Problem 11-18 Relevant Cost Analysis in a Variety of Situations [LO11-2, LO11-3, LO11-4]

Andretti Company has a single product called a Dak. The company normally produces and sells 120,000 Daks each year at a selling price of $48 per unit. The company’s unit costs at this level of activity are given below:

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

1-a. Assume that Andretti Company has sufficient capacity to produce 162,000 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 35% above the present 120,000 units each year if it were willing to increase the fixed selling expenses by $120,000. What is the financial advantage (disadvantage) of investing an additional $120,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 162,000 Daks each year. A customer in a foreign market wants to purchase 42,000 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $29,400 for permits and licenses. The only selling costs that would be associated with the order would be $2.40 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 800 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?

4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 40% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.

a. How much total contribution margin will Andretti forgo if it closes the plant for two months?

b. How much total fixed cost will the company avoid if it closes the plant for two months?

c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?

d. Should Andretti close the plant for two months?

5. An outside manufacturer has offered to produce 120,000 Daks and ship them directly to Andretti’s customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. What is Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer?

Workpaper Entries and Consolidated Net Income for Two Years, Cost Method LO 6 LO 3 LO 5 On January 1, 2014, Palmero Company purchased an 80% interest in Santos Company for $2,800,000, at which time Santos Company had retained earnings of $1,000,000 and capital stock of $500,000. On the date of acquisition, the fair value of the assets and liabilities of Santos Company was equal to their book value, except for property and equipment (net), which had a fair value of $1,500,000 and a book value of $600,000. The property and equipment had an estimated remaining life of 10 years. Palmero Company reported net income from independent operations of $400,000 in 2014 and $425,000 in 2015. Santos Company reported net income of $300,000 in 2014 and $400,000 in 2015. Neither company declared dividends in 2014 or 2015. Palmero uses the cost method to account for its investment in Santos. Required: A. Prepare in general journal form the entries necessary in the consolidated statements work papers for the years ended December 31, 2014 and 2015. B. Prepare a schedule or t-account showing the calculation of the controlling and non controlling interest in consolidated net income for the years ended December 31, 2014 and December 31, 2015.

Useful Art Inc. creates and manufactures objects that are characterized by both utility and artistry. One of its most popular products is the trivet (a 3-legged hot plate). The top of each trivet is a unique, handmade ceramic tile. Useful Art buys the tiles from artists and the trivet legs from a metal-working company, then assembles the trivets in-house. Towards the end of 2015, Useful Art prepares monthly budgets for 2016 using the following assumptions and data:

2015 actual sales:

Jan 300 u

Apr 350 u

Feb 325 u

May 345 u

Mar 275 u

Jun 370 u

Selling price per unit 50 $/u

Useful Art plans to launch a marketing campaign in 2016 that should increase sales (units) by 10% over 2015 sales as long as the selling price remains unchanged. Because each trivet is unique, management wants to have a substantial number of trivets on hand at all times so that customers can choose from among many options. So management plans to have 20% of next month's sales (units) on hand at the end of each month. The artists from whom Useful Art purchases the ceramic tiles do great work, but are sometimes a bit unreliable as to when they deliver the tiles. So management wants to have 30% of next month's production needs (tiles) on hand at the end of each month. The metal-working supplier is very reliable, so management wants to have just 15% of next month's production needs (legs) on hand at the end of each month Useful Art pays $35 per tile. • Useful Art pays $.45 per leg. • Useful Art has collected the following data related to cash inflows from sales: 20% of sales revenues are collected in the month of sale 70% of sales revenues are collected in the month after the sale 10% of sales revenues are collected two months after the sale

REQUIRED: Prepare the following budgets on a monthly basis for Useful Art for 2016: 1. Sales Budget (first two quarters of 2016) 2. Production Budget (first quarter of 2016) 3. Materials Purchases Budget (tiles) (first quarter of 2016) 4. Materials Purchases Budget (legs) (first quarter of 2016) 5. Cash Receipts (AKA Cash Collections) Budget (second quarter of 2016)

Black Mountain Ski Resort has been granted a 20 - year permit to develop and operate a skiing operation in a national park. After 20 years the site must be returned to its original condition. The roads may remain, as they can be used for fire prevention purposes. In the spring and summer before the ski hill opened, the following transactions and events occurred:

You must use the following Long-Lived asset accounts

Ski Lift

Ski Chalet

Land improvement

Roads

Parking lot

1. Installed three ski lifts for a total cost of $150,000,000. It is estimated that the scrap metal from the lifts could be sold for $4,000,000 at the end of 20 years.
2. Built a Ski chalet for $70,000,000
3. Removed Trees and cleared the area for ski runs at a cost of $40,000,000
4. Received $ 10,000,000 for the trees that were removed for the ski runs.
5. Put in roads for a cost of $50,000,000.
6. Paved an area at the base of the mountain for a parking lot at a cost of $10,000,000.
7. Estimated that it would cost $20,000,000 to dismantle the ski lifts in 20 years. The chalet could be removed for a cost of $15,000,000. Re-foresting the site would cost $5,000,000. Removing the parking lot will cost $3,000,000. Calculate the PV of Site Restoration using a risk rate of 6% and provide the journal entry.

