Problem 6-27 Sales Mix; Break-Even Analysis; Margin of Safety [LO6-7, LO6-9]

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product’s selling price, variable expense per unit, and annual sales volume are as follows:

Fixed expenses total $506,000 per year.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.

2. The company has developed a new product called Samoan Delight that sells for $55 each and that has variable expenses of $44 per unit. If the company can sell 10,000 units of Samoan Delight without incurring any additional fixed expenses:

a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.

b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

Describe how the managerial finance function is related to economics and accounting.
Q2. Describe the legal forms of business organization.
Q3. Discuss business taxes and their importance in financial decisions.
Q4. Complete the 2012 balance sheet for O’Keefe Industries using the information that follows it.
O’Keefe Industries Balance Sheet December 31, 2012
Assets                                                                                                Liabilities and Stockholders’ Equity
Cash                                $33,720                                                                                Accounts payable $130,000 Marketable securities 27,000                                                                            Notes payable ________ Accounts receivable _______                                                                           Accruals                22,000                           Inventories _______                                                                                       Total current liabilities ________ Total current assets _______                                                                  Long-term debt ________
Net fixed assets _______                                                                     Stockholders’ equity $500,000
Total assets ………………$                                                             Total liabilities and stockholders’ equity $------
The following financial data for 2012 are also available:
1. Sales totaled $1,800,000.
2. The gross profit margin was 29%.
3. Inventory turnover was 4.0.
4. There are 365 days in the year.
5. The average collection period was 42 days.
6. The current ratio was 1.61.
7. The total asset turnover ratio was 1.22.
8. The debt ratio was 70%.
Q4) Liquidity management Bauman Company’s total current assets, total current liabilities, and inventory for each of the past 4 years follow:
Item 2009 2010 2011 2012
Total current assets $16,950 $21,900 $22,500 $27,000
Total current liabilities $9000 $12600 $12600 $17400
Inventory 6000 6900 6900 7200

a. Calculate the firm’s current and quick ratios for each year. Compare the resulting time series for these measures of liquidity.
b. Comment on the firm’s liquidity over the 2009–2010 period.
Q5) Inventory management Wilkins Manufacturing has annual sales of $4 million and a gross profit margin of 40%. Its end-of-quarter inventories are  
Quarter Inventory
1 $400000
2 800,000

3 1,200,000

4 200,000


a). Find the average quarterly inventory and use it to calculate the firm’s inventory turnover and the average age of inventory.
b). Assuming that the company is in an industry with an average inventory turnover of 2.0, how would you evaluate the activity of Wilkins’ inventory?

Explain the role that earnings and profits play in determining the tax treatment of distributions. Describe the tax treatment of dividends for individual shareholders. Find an example of a corporation (AT&T) that has a dividend program and share their approach of (AT&T).

The following selected accounts and their current balances appear in the ledger of Clairemont Co. for the fiscal year ended May 31, 2018:

Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

*$60 of the $90 per unit represents materials costs, and the remaining $30 per unit represents other variable conversion expenses incurred within the Communication Systems Division.

The GPS Systems Division is presently producing 85,000 units out of a total capacity of 150,000 units. Materials used in producing the Communication Systems Division's product are currently purchased from outside suppliers at a price of $60 per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division at a variable cost of $41 per unit. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Required:

1. Would the market price of $60 per unit be an appropriate transfer price for Birrell Scientific Inc.?
No

2. If the Communication Systems Division purchases 25,000 units from the GPS Systems Division, rather than externally, at a negotiated transfer price of $52 per unit, how much would the operating income of each division and the total company operating income increase?

The GPS Systems Division's operating income would increase by
$

The Communication Systems Division's operating income would increase by
$

Birrell Scientific Inc.'s total operating income would increase by
$

Feedback

Review how transfer pricing functions.

2. Multiply the units transferred by the difference between the transfer price (supplying company) or the market price (purchasing company) and the variable cost per unit.

3. Prepare condensed divisional income statements for Birrell Scientific Inc. based on the data in part (2).

Feedback

3. Keep in mind, 25,000 units are transferred in at $52 per unit plus $38 in other variable conversion expenses incurred within the division.

4. If a transfer price of $49 per unit is negotiated, how much would the operating income of each division and the total company operating income increase?

