The Hyatt Company is trying to decide whether it should purchase new equipment and continue to make its subassemblies internally or if production should be discontinued and the subassembly purchased from an outside supplier. Either way production cannot continue using the current equipment.

            New equipment for producing the subassemblies can be purchased at a cost of $400,000. The equipment would have a five-year useful life (the company uses straight-line depreciation) and a $50,000 salvage value.

            Alternatively, the subassemblies could be purchased from an outside supplier. The supplier has offered to provide the subassemblies for $9 each under a five-year contract.

            Hyatt Company's present costs per unit of producing the subassemblies internally (with the old equipment) are given below. The costs are based on a current activity level of 40,000 subassemblies per year:

            The new equipment would be more efficient and would reduce direct labour costs and variable overhead costs by 25%. Supervision cost and direct materials cost per unit would not be affected by the new equipment. The company has no other use for the space now being used to produce the subassemblies. The company's total general company overhead would not be affected by this decision. Assume direct labour is a variable cost.

            Required:

            Assume that 40,000 subassemblies are needed each year. Prepare an analysis of the two alternatives and make a recommendation to the management of the company of the appropriate course of action.

Problem 6-23 CVP Applications; Contribution Margin Ratio: Degree of Operating Leverage [LO6-1, LO6-3, LO6-4, LO6-5, LO6-8]

Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $80 per unit. Variable expenses are $40.00 per unit, and fixed expenses total $160,000 per year. Its operating results for last year were as follows:

Required:

Answer each question independently based on the original data:

1. What is the product's CM ratio?

2. Use the CM ratio to determine the break-even point in dollar sales.

3. If this year's sales increase by $48,000 and fixed expenses do not change, how much will net operating income increase?

4-a. What is the degree of operating leverage based on last year's sales?

4-b. Assume the president expects this year's sales to increase by 11%. Using the degree of operating leverage from last year, what percentage increase in net operating income will the company realize this year?

5. The sales manager is convinced that a 12% reduction in the selling price, combined with a $61,000 increase in advertising, would increase this year's unit sales by 25%.

a. If the sales manager is right, what would be this year's net operating income if his ideas are implemented?

b. If the sales manager's ideas are implemented, how much will net operating income increase or decrease over last year?

6. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $2.30 per unit. He thinks that this move, combined with some increase in advertising, would increase this year's sales by 25%. How much could the president increase this year's advertising expense and still earn the same $880,000 net operating income as last year?

Andretti Company has a single product called a Dak. The company normally produces and sells 86,000 Daks each year at a selling price of $60 per unit. The company’s unit costs at this level of activity are given below: Direct materials $ 8.50 Direct labor 10.00 Variable manufacturing overhead 2.50 Fixed manufacturing overhead 5.00 ($430,000 total) Variable selling expenses 1.70 Fixed selling expenses 3.00 ($258,000 total) Total cost per unit $ 30.70 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 107,500 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 86,000 units each year if it were willing to increase the fixed selling expenses by $150,000. What is the financial advantage (disadvantage) of investing an additional $150,000 in fixed selling expenses? 1-b. Would the additional investment be justified? 2. Assume again that Andretti Company has sufficient capacity to produce 107,500 Daks each year. A customer in a foreign market wants to purchase 21,500 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $2.70 per unit and an additional $12,900 for permits and licenses. The only selling costs that would be associated with the order would be $1.70 per unit shipping cost. What is the break-even price per unit on this order? 3. The company has 700 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 86,000 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?

Problem 6-22 CVP Applications; Contribution Margin Ratio; Break-Even Analysis; Cost Structure [LO6-1, LO6-3, LO6-4, LO6-5, LO6-6]

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing financial difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Required:

1. Compute the company’s CM ratio and its break-even point in unit sales and dollar sales.

2. The president believes that a $6,900 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $88,000 increase in monthly sales. If the president is right, what will be the increase (decrease) in the company’s monthly net operating income?

3. Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $39,000 in the monthly advertising budget, will double unit sales. If the sales manager is right, what will be the revised net operating income (loss)?

4. Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would grow sales. The new package would increase packaging costs by $0.40 per unit. Assuming no other changes, how many units would have to be sold each month to attain a target profit of $4,200?

5. Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $52,000 each month.

a. Compute the new CM ratio and the new break-even point in unit sales and dollar sales.

b. Assume that the company expects to sell 20,200 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are. (Show data on a per unit and percentage basis, as well as in total, for each alternative.)

c. Would you recommend that the company automate its operations (Assuming that the company expects to sell 20,200)?

