reconciliation of Combined Income with Forecasted Income
Combined net income $ 48,600
ANALYSIS
Department Z's avoidable expenses of $181,960 are $6,960 greater than its revenues of
Title: Serial Problem, Success Systems
QA_Ori:
COMPUTING NET CASH FLOWS FROM NET INCOME
Net income Cash flows
Sales $375,000 $375,000
Materials, labor & overhead (200,000) (200,000)
1. Payback period = = 2.7 years
*Average investment
Cost $300,000
Salvage 0
Title: Reporting in Action — BTN 25-1
QA_Ori:
1. The internal rate of return (given here as 10%) is the rate which yields a net
present value of zero for an investment. The annuity factor for 10 periods and a
discount rate of 10% is 6.1446. This means we can solve for the amount of annual cash
flows as follows:
$300,000
$111,250
For Polaris’s initial investment of $2.12 million to provide an internal rate of return
of 10% over 10 years, the investment must generate cash flows of $345,018.39 per
year for 10 years.
Answer depends on the information obtained.
Title: Comparative Analysis — BTN 25-2
QA_Ori:
1. Answer depends on the newspaper selected and its price for advertising space.
2. If we assume that the average product of Polaris and Arctic Cat sells for around
$12,000, then the contribution margin per product is about $2,400 (using the 20% stated
3.
MEMORANDUM
TO:
FROM:
DATE:
SUBJECT:
Primary points for discussion of the importance of effective advertising:
(a) Students need to recognize that advertising is very expensive and crucial to
(b) The students should also recognize that an advertisement must be effective
(c) In most cases the advertisement must generate several thousand dollars in
Title: Ethics Challenge — BTN 25-3
QA_Ori:
1. Present value of $100 to be received in 10 years assuming a 12% discount rate
2. We need to be concerned about any project with expected long-term cash
inflows. This is especially the case if the larger cash inflows are expected later rather
Title: Communicating in Practice — BTN 25-4
QA_Ori:
Instructor note: Answers will vary, but responses should address the questions asked
and include some discussion of the following points for each method.
Payback Period Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Measurement
basis
Cash flows Accrual income Cash flows
Profitability
Cash flows
Profitability
period
project
Title: Taking It to the Net — BTN 25-5
QA_Ori:
According to Bizbrim, the business processes typically outsourced are “backend” jobs
like call/help centers, medical transcription, billing, payroll processing, and data entry.
2. Companies who are outsourcing their business processes are able to recruit
more labor at lower prices than they otherwise could. This enables these companies to
Title: Teamwork in Action — BTN 25-6
QA_Ori:
Instructor note: Answers will vary across students. Yet the examples, while different,
should capture similar qualitative factors.
SAMPLE SOLUTION
Project: Investment in an improved baggage handling system.
The new, improved baggage handling system is expected to increase both customer
satisfaction and likelihood of repeat business.
Title: Entrepreneurial Decision — BTN 25-7
QA_Ori:
2. For these tools, Charlie needs estimates of how much the bakery and
warehousing center will cost, both upfront and for recurring (e.g. maintenance) costs
3.
Payback Period Accounting Rate
of Return
Net Present
Value
Internal Rate
of Return
Advantages Easy to
understand
Easy to
understand
Reflects time
value of money
Reflects
Reflects time
value of
money
after payback
period
project
Title: Hitting the Road
QA_Ori:
1. Answers will vary among students.
Sample Example
For illustrative purposes, one sample solution would appear as follows:
Lease terms—$400 per month for 35 months; plus $10,000 final payment at the
end of 35 months; 12% annual interest rate.
To compute the present value of the lease payments
In most cases the students will find it more costly to lease an automobile than to
purchase it outright. Also, getting the salesperson to negotiate the outright purchase of
the automobile is sometimes challenging once you’ve shown interest in leasing. This is
because of the usually higher profit margin associated with leasing.
Title: Global Decision
QA_ Ori: There are probably several reasons why KTM would take on this project. One
reason is that the lower ongoing packaging costs can generate some improved ongoing
cash flows. KTM also probably feels a responsibility to society to be a good citizen.
