Yogurt Vi (pronounced vee) is a frozen yogurt restaurant with several locations in Ohio. Customers will select the flavor of frozen yogurt they want and fill their cup from the self-serve machine with the desired amount of the frozen yogurt. Next the customer will proceed to the toppings bar, where they can select from a large variety of toppings including strawberries, kiwis, gummy bears, chocolate chips, crushed Oreos, M&M candies, sprinkles, salted caramels, and many other toppings. Once the customer has finished adding toppings, the customer then proceeds to the cash register where the cup of frozen yogurt and toppings is weighed. The customer is charged a flat fee of $0.48 per ounce.

Questions 1: Do you think that Yogurt Vi pays the same amount to its suppliers for each of the toppings? For example, is it probable that fresh strawberries cost the exact same amount as M&M candies? Do you think the toppings would cost the same amount as the frozen yogurt mix that is put into the soft-serve machines?

Question 2: From a technical viewpoint, do you think Yogurt Vi would use a job costing system or a process costing system for calculating the cost of each customer’s order? Explain.

Question 3: From a practical standpoint, do you think Yogurt Vi would use a job costing system or a process costing system for calculating the cost of each customer’s order? Explain.

1. Gloria J Company provided the following information for 2019.

Required: Prepare an income statement using “functional method” for the year with supporting notes

*Hint: don't miss out income tax

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Mastery Problem: Cash Payback and Average Rate of Return (Advanced)

Companies use capital investment analysis to evaluate long-term investments. Capital investment evaluation methods that do not use present values are (1) Average rate of return method and (2) Cash payback method.

Methods that do not use present value

One category of capital investment evaluation methods does not use present value. The primary difference between the category of methods that do use present value and this category is that this category does not  take the time value of money into account. The basic premise of the time value of money is that a dollar today is worth more than  a dollar tomorrow.

True or False: Considering the fact that most firms use methods from each category, it can be concluded that both categories have value.
True

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Cash Payback Method

This method identifies how long it will take (in years) to recover the initial investment . The particulars of the method vary depending on whether the cash flows from an investment are even or uneven.

Cash Payback Method (Even cash flows)

Suppose that a particular investment required an up-front capital outlay of $100,000. This investment is expected to yield cash flows of $50,000 per year for 10 years. What is the payback period for this investment? If required, round your answer to two decimal places.

Cash Payback Period = $ / $ =  years

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Payback Period (Uneven cash flows)

When the annual cash flows are unequal, the payback period is computed by adding the annual cash flows until such time as the original investment is recovered. If a fraction of a year is needed, it is assumed that cash flows occur evenly within each year.

The steps for determining the payback period with uneven cash flows is as follows:

1. Add the annual cash flows to one another until the investment is recovered.
2. For each full year's worth of cash flows consumed, add that year to your calculation for total payback years.
3. If you arrive at a point where only part of the year's cash flows are needed, only add the fraction of the year's cash flows relevant to recovering the initial investment to the total payback years.
4. If the unrecovered investment is greater than the annual cash flow, the payback period is "1". If the unrecovered investment is less than the annual cash flow the time needed for payback is computed by dividing the unrecovered investment by the annual cash flow for than year.

Compute the time needed for payback for the following example assuming the investment required an up-front capital outlay of $100,000 and the uneven annual cash flows for each year are provided in the table. If an amount is zero, enter "0". For the time needed for payback, enter your answer to one decimal place, if less than one year (i.e. 0.2, 0.5, etc.).

Total time needed for payback (to the nearest tenth of a year) = years

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Average Rate of Return

The average rate of return is another method that does not use present value and is commonly used in making capital investment decisions. Unlike the cash payback method, the average rate of return focuses on income rather than cash flow.

Assume that the investment involves an initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: Year 1 - $10,000, Year 2 - $20,000, Year 3 - $30,000, Year 4 - $40,000 and Year 5 - $50,000.

Use the minus sign to indicate a net loss. If an amount is zero, enter "0".

