Northern Lights Company manufacture recreated painting products in a highly automated assembly plant in Yukon, North West Territories. Their automated system is in its first year of operation, and management is still unsure of the best way to estimate the overhead costs of operations for budgetary purposes. For the first six months of operations the following data were collected:

Required:

1) Compute a cost estimating equation for each independent variable (machine-hours and kilowatt-hours) using the high-low method.

2) For July the company ran the machines for 1,600 hours and used 2,075,000 kilowatt hours of power. The overhead costs totaled $95,000. Which driver was the best predictor for July?

On January 1, 2017, Buffalo Company purchased $290,000, 6% bonds of Aguirre Co. for $266,477. The bonds were purchased to yield 8% interest. Interest is payable semiannually on July 1 and January 1. The bonds mature on January 1, 2022. Buffalo Company uses the effective-interest method to amortize discount or premium. On January 1, 2019, Buffalo Company sold the bonds for $267,985 after receiving interest to meet its liquidity needs.

(Round answers to 0 decimal places, e.g. 2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage door opening device. The president has asked that you review the company’s costing system and “do what you can to help us get better control of our manufacturing overhead costs.” You find that the company has never used a flexible budget, and you suggest that preparing such a budget would be an excellent first step in overhead planning and control.

After much effort and analysis, you determined the following cost formulas and gathered the following actual cost data for March:

During March, the company worked 13,000 machine-hours and produced 7,000 units. The company had originally planned to work 15,000 machine-hours during March.

Required:

1. Calculate the activity variances for March.

2. Calculate the spending variances for March.

Sheridan Corporation manufactures car stereos. It is a division of Bonita Motors, which manufactures vehicles. Sheridan sells car stereos to Bonita, as well as to other vehicle manufacturers and retail stores. The following information is available for Sheridan's standard unit: variable cost per unit $41, fixed cost per unit $19, and selling price to outside customer $79. Bonita currently purchases a standard unit from an outside supplier for $73. Because of quality concerns and to ensure a reliable supply, the top management of Bonita has ordered Sheridan to provide 183,000 units per year at a transfer price of $39 per unit. Sheridan is already operating at full capacity. Sheridan can avoid $3 per unit of variable selling costs by selling the unit internally.

a) What is the minimum transfer price that Sheridan should accept?

b) What is the potential loss to the corporation as a whole resulting from this forced transfer?

Welsh Meds Plc Mini Case

Welsh Meds Plc is a small but rapidly growing biotechnology company in Cardiff with annual revenues of £115 million. Last year’s net income was £6.38 million. Founded in 2002 by Carwyn Thomas and Geraint Jones with the support of a venture capitalist, the firm’s success has been remarkable. After a three year development phase, thecompany’s breakthrough was brought about by a drug called Enzyme Shield that was designed to treat immune system deficiencies (ISD). To fund the substantial increase in production capacity, which the owners decided should remain in-house, Carwyn and Geraint took Welsh Meds public, thereby taking advantage of the favorable stock market conditions of 2006. By issuing 2.8 million shares at £19, £53.2 million of equity were raised. Two years ago, Welsh Meds made its first annual dividend payment of £0.40 which increased by 15% last year. Ten months ago, the company received the Drug Administration Authority’s approval the mass market Enzyme Shield Light, a derivative of its first drug was specifically targets ISD in younger children. As a result, last quarter company earnings are up 37%, compared to the previous quarter. Carwyn and Geraint are very optimistic about Welsh Meds’ future and wonder if it is time to reward its shareholders with either a special one-time dividend of £2.50 or an increase of the annual dividend by £1.00. William Stewart, the company’s CFO, however, suggests using half of the accumulated cash of £12 million to initiate a buy back. In addition, Mr. Stewart would like to reduce the company’s debt by 4 million, thereby maintaining a cash reserve of only £2 million. Recovering from the global financial crisis when shares of Welsh Med fell by more than half, its current share price £17.38 is still, down 32% from its peak £25.55 of summer 2007. However, Carwyn and Geraint are very optimistic that the economic recovery will continue and that their company’s share price will reach new highs within the next 2–3 years.