The Town of Weston has a Water Utility Fund with the following trial balance as of July 1, 2016, the first day of the fiscal year:

During the year ended June 30, 2017, the following transactions and events occurred in the Town of Weston Water Utility Fund:

1. Accrued expenses at July 1 were paid in cash.
2. Billings to nongovernmental customers for water usage for the year amounted to $1,383,000; billings to the General Fund amounted to $110,000.
3. Liabilities for the following were recorded during the year:

4. Materials and supplies were used in the amount of $278,000 all for costs of sale and services.
5. $14,200 of old accounts receivable were written off.
6. Accounts receivable collections totaled $1,482,800 from nongovernmental customers and $49,000 from the General Fund.
7. $1,047,800 of accounts payable were paid in cash.
8. One year’s interest in the amount of $177,200 was paid.
9. Construction was completed on plant assets costing $253,000; that amount was transferred to Utility Plant in Service.
10. Depreciation was recorded in the amount of $263,100.
11. Interest in the amount of $25,300 was reclassified to Construction Work in Progress. (This was previously paid in item 8).
12. The Allowance for Uncollectible Accounts was increased by $10,000.
13. As required by the loan agreement, cash in the amount of $103,000 was transferred to Restricted Assets for eventual redemption of the bonds.
14. Accrued expenses, all related to costs of sales and services, amounted to $92,000.
15. Nominal accounts for the year were closed.

Required:

1. Record the transactions for the year in general journal form.
2. Prepare a Statement of Revenues, Expenses, and Changes in Fund Net Position.
3. Prepare a Statement of Net Position as of June 30, 2017.
4. Prepare a Statement of Cash Flows for the year ended June 30, 2017. Assume all debt and interest are related to capital outlay. Assume the entire construction work in progress liability (see item 3) was paid in entry 7. Include restricted assets as cash and cash equivalents.

Exercise 6-9 Compute and Use the Degree of Operating Leverage [LO6-8]

Engberg Company installs lawn sod in home yards. The company’s most recent monthly contribution format income statement follows:

Required:

1. What is the company’s degree of operating leverage?

2. Using the degree of operating leverage, estimate the impact on net operating income of a 16% increase in sales.

3. Construct a new contribution format income statement for the company assuming a 16% increase in sales.

On September 1, Duffs Beer Distributor had an inventory of 60 cases of beer at a cost of $21 each. The company uses a perpetual inventory system. During September, the following transactions occurred. Sept 6 Purchased 75 cases at $20 each from Iron City Brewers, terms 2/10, n/30. Sept 9 Paid freight of $75 on the cases purchased from Iron City Brewers. Sept 10 Returned 2 cases to Iron City Brewers for $40 credit because they did not meet specifications. They had a “skunky” smell. Sept 11 Paid Iron City Brewers what was owed from the Sept 6th purchase. Sept 12 Sold 41 cases costing $21 each for $34 each to the Drunken Clam, terms 2/10,n/30. Sept 14 Granted credit of $34 to the Drunken Clam for the return of one case that was not ordered. Sept 21 Received payment in full from the Drunken Clam. Prepare journal entries IN GOOD FORM for the September transactions. Include Sales and cost of goods sold entries if applicable.

International business and environment

The MIR requires teams to gather current, or the most recently available, data on the market’s people, economy, government, and technological status from online sources.

1. Statement of Cost of Goods Manufactured for a Manufacturing Company

   Cost data for Sandusky Manufacturing Company for the month ended January 31 are as follows:

   Inventories	January 1		January 31
   Materials	$208,750		$187,880
   Work in process	139,860		125,880
   Finished goods	108,550		127,760

   Direct labor		$375,750
   Materials purchased during January		400,800
   Factory overhead incurred during January:
   	Indirect labor	40,080
   	Machinery depreciation	24,220
   	Heat, light, and power	8,350
   	Supplies	6,680
   	Property taxes	5,850
   	Miscellaneous costs	10,860

   a. Prepare a cost of goods manufactured statement for January.

   Sandusky Manufacturing Company
   Statement of Cost of Goods Manufactured
   For the Month Ended January 31
   			$
   Direct materials:
   	$
   	$
   		$
   Factory overhead:
   	$
   Total factory overhead
   Total manufacturing costs incurred during January
   Total manufacturing costs			$
   Cost of goods manufactured			$

   b. Determine the cost of goods sold for January.
   $

Check My Work

1. Austin Co. manufactures a product called Aster in a three-process series. All materials are introduced at the beginning of the first process. Austin uses the first-in, first-out method of inventory costing. Unit and cost data for the first process (Department A) for the month of December follow:
   

   	Units	Completion	Cost
   Work in process inventory:
   December 1	12,000	60%	$140,400
   December 31	5,000	40%	?
   Started in December:	14,000
   Direct materials cost			106,400
   Conversion cost			70,310
   Completed in December	21,000		?

   Prepare Austin's Department A cost of production report for December.

   Round your cost per equivalent unit amounts to two decimal places. Round all other amounts to the nearest dollar. If an amount value is zero enter "0" as answer.

   Austin Company
   Cost of Production Report—Department A
   For the Month Ended December 31
   Unit Information
   Units charged to production:
   Inventory in process, December 1
   Received from materials storeroom
   Total units accounted for by Department A
   Units to be assigned cost:
   		Equivalent Units
   	Whole Units	Direct Materials	Conversion
   Inventory in process, December 1 (60% completed)
   Started and completed in December
   Transferred to Dept. B in December
   Inventory in process, December 31 (40% complete)
   Total units to be assigned costs
   Cost Information
   COSTS:
   		Direct Materials Costs	Conversion Costs
   Costs per equivalent unit:
   Total costs for December in Department A		$	$
   Total equivalent units
   Cost per equivalent unit		$	$
   Costs charged to production:
   	Direct Materials Costs	Conversion Costs	Total Costs
   Inventory in process, December 1			$
   Costs incurred in December
   Total costs accounted for by Department A			$
   Costs allocated to completed and partially completed units:
   Inventory in process, December 1, balance			$
   To complete inventory in process, December 1	$	$
   Started and completed in December
   Transferred to finished goods in December			$
   Inventory in process, December 31
   Total costs assigned by Department A			$

Your assistant prepared the following bank reconciliation statement. It appears that the statement is unacceptable and the task of preparing a proper reconciliation falls upon you.

Required:
1. Prepare a proper bank reconciliation showing the true Cash balance.

BRANDON COMPANY Bank Reconciliation May 31, 2017

Company's Books Bank Statement Balance per books Balance per bank Add Add Deduct Deduct

• 1

  Record to collection of EFT.

• 2

  Record to error, bank service charges, and NSF cheque.

2. Prepare the necessary journal entries. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

1.

In 2020, Elaine paid $2,440 of tuition and $1,160 for books for her dependent son to attend State University this past fall as a freshman. Elaine files a joint return with her husband.

What is the maximum American opportunity tax credit that Elaine can claim for the tuition payment and books in each of the following alternative situations? (Leave no answer blank. Enter zero if applicable.)

Elaine’s AGI is $88,000.

What is the American opportunity tax credit?

2. In 2020, Laureen is currently single. She paid $2,400 of qualified tuition and related expenses for each of her twin daughters Sheri and Meri to attend State University as freshmen ($2,400 each for a total of $4,800). Sheri and Meri qualify as Laureen’s dependents. Laureen also paid $1,750 for her son Ryan’s (also Laureen’s dependent) tuition and related expenses to attend his junior year at State University. Finally, Laureen paid $1,250 for herself to attend seminars at a community college to help her improve her job skills. (Leave no answer blank. Enter zero if applicable.)

a. What is the maximum amount of education credits Laureen can claim for these expenditures? Laureen's AGI is $45,000. If Laureen claims education credits for her three children and herself, how much credit is she allowed to claim in total? If she claims education credits for her children, how much of her children’s tuition costs that do not generate credits may she deduct as for AGI expenses?

-American opportunity tax credit? _______

Lifetime learning credit?_______

For AGI deduction?_______

3.In 2020, Laureen is currently single. She paid $2,400 of qualified tuition and related expenses for each of her twin daughters Sheri and Meri to attend State University as freshmen ($2,400 each for a total of $4,800). Sheri and Meri qualify as Laureen’s dependents. Laureen also paid $1,750 for her son Ryan’s (also Laureen’s dependent) tuition and related expenses to attend his junior year at State University. Finally, Laureen paid $1,250 for herself to attend seminars at a community college to help her improve her job skills.

b. Laureen’s AGI is $95,000. What is the maximum amount of education deductions Laureen can claim to the extent the costs don’t generate a credit?

For AGI deduction?_______

4.
In 2020, Laureen is currently single. She paid $2,400 of qualified tuition and related expenses for each of her twin daughters Sheri and Meri to attend State University as freshmen ($2,400 each for a total of $4,800). Sheri and Meri qualify as Laureen’s dependents. Laureen also paid $1,750 for her son Ryan’s (also Laureen’s dependent) tuition and related expