Question

In: Accounting

Part I: Wilson Company sells two products, X and Y. The company expects to sell 100,000...

Part I:

Wilson Company sells two products, X and Y. The company expects to sell 100,000 units of X at an average price of $20 per unit during the upcoming year. Actual results are 98,600 units sold at an average price of $22 per unit.

Required: Calculate the overall sales variance, the sales price variance, and the sales volume variance. Indicate whether each variance is favorable or unfavorable.

Part II:

Capitol Manufacturing Co. is currently making Part XYZ, producing 80,000 units annually. The part is used in the production of several products made by Capitol. The per-unit cost for XYZ is as follows:

Direct Materials $95.00
Direct Labor 22.00
Variable Overhead 7.50
Fixed overhead 8.00
Total $132.50

Of the total fixed overhead assigned to XYZ, $32,000 is direct fixed overhead (the annual rental cost of machinery used to manufacture Part XYZ), and the remainder is common fixed overhead. An outside supplier has offered to sell the part to Capitol for $120. There is no alternative use for the facilities currently used to produce the part.

Should Capitol Manufacturing Co. make or buy Part XYZ?   Briefly describe three qualitative factors that the company should consider when making its decision.

Part III:

A company is considering two different and mutually exclusive projects, Alpha and Beta, where both have a five-year life and require an investment of $420,000. The cash flow patterns for each project are given below:

Alpha: Even cash flows of $140,000 per year
Beta: Year 1 $240,000
Year 2 $200,000
Year 3 $180,000
Year 4 $100,000
Year 5 $60,000

Required: Calculate the payback period for each project. Which project, Alpha or Beta, should be accepted based on payback analysis? Explain.

Solutions

Expert Solution

Part I
Overall sales variance=(Expected/planned sales units*Expected /plannedselling price/unit)-(Actual sales units*Actual selling price/unit)
ie.(100000*20)-(98600*22)=
-169200
F
Sales price Variance=(Expected Price-Actual price)*Actual units sold
ie.(20-22)*98600=
-197200
F
Sales Volume Variance=(Expected Sales units-Actual sales units)*Expected selling price/unit
ie.(100000-98600)*20=
28000
U
Overall sales variance=sales price Variance+Sales Volume variance
ie.169200 F=197200 F+28000 U
Part II
Cost to make
Direct Materials 95.00
Direct Labor 22.00
Variable Overhead 7.50
Fixed overhead(32000/80000) 0.40
Total cost to make 124.90
Supplier's offer- cost 120.00
Savings in cost when bought 4.90
Total savings to company   (4.90*80000) 392000
As it is less costly, Capitol Mfg. should BUY the part
3 qualitative factors that the company should consider when making the BUY decision :
a. Capital must ensure continuity of supply to meet the company's demand--without having to lose customers.
b. whether this price of $ 120 will be maintained by the seller
c. How to go about the current facilities that have no alternative use , if this production is discontinued.
Part III
Payback period for Alpha
Initial investment/Annual cash flows=
420000/140000=
3
Yrs.
P/B-Beta
Year Cash flows Cumulative cash flows(Previous CF+Current CF
Year 0 -420000 -420000
Year 1 240000 -180000
Year 2 200000 20000
Year 3 180000 200000
Year 4 100000 300000
Year 5 60000 360000
Total 360000
Payback period for Beta
Year corresponding to last negative Cash flow+(That $ negative cash flow/Next yr.'s total Cash flow)
1+(180000/200000)=
1.9
Years
As Preoject Beta 's pay back period 1.9 yrs. < project Alpha's pay back period of 3 yrs. ,
Project Beat should be selected,
as it recovers the initial investment in lesser no.of yrs.

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