QUESTIONS

1. Do you think it was prudent to initiate annual dividend payments only 3 years after the IPO?

2. If a special one-time dividend was paid, how would it likely affect Welsh Meds’ share price?

3. Would the share price reaction be different if the annual dividend was raised by £1.00 instead?

4. What is the current dividend payout ratio and how would it change if the annual dividend was raised by £1.00?

5. Based on the current share price of £17.63, determine the company’s implied cost of capital according to the dividend discount model (DDM).

6. What do you think about the owner’s optimistic view that the share price will reach new highs in 2–3 years? Is a share price of £25.55 or higher realistic under the current dividend growth rate assumption?

7. Is the commonly used DDM that assumes a constant and perpetual growth rate applicable to Welsh Meds? Explain.

8. How would the suggested debt reduction affect the company’s P/E ratio, return on assets, and return on equity?

9. How would the suggested share repurchase affect the company’s P/E ratio, return on assets, and return on equity?

10. Would you regard a £2 million cash reserve as sufficient for Welsh Meds? Explain.

Imperial Jewelers manufactures and sells a gold bracelet for $406.00. The company’s accounting system says that the unit product cost for this bracelet is $265.00 as shown below:

Direct materials $ 144

Direct labor 81

Manufacturing overhead 40

Unit product cost $ 265

The members of a wedding party have approached Imperial Jewelers about buying 20 of these gold bracelets for the discounted price of $366.00 each. The members of the wedding party would like special filigree applied to the bracelets that would require Imperial Jewelers to buy a special tool for $464 and that would increase the direct materials cost per bracelet by $13. The special tool would have no other use once the special order is completed.

To analyze this special order opportunity, Imperial Jewelers has determined that most of its manufacturing overhead is fixed and unaffected by variations in how much jewelry is produced in any given period. However, $14.00 of the overhead is variable with respect to the number of bracelets produced. The company also believes that accepting this order would have no effect on its ability to produce and sell jewelry to other customers. Furthermore, the company could fulfill the wedding party’s order using its existing manufacturing capacity.

Required: 1. What is the financial advantage (disadvantage) of accepting the special order from the wedding party? 2. Should the company accept the special order?

(c) Concise Limited makes a component for one of the engines that it builds. It uses, on average, 2,000 of these components, steadily throughout the year. The component costs $16 per unit to make and it costs an additional $320 to setup the production process each time a batch of components is made. The holding cost per unit is 10% of the unit production cost. The company makes these components at a rate of 200 per week, and the factory is open for 50 weeks per annum. Calculate the Economic Batch Quantity EBQ. (d) List and explain seven key purposes of a budgeting system. (e) Briefly explain any four (4) approaches to budgeting

Amy, a single individual and sole shareholder of Brown Corporation, sold all of the Brown stock for $30,000. Amy's stock basis was $150,000. She had owned the stock for 3 years. Brown Corporation meets the Section 1244 requirements. 1) How much of an ordinary loss does Amy have? 2) How much of a capital loss does Amy have? 3) Do your answers above change if Amy is married? Explain how.

Given the following information:     

                                                                 Budget       Actual               

Units produced                                     20,000      22,000    

Materials (kg)                                         80,000      96,000                

Direct Labour (Hours)                         290,000     343,000                 

Material Costs                                    $800,000                    ?                

Direct Labour Costs                         $3,850,000     $4,557,800             

Variable Overhead Costs                $3,500,000     $4,400,000

Fixed Overhead Costs                      $1,600,000     $1,610,000

Other Information

Overhead is Allocated on Direct Labour Hours

During the year 99,000 kg of materials were purchased for $800,000

Beginning Inventory:  none

Ending Inventory:     3,000 kg

Required:

Prepare a flexible budget

Calculate the following variances

1. Material Rate
2. Material Efficiency
3. Labour Price            
4. Labour Efficiency
5. Variable Overhead Rate
6. Variable Overhead Efficiency
7. Fixed Overhead Rate
8. Fixed Overhead Production Volume

A client that has been allocating Overhead just based on Square Footage in the Plant and office. For example, if the purchasing department uses 100 square feet to a total of 1000 sq feet, they will get 10% of overhead allocated to the purchasing department. A recently added employee discussed ABC accounting for overhead allocation. My question is, what might be one advantage over all of the new work required? The costs do not change.

On December 31, 2017, Ainsworth, Inc., had 820 million shares of common stock outstanding. Thirty three million shares of 6%, $100 par value cumulative, nonconvertible preferred stock were sold on January 2, 2018. On April 30, 2018, Ainsworth purchased 30 million shares of its common stock as treasury stock. Twelve million treasury shares were sold on August 31. Ainsworth issued a 5% common stock dividend on June 12, 2018. No cash dividends were declared in 2018. For the year ended December 31, 2018, Ainsworth reported a net loss of $205 million, including an after-tax loss from discontinued operations of $530 million. Required: 1. Compute Ainsworth's net loss per share for the year ended December 31, 2018. 2. Compute the per share amount of income or loss from continuing operations for the year ended December 31, 2018. 3. Prepare an EPS presentation that would be appropriate to appear on Ainsworth's 2018 and 2017 comparative income statements. Assume EPS was reported in 2017 as $0.75, based on net income (no discontinued operations) of $615 million and a weighted-average number of common shares of 820 million.

Identify the financial statements that need to be reformatted and the new classifications arising from the reformatting. Explain why financial statements need to be reformatted.

(c) Concise Limited makes a component for one of the engines that it builds. It uses, on average, 2,000 of these components, steadily throughout the year. The component costs $16 per unit to make and it costs an additional $320 to setup the production process each time a batch of components is made. The holding cost per unit is 10% of the unit production cost. The company makes these components at a rate of 200 per week, and the factory is open for 50 weeks per annum. Calculate the Economic Batch Quantity EBQ. (d) List and explain seven key purposes of a budgeting system. (e) Briefly explain any four (4) approaches to budgeting

DIRECTIONS: Summarize these notes

The Current Ratio measures a firm’s ability to pay off its short-term obligations. It is calculated as follows: Current Ratio = Current Assets/Current liabilities Ideally, current ratio of 2 is desirable. Current ratio for both Lockheed Martin and Raytheon is less than 2. Moving from 2016 to 2017, the current ratio for both the companies improves indicating increase in current assets or decrease in current liabilities or both. For Lockheed Martin the current ratio improves from 1.2 to 1.38 and for Raytheon it moves from 1.54 to 1.66. Between the two companies, Raytheon is better placed as it has higher current ratios in both 2016 and 2017. Quick Ratio measures a firm's ability to meet current liabilities with its most liquid assets. It is calculated as: Quick Ratio = Current Assets excluding inventories/Current liabilities A quick ratio above 1 is considered safe as liabilities can be safely paid back using liquid assets. Raytheon's quick ratio in 2016 and 2017 is 1.35 and 1.49. The company is well poised. Its quick ratio is improving year to year. Quick ratio less than 1 indicates that the firm cannot fully pay back its liabilities with its most liquid assets. Lockheed Martin has quick ratio of 0.80 and 0.91 in 2016 and 2017. This is a worrisome situation for Lockheed Martin. Even though the quick ratio is improving, it is still less than 1. Raytheon is in a better position than Lockheed Martin as far as liquidity is concerned. From the above ratios, it can be observed that Lockheed is better in terms of asset turnover meaning that it is more efficient in using its assets. Whereas, Raytheon fairs a lot better in terms of converting its account receivables into cash. Raytheon takes about 17 days to do so which contrasts with Lockheed's 60 days. Based on Net Profit Margin, Lockheed Martin performs better than Raytheon as Lockheed Martin’s was 11.22% whereas Raytheon’s was just 7.98% only. Higher Net Profit Margin implies that the firm generates more net profit from each dollar sales it makes. Based on Total Assets turnover, Lockheed Martin performs better than Raytheon as Lockheed Martin’s was .98 whereas Raytheon was just .83. Higher total asset turnover implies that the firm generates more revenue from each dollar asset it has invested in the firm. Based on equity multiplier, Equity multiplier does not always explain about firm’s profitability. Instead, it explains the ratio of total assets of the firm versus total equity for the respective period. Higher the ratio, lower the firm’s dependency on equity capital and vice-versa. Lockheed Martin’s equity multiplier of 21.03 implies that the firm depends very less on its equity capital when compared to Raytheon.