8. Using Straight Line Depreciation record the depreciation for the first year of operations on the Long-Lived assets and site restoration costs. Put all the depreciation expense in one account and then create accumulated depreciation accounts for each asset that requires depreciation.

9. Allocate the interest expense on the site restoration costs for the first three years

10. Using the table below prepare the balance sheet presentation of all the accounts involved in this question for the end of the third year of operations.

    	Cost	Accumulated Depreciation	Net Carrying Amount
    Property Plant and Equipment
    Ski Lift
    Ski Chalet
    Land Improvement
    Roads
    Parking Lot
    Site Restoration Costs
    Total Property Plant and Equipment

    Long Term Liabilities

    Obligation for future restoration =

11. At the end of the project the actual cost of restoring the site is $43,000,000, as originally estimated. Prepare the journal entry to record the payment of these costs at the end of the project

    Date	Explanation/ Account	Debit	Credit

    what would be the total expenses associated with the site restoration in the first, second and 20^th year?

    Year	Depreciation of Site Restoration Costs	Interest expense accrual on obligation for future site restoration	Total Expense relating to site restoration
    1
    2
    20

    Calculations

Nonsense Pty Ltd has 6 shareholders, each of whom is a director involved in a day to day operations of the company. Nonsense Pty Ltd has only 8 full time employees each of whom has direct personal contract with the directors.

The financial statements of Nonsense Pty Ltd for the year ended 30 June 2019 show:
- GROSS ASSETS OF $40,000,000
a LIABILITY OF 9000,000 owed entirely to a public sector bank and
- Gross revenues of $60000,000

Explain, justifying your answer, if Nonesence Pty Ltd is required by the Corporations Act 2001 to produce an annual report according to AASB accounting standards for the year ending 30 June 2019?

For the year ended December 31, 2018, Fidelity Engineering reported pretax accounting income of $980,000. Selected information for 2018 from Fidelity’s records follows: Interest income on municipal bonds $ 32,600 Depreciation claimed on the 2018 tax return in excess of depreciation on the income statement 55,900 Carrying amount of depreciable assets in excess of their tax basis at year-end 86,500 Warranty expense reported on the income statement 26,450 Actual warranty expenditures in 2018 16,300 Fidelity's income tax rate is 40%. At January 1, 2018, Fidelity's records indicated balances of zero and $12,240 in its deferred tax asset and deferred tax liability accounts, respectively. Required: 1. Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry. 2. What is Fidelity’s 2018 net income?

For the year ended December 31, 2018, Fidelity Engineering reported pretax accounting income of $980,000. Selected information for 2018 from Fidelity’s records follows:

Fidelity's income tax rate is 40%. At January 1, 2018, Fidelity's records indicated balances of zero and $12,240 in its deferred tax asset and deferred tax liability accounts, respectively.

Required:
1. Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry.
2. What is Fidelity’s 2018 net income?
  

Exercise 21-12 Direct materials and direct labor variances LO P2

Reed Corp. has set the following standard direct materials and direct labor costs per unit for the product it manufactures.

During June the company incurred the following actual costs to produce 8,500 units.

AQ = Actual Quantity
SQ = Standard Quantity
AP = Actual Price
SP = Standard Price

AH = Actual Hours
SH = Standard Hours
AR = Actual Rate
SR = Standard Rate

(1) Compute the direct materials price and quantity variances.
(2) Compute the direct labor rate variance and the direct labor efficiency variance. Indicate whether each variance is favorable or unfavorable.

Complete this question by entering your answers in the tabs below.

Required 1

Compute the direct materials price and quantity variances and classify it as favorable or unfavorable.

Actual Cost

1)

2)

3)

$

___________

1)

2)

3)

Standard Cost

1)

2)

3)

$

________________

________________

_________________

Required 2

Compute the direct labor rate variance and the direct labor efficiency variance. Indicate whether each variance is favorable or unfavorable.

