Question

1. Holl Corporation has provided the following data for November.

Denominator level of activity		5,700	machine-hours
Budgeted fixed manufacturing overhead costs	$	72,390
Standard machine-hours allowed for the actual output		6,000	machine-hours
Actual fixed manufacturing overhead costs	$	71,250

Required:

a. Compute the budget variance for November.

b. Compute the volume variance for November.

(Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

2. Ramson Corporation is considering purchasing a machine that would cost $457,050 and have a useful life of 7 years. The machine would reduce cash operating costs by $83,100 per year. The machine would have a salvage value of $107,120 at the end of the project. (Ignore income taxes.)

Required:

a. Compute the payback period for the machine. (Round your answer to 2 decimal places.)

b. Compute the simple rate of return for the machine. (Round your intermediate calculations to nearest whole dollar and your final answer to 2 decimal places.)

Answer 1

Solution 1:

Budget varaince for November = Budgeted fixed manufacturing overhead costs - Actual fixed manufacturing overhead costs

= $72,390 - $71,250 = $1,140 Favorable

Fixed overhead rate = $72,390 / 5700 = $12.70 per hour

Volume variance for November = Fixed overhead applied - Budgeted fixed overhead

= (6000*$12.70) - $72,390

= $3,810 Favorable

Solution 2:

Payback period = Initial investment / Annual cash inflows = $457,050 / $83,100 = 5.5 years

Net income = Saving in cash operating costs - Depreciation = $83,100 - ($457,050 - $107,120) / 7 = $33,110

Simple rate of return = Net income / Initial investment = $33,110 / $457,050 = 7.24%