Total Net Income (five years) = $

Winnebago Industries, Inc. is a leading manufacturer of recreational vehicles (RVs), including motorized and towable products. The company designs, develops, manufactures, and markets RVs as well as supporting products and services. The RVs are sold to consumers through a dealer network. On the August 29, 2015, balance sheet, Winnebago reported inventory of approximately $112 million. Of this amount, approximately $12 million, about 11%, was Finished Goods Inventory (Notes to Consolidated Financial Statements, Note 3). Suppose Winnebago motor homes have an average sales price of $96,000 and cost of goods sold is 89% of sales. Thor Industries, Inc., a major competitor, has an average cost of goods sold of 86% of sales. For year ending August 29, 2015, Winnebago sold 9,097 motor homes (Form 10-K, Item 1 Business).
Requirements

1. Why would the Finished Goods Inventory be such a relatively small portion of total inventory?

2. What is the average cost of goods sold (in dollars) for a Winnebago motor home? What is the average gross profit?

3. If Winnebago could reduce production costs so that the average cost of goods sold is equal to their competitor’s average cost of goods sold, how much more profit would Winnebago earn on each motor home sold?

4. Based on 2015 sales, how much would operating income increase if the company reduced the average cost of goods sold to equal their competitor’s average cost of goods sold?

5. How could managers at Winnebago use managerial accounting to reduce costs and increase profits?

1. Cutter Enterprises purchased equipment for $72,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,000.

Using the sum-of-the-years'-digits method, depreciation for 2019 and book value at December 31, 2019, would be:

Multiple Choice

• $19,200 and $30,800 respectively.

• $19,200 and $28,800 respectively.

• $17,600 and $26,400 respectively.

• $17,600 and $32,400 respectively.

  2. Cutter Enterprises purchased equipment for $66,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $7,500.
  
  Using the sum-of-the-years'-digits method, depreciation for 2018 and book value at December 31, 2018, would be: (Do not round depreciation rate per year)

  Multiple Choice

• $22,000 and $36,500 respectively.

• $19,500 and $46,500 respectively.

• $22,000 and $44,000 respectively.

• $19,500 and $39,000 respectively.

Make sure you understand the two alternatives.

• The "make" means that KCSB assembles and ships all of its regular bicycles.
• The "buy" means that KCSB pays another firm to assemble and ship some of its regular bicycles and uses the freed-up resources to assemble and ship specialty racing bicycles.
• TIP: Ignore revenues from regular bike sales - they will be the same under both alternatives and are therefore common costs that can be ignored.

______________________________________________________

King City Specialty Bikes (KCSB) produces high-end bicycles. Costs to manufacture and market the bicycles at last year's volume level of 2,100 bicycles per month are shown in the following table:

KCSB expects to produce and sell 2,500 bicycles per month in the coming year. The bicycles sell for $580 each.

KCSB receives a proposal from an outside contractor who, for $170 per bicycle, will assemble 750 bicycles per month and ship them directly to KCSB's customers as orders are received from KCSB's sales force. KCSB would provide the materials for each bicycle, but the outside contractor would assemble, box, and ship the bicycles. The variable manufacturing costs would be reduced by 30% for the 750 bicycles assembled by the outside contractor, and variable nonmanufacturing costs for the 750 bicycles would be cut by 55%.

KCSB's marketing manager thinks that it could sell 80 specialty racing bicycles per month for $6,000 each, and its production manager thinks that it could use the idle resources to produce each of these bicycles for variable manufacturing costs of $5,000 per bicycle and variable nonmanufacturing costs of $450 per bicycle.

If KCSB accepts the proposal, it would be able to save $14,595 of fixed manufacturing costs; fixed nonmanufacturing costs would be unchanged.

REQUIRED [Note: Round unit cost computations to the nearest cent]

What is the difference in KCSB's monthly costs between accepting the proposal and rejecting the proposal?   (Note: If the costs of accepting the proposal are less than the costs of rejecting it, enter the difference as a positive number; if the accept costs are more than the reject costs, enter the difference as a negative number.)