Actual Cost

1)

2)

3)

$

__________________

1)

2)

3)

Standard Cost

1)

2)

3)

$

______________

______________

_______________

Problem 3-5A Preparing financial statements from the adjusted trial balance and computing profit margin LO P3, A1 [The following information applies to the questions displayed below.] The adjusted trial balance for Chiara Company as of December 31, 2018, follows. Debit Credit Cash $ 30,000 Accounts receivable 52,000 Interest receivable 18,000 Notes receivable (due in 90 days) 168,000 Office supplies 16,000 Automobiles 168,000 Accumulated depreciation—Automobiles $ 50,000 Equipment 138,000 Accumulated depreciation—Equipment 18,000 Land 78,000 Accounts payable 96,000 Interest payable 20,000 Salaries payable 19,000 Unearned fees 30,000 Long-term notes payable 138,000 Common stock 20,000 Retained earnings, December 31, 2017 235,800 Dividends 46,000 Fees earned 484,000 Interest earned 24,000 Depreciation expense—Automobiles 26,000 Depreciation expense—Equipment 18,000 Salaries expense 188,000 Wages expense 40,000 Interest expense 32,000 Office supplies expense 34,000 Advertising expense 58,000 Repairs expense—Automobiles 24,800 Totals $ 1,134,800 $ 1,134,800 Problem 3-5A Part 1 Required: 1(a) Prepare the income statement for the year ended December 31, 2018. 1(b) Prepare the statement of retained earnings for the year ended December 31, 2018. 1(c) Prepare Chiara Company's balance sheet as of December 31, 2018.

1. Income Statements under Absorption and Variable Costing

   Shawnee Motors Inc. assembles and sells MP3 players. The company began operations on August 1 and operated at 100% of capacity during the first month. The following data summarize the results for August:

   Sales (15,500 units)				$2,170,000
   Production costs (20,000 units):
   Direct materials		$1,036,000
   Direct labor		498,000
   Variable factory overhead		248,000
   Fixed factory overhead		166,000		1,948,000
   Selling and administrative expenses:
   Variable selling and administrative expenses		$301,900
   Fixed selling and administrative expenses		116,900		418,800

   If required, round interim per-unit calculations to the nearest cent.

   a. Prepare an income statement according to the absorption costing concept.

   Shawnee Motors Inc.
   Absorption Costing Income Statement
   For the Month Ended August 31
   	$
   	$
   	$

   b. Prepare an income statement according to the variable costing concept.

   Shawnee Motors Inc.
   Variable Costing Income Statement
   For the Month Ended August 31
   		$
   		$
   		$
   Fixed costs:
   	$
   		$

   c. What is the reason for the difference in the amount of income from operations reported in (a) and (b)?

   Under the   method, the fixed manufacturing cost included in the cost of goods sold is matched with the revenues. Under  , all of the fixed manufacturing cost is deducted in the period in which it is incurred, regardless of the amount of inventory change. Thus, when inventory increases, the   income statement will have a higher income from operations than will the variable costing income statement.

Choco Company had the following capital structure at January 1, 2018:

Outstanding

Ordinary shares, 600,000 shares $7,200,000

10% stated interest rate convertible bonds issued at par;

each $1,000 bond is convertible into 80 ordinary shares $5,000,000

During 2018, Choco had the following share transactions:

May 1 Issued 50,000 ordinary shares for $30 per share.

Sep. 1 Redeemed 100,000 ordinary shares at $35 per share.

Nov. 1 Converted $2,000,000 of bonds. Net income for 2018 was $1,900,000.

The income tax rate was 32%.

Required: Compute the basic and diluted earnings per share for Choco for 2018 (Round to 2 decimal places).

. Come up with a merchandise company scenario, where this company performed four purchasing transactions and two sales transactions. Then, calculate the balance of ending inventory and cost of goods sold after each sales transaction, assuming the company used the FIFO, Moving Average Cost. Use the following table to answer.

Airnova Inc. has two types of bonds, Bond D and Bond F. Both have 8 percent coupons, make semiannual payments, and are priced at par value. Bond D has 2 years to maturity. Bond F has 15 years to maturity.

Airnova Inc. is considering four different types of stocks. They each have a required return of 20 percent and a dividend of $3.75 for share. Stocks, A, B, and C are expected to maintain constant growth rates in dividends for the near future of 10 percent, 0 percent, and -5 percent, respectively. Stock D is a growth stock and will increase its dividend by 30 percent for the next four years and then maintain a constant 12 percent growth rate after that.

What is the dividend yield for each of the four stocks?

What is the expected capital gains yield?

Discuss the relationship among the various returns that you find for each of the stocks.

1. Profit-Linked Productivity Measurement

   In 20x2, Choctaw Company implements a new process affecting labor and materials.