The GPS Systems Division’s operating income would increase by
$

The Communication Systems Division's operating income would increase by
$

Birrell Scientific Scientific Inc.'s total operating income would increase by
$

5a. What is the range of possible negotiated transfer prices that would be acceptable for Birrell Scientific Inc.?

Between $ and $

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what transfer price would represent the best compromise? If required, round your answer to the nearest dollar.

$51

Using the capital expenditures above, calculate the missing depreciation numbers for all 3 years.

All equipment will be depreciated using the straight-line method. Everything in the table is purchased on January 1 of the first year (2019)

In addition, on June 30 of the 3rd year, the two iMac computers are sold for a total of $500 and two new better computers are purchased for $4,000 total.

For its three investment centers, Martinez Company accumulates the following data:

The centers expect the following changes in the next year: (I) increase sales 10%; (II) decrease costs $390,000; (III) decrease average operating assets $450,000.

Compute the expected return on investment (ROI) for each center. Assume center I has a controllable margin percentage of 70%.

1. Decision on Accepting Additional Business

   Down Home Jeans Co. has an annual plant capacity of 64,600 units, and current production is 46,700 units. Monthly fixed costs are $40,300, and variable costs are $25 per unit. The present selling price is $37 per unit. On November 12 of the current year, the company received an offer from Fields Company for 16,700 units of the product at $29 each. Fields Company will market the units in a foreign country under its own brand name. The additional business is not expected to affect the domestic selling price or quantity of sales of Down Home Jeans Co.

   a. Prepare a The area of accounting concerned with the effect of alternative courses of action on revenues and costs.differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

   Differential Analysis
   Reject Order (Alt. 1) or Accept Order (Alt. 2)
   November 12
   	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
   Revenues	$	$	$
   Costs:
   Variable manufacturing costs
   Income (Loss)	$	$	$

   Feedback

   b. Having unused capacity available is

   • relevant
   • irrelevant
   to this decision. The differential revenue is
   • more
   • less
   than the differential cost. Thus, accepting this additional business will result in a net
   • gain
   • loss
   .

   c. What is the minimum price per unit that would produce a positive contribution margin? Round your answer to two decimal places.
   $

At the beginning of the current season on April 1, the ledger of Granite Hills Pro Shop showed Cash $2,810; Inventory $3,500; and Common Stock $6,310. The following transactions were completed during April 2017.

Journalize the April transactions using a perpetual inventory system. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. Round answers to 0 decimal places, e.g. 5,275.)

1. Machine Replacement Decision

   A company is considering replacing an old piece of machinery, which cost $597,600 and has $352,200 of accumulated depreciation to date, with a new machine that has a purchase price of $484,300. The old machine could be sold for $63,200. The annual variable production costs associated with the old machine are estimated to be $156,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for eight years.

   a. Prepare a The area of accounting concerned with the effect of alternative courses of action on revenues and costs.differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

   Differential Analysis
   Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
   April 29
   	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
   Revenues:
   Proceeds from sale of old machine	$	$	$
   Costs:
   Purchase price
   Variable productions costs (8 years)
   Income (Loss)	$	$	$

   Feedback

   Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
   

   • Continue with the old machine
   • Replace the old machine

   Feedback

   b. What is the sunk cost in this situation?

   The sunk cost is $.

1. Make-or-Buy Decision for a Service Company

   The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service is quoting a price of $16 per layout page. The budget for the Publication Department for the current year is as follows:

   Salaries	$190,100
   Benefits	43,200
   Supplies	23,000
   Office expenses	28,800
   Office depreciation	25,900
   Computer depreciation	17,300
   Total	$328,300

   The department expects to lay out 18,000 pages for the current year. The Publication Department office space and equipment would be used for future administrative needs, if the department's function were purchased from the outside.

   a. Prepare a The area of accounting concerned with the effect of alternative courses of action on revenues and costs.differential analysis dated February 22 to determine whether TAG-D should layout pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

   Differential Analysis
   Lay out Pages Internally (Alt. 1) or Purchase Layout Services (Alt. 2)
   February 22
   	Lay out Pages Internally (Alternative 1)	Purchase Lay out Services (Alternative 2)	Differential Effect on Income (Alternative 2)
   Sales price	$	$	$
   Costs:
   Purchase price of lay out work	$	$	$
   Salaries
   Benefits
   Supplies
   Office expenses
   Office depreciation
   Computer depreciation
   Income (loss)	$	$	$

   Feedback

   b. The benefit from using an outside service is shown to be

   • more
   • less
   than performing the layout work internally. The fixed costs (depreciation expenses) in the budget are
   • relevant
   • irrelevant
   to the decision. Thus, the work should
   • be
   • not be
   purchased from the outside on a strictly financial basis.

   c. Before electing to

   • keep
   • lay off
   the five employees, the Guild should consider the
   • short-run impact
   • long-run impact
   of the decision.

The following information pertains to Austin, Inc. and Huston Company:

Required
a-1. Compute each company’s debt-to-assets ratio, current ratio, and times interest earned (EBIT must be computed).

Compute each company’s return-on-equity ratio and return-on-assets ratio. Use EBIT instead of net income when computing the return-on-assets ratio.

Clayton Industries has the following account balances:

The company wishes to raise $37,000 in cash and is considering two financing options: Clayton can sell $37,000 of bonds payable, or it can issue additional common stock for $37,000. To help in the decision process, Clayton’s management wants to determine the effects of each alternative on its current ratio and debt-to-assets ratio.

Required
a-1. Compute the current ratio for Clayton’s management currently, if bonds are issued, if stock is issued.

a-2. Compute the debt-to-assets ratio for Clayton’s management currently, if bonds are issued, if stock is issued.

Assume that after the funds are invested, EBIT amounts to $13,100. Also assume the company pays $4,400 in dividends or $4,400 in interest depending on which source of financing is used. Based on a 30 percent tax rate, determine the amount of the increase in retained earnings that would result under each financing option.(bonds, stocks)

7. International capital budgeting

One of the important components of multinational capital budgeting is to analyze the cash flows generated from subsidiary companies.

Consider this case:

Sacramone Products Co. is a U.S.-based firm evaluating a project in Mexico.

You have the following information about the project:

What is the dollar-denominated net present value (NPV) of this project?

$2,580.13

$2,345.57

$2,697.41

$2,228.29

1.

At the beginning of the month, the Painting Department of Skye Manufacturing had 23,000 units in inventory, 70% complete as to materials, and 25% complete as to conversion. The cost of the beginning inventory, $31,650, consisted of $25,400 of material costs and $6,250 of conversion costs. During the month the department started 118,000 units and transferred 124,500 units to the next manufacturing department. Costs added in the current month consisted of $298,600 of materials costs and $541,910 of conversion costs. At the end of the month, the department had 16,500 units in inventory, 40% complete as to materials and 10% complete as to conversion. If Skye Manufacturing uses the weighted average method of process costing, compute the costs per equivalent unit of materials and conversion respectively for the Painting Department.

Multiple Choice

• $2.47; $4.35.

• $2.22; $4.29.

• $2.54; $4.40.

• $2.54; $4.29.

• $2.82; $4.55.

2.

The following is an account for a production department, showing its costs for one month:

Assume that materials are added at the beginning of the production process and that direct labor and overhead are applied uniformly. If the started and completed units cost $42,050, what was the cost of completing the units in the beginning Work in Process inventory?

• $54,800.

• $12,750.

• $7,960.

• $2,360.

• $37,260.

3.

During March, the production department of a process operations system completed and transferred to finished goods 33,000 units that were in process at the beginning of March and 100,000 that were started and completed in March. March's beginning inventory units were 100% complete with respect to materials and 30% complete with respect to labor. At the end of March, 38,000 additional units were in process in the production department and were 100% complete with respect to materials and 30% complete with respect to labor. The production department incurred direct labor cost of $579,200 and its beginning inventory included labor cost of $55,000. Compute the direct labor cost per equivalent unit for the department using the weighted-average method.

• $4.77.

• $4.01.

• $5.79.

• $4.35.

• $4.39.

4.

A company uses the weighted-average method for inventory costing. At the end of the period, 18,000 units were in the ending Work in Process inventory and are 100% complete for materials and 69% complete for conversion. The equivalent costs per unit are materials, $2.59, and conversion $2.25. Compute the cost that would be assigned to the ending Work in Process inventory for the period.

• $74,565.

• $145,620.

• $67,760.

• $114,930.

• $100,478.