Rita owns a sole proprietorship in which she works as a management consultant. She maintains an office in her home (500 square feet) where she meets with clients, prepares bills, and performs other work-related tasks. Her business expenses, other than home office expenses, total $5,820. The following home-related expenses have been allocated to her home office under the actual expense method for calculating home office expenses.

Also, assume that, not counting the sole proprietorship, Rita’s AGI is $62,200.

Assume Rita’s consulting business generated $15,550 in gross income. (Leave no answer blank. Enter zero if applicable.)

a. What would Rita’s home office deduction be if her business generated $10,550 of gross income instead of $15,550? (Answer for both the actual expense method and the simplified method.)

b. Given the original facts, what is Rita’s AGI for the year?

(Deferred Income Taxes)

This year, a company has each of the following income statement items:

1. Gross profits on installment sales.
2. Revenues on long-term construction contracts.
3. Estimated costs of product warranty contracts.
4. Premiums on officers’ life insurance policies with the company as beneficiary.

Indicate where deferred income taxes are reported in the financial statements. Specify when deferred income taxes would need to be recognized for each of the items above, and indicate the rationale for such recognition.

Problem 8-19 Cash Budget; Income Statement; Balance Sheet [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]

Minden Company is a wholesale distributor of premium European chocolates. The company’s balance sheet as of April 30 is given below:

The company is in the process of preparing a budget for May and has assembled the following data:

1. Sales are budgeted at $240,000 for May. Of these sales, $72,000 will be for cash; the remainder will be credit sales. One-half of a month’s credit sales are collected in the month the sales are made, and the remainder is collected in the following month. All of the April 30 accounts receivable will be collected in May.

2. Purchases of inventory are expected to total $118,000 during May. These purchases will all be on account. Forty percent of all purchases are paid for in the month of purchase; the remainder are paid in the following month. All of the April 30 accounts payable to suppliers will be paid during May.

3. The May 31 inventory balance is budgeted at $31,500.

4. Selling and administrative expenses for May are budgeted at $93,500, exclusive of depreciation. These expenses will be paid in cash. Depreciation is budgeted at $2,400 for the month.

5. The note payable on the April 30 balance sheet will be paid during May, with $160 in interest. (All of the interest relates to May.)

6. New refrigerating equipment costing $15,000 will be purchased for cash during May.

7. During May, the company will borrow $26,600 from its bank by giving a new note payable to the bank for that amount. The new note will be due in one year.

Required:

1. Calculate the expected cash collections from customers for May.

2. Calculate the expected cash disbursements for merchandise purchases for May.

3. Prepare a cash budget for May.

4. Prepare a budgeted income statement for May.

5. Prepare a budgeted balance sheet as of May 31.

Cutter Enterprises purchased equipment for $102,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $6,600.

Using the sum-of-the-years'-digits method, depreciation for 2019 and book value at December 31, 2019, would be: (Do not round depreciation rate per year)

Multiple Choice

• $25,440 and $44,760 respectively.

• $25,440 and $38,160 respectively.

• $27,200 and $40,800 respectively.

• $27,200 and $34,200 respectively.

According to the EY Foundation, over which data analytic techniques should accountants gain mastery?

Concord Ltd. and Riverbed Ltd. incurred the following merchandise transactions in June. June 10 Concord sold $4,400 of merchandise to Riverbed, terms 1/10, n/30, FOB shipping point. The merchandise cost Duvall $2,640 when it was originally purchased. 11 Freight costs of $190 were paid by the appropriate company. 12 Concord received damaged goods returned by Riverbed for credit. The goods were originally sold for $700; the cost of the returned merchandise was $420. The merchandise was not returned to inventory. 19 Concord received full payment from Riverbed.

Prepare journal entries for each transaction in the books of Concord Ltd., assuming (1) a perpetual inventory system is used, and (2) a periodic inventory system is used.

Preparing production and mfg. budgets

Black Diamond co produces snow skis. Each ski requlires 2 pounds of carbon fiber. Teh co. mangement predicts that 5000 skis and 6000 poiunds of carbon fiber will be ininvenotry of jun 30 of the cureent year andthat 150,000 skis will be sold during the next ( third ) quarter . A set of two skis sells for 300. Management wants to end the quarter with 3500 skis and 4000 pounds of carbon fiber in inventory. Carbon fiber can be purchasedd fo 15 per poiund. Each ski requires .5 hours of dircet labor at 20 per hour. Variable overhead is applies at the rate of 8 per direct labor hour. The company budgets fixed overheaddof 1,782,000 for quarter.

Make a direct materials budget for carbon

Bob is evaluating the merits of a potential investment in a drone manufacturing company. He already owns the land for the facility, but he would need to purchase and install the assembly machinery for $240,000. The machine falls into the MACRS 5-year class, and it will cost $20,000 to modify it for Bob's particular needs. A consultant, who charged Bob's $10,000 for his services, already completed the process of restructuring the facility for the required zoning and industry standards. The facility require additional net working capital of $5,000. Drone sales are expected to yield before tac revenues of $450,000 per year with labor costs of $200,000 per year and fixed costs of $175,000 per year. Bob expects the machine to be used for 5 years and then sold for $55,000.

Bob has asked you to evaluate his proposed project, and he has provided you with the following information about the investment.

Bob's firm has a target capital structure of 25% debt, 5% preferred stock, and 70% common equity. Its bonds have a 9% coupon, paid semiannually, a current mature of 20 years, and sell at par for $1,000. The firm could sell, at par, $100 preferred stock that pays a 5.75% annual dividend, but flotation costs of 4% would be incurred. The firm's beta is 1.25, the risk-free rate is 3%, and the expected rate of return on the market portfolio is 9.4%. The company is a constant growth firm that just paid a dividend of $2.00, sells for $30 per share, and has a growth rate of 5%. The firm's policy is to use a risk premium of 4% when using the bond-yield-plus-risk-premium method to find the cost of equity. The firm's marginal tax rate is 42%.

In addition to finding the firm's average-risk cost of capital, Bob has also asked you to calculate a risk-adjusted cost of capital. He believes that the project's cash flows for years 1 through 5 will increase by 10% in particularly good market, and the cash flows will decrease by 10% in a particularly bad market. He estimates that there is a 15% probability of a good market occurring, a 25% probability of a bad market occurring, and a 60% probability of an "average" market occurring.

To complete this task of calculating a risk-adjusted cost of capital, you will need to find the expected NPV, its standard deviation, and its coefficient of variation (CV). Bob informs you that his average project has a CV in the range of 1.0 to 2.0. If the CV of a project being evaluated is greater than 2.0, 2 percentage points are added to the cost of capital for the evaluation. Similarly, if the CV is less than 1.0, 1 percentage point is deducted from the cost of capital for the evaluation.

In the end, Bob wants to know whether to accept or reject the project. He expects you to make your conclusion using 3 techniques: discounted payback method, NPV analysis, and IRR analysis.

Throughout your analysis, you are to be as thorough as possible, documenting all of your work to support your conclusion. Please show the following calculations:

1) Bob's WACC for an average-risk project

2) Annual cash flow estimates for the project (including the initial outlay)

3) A Risk- adjusted cost of capital for this project

4) An accept/reject decision based on the above 3 techniques

The Quick Wash 24-hour Laundromat has 16 washing machines. A machine breaks down every 20 days (exponentially distributed). The repair service with which the Laundromat contracts takes an average of 1 day to repair a machine (exponentially distributed). A washing machine averages $5 per hour in revenue. The Laundromat is considering a new repair service that guarantees repairs in 0.50 day, but it charges $10 more per hour than the current repair service. Should the Laundromat switch to the new repair service. please put in excel format.