   Choctaw Company provides the following information so that total productivity can be valued:

   	20x1	20x2
   Number of units produced	540,000	450,000
   Labor hours used	108,000	112,500
   Materials used (lbs.)	2,160,000	1,500,000
   Unit selling price	$20	$22
   Wages per labor hour	$12	$14
   Cost per pound of material	$3.40	$3.50

   Required:

   1. Calculate the cost of inputs in 20x2, assuming no productivity change from 20x1 to 20x2.

   Cost of labor	$
   Cost of materials
   Total PQ cost	$

   2. Calculate the actual cost of inputs for 20x2.

   Cost of labor	$
   Cost of materials
   Total current cost	$

   What is the net value of the productivity changes?
   $

   How much profit change is attributable to each input's productivity change? If an item is negative, use a minus (-) sign to indicate.

   Labor productivity change	$
   Materials productivity change	$

   3. What if a manager wants to know how much of the total profit change from 20x1 to 20x2 is attributable to price recovery? Calculate the total profit change.
   $

   Calculate the price-recovery component.
   $

1.        Angelo uses the equity method to account for its investment in Fischer on January 1. On the date of acquisition, Fischer’s land and buildings were undervalued on its balance sheet. During the year following the acquisition, how do these excesses of fair values over book values affect Angelo's Equity Income from Fischer?

a. Building, Decrease; Land, No Effect

b. Building, Decrease; Land, Decrease

c. Building, Increase;   Land, Increase

d. Building, Increase;   Land, No Effect

2.         On January 2, 2020, Campbell, Inc. purchased a 20% interest in Renner Corp. for $2,000,000 cash. During 2020, Renner's net income was $2,500,000 and it paid dividends of $750,000.

Equity Investment balance should Campbell report at December 31, 2020?

a. $2,500,000

b. $   500,000

c. $2,350,000

d. $2,150,000

3.        On December 31, 2020, Park Inc. paid $500,000 for all of the common stock of Smith Corp. On that date, Smith had assets and liabilities with book values of $400,000 and $100,000; and fair values of $450,000 and $125,000, respectively.

What amount of goodwill will be reported on the December 31, 2020 balance sheet?

a. $ 50,000

b. $100,000

c. $200,000

d. $175,000

4.         Francis, Inc. acquired 40% of Park's voting stock on January 1, 2020 for $420,000. During 2020, Park earned $120,000 and paid dividends of $60,000. During 2021, Park earned $160,000 and paid dividends of $50,000 on April 1 and $40,000 on December 1. On July 1, 2021, Francis sold half of its stock in Park for $275,000 cash.

The Equity Investment balance at December 31, 2020 is:

a. $420,000

b. $444,000

c. $408,000

d.   $492,000

5.         On January 1, 2020, Cracker Co. purchased 40% of Dallas Corp.'s common stock at book value of net assets. The balance in Cracker's Equity Investment account was $820,000 at December 31, 2020. Dallas reported net income of $500,000 for the year ended December 31, 2020, and paid dividends totaling $150,000 during 2020.

How much did Cracker pay for its 40% interest in Dallas?

a. $680,000

b. $500,000

c. $560,000

d. $760,000

The Frost Company has accumulated the following information relevant to its 2018 earnings per share. 1. Net income for 2018, $150,000. 2. Bonds payable: On January 1, 2018, the company had issued 10%, $200,000 bonds. Each $1,000 bond is currently convertible into 20 shares of ordinary share. To date, no bonds have been converted. 3. Bonds payable: On January 31, 2018, the company had issued $540,000 of 5.8% bonds. Each $1,000 bond is currently convertible into 11 shares of ordinary share. To date, no bonds have been converted. 4. Preference share: On July 1, 2017, the company had issued 3,800 shares of $7.5 preference share at $108 per share. Each share of preference share is currently convertible into 2.45 shares of ordinary share. To date, no preference share has been converted and no additional shares of preference share have been issued. The current dividends have been paid. 5. Ordinary share: At the beginning of 2018, 25,000 shares were outstanding. On July 1, 7,000 additional shares were issued. On September 1, a 20% bonus issue was declared and issued. On November 1, 2,000 shares were repurchased by the company. 6. Share options: Options to acquire ordinary share at a price of $33 per share were outstanding during all of 2018. Currently, 4,000 shares may be acquired. TO date, No options have been exercised. 7. Miscellaneous: Stock market prices on ordinary share averaged $41 per share during 2018, and the 2018 ending stock market price was $40 per share. The corporate income tax rate is 30%. Required: Compute the basic and diluted earnings per share for 2018 (Round to 2 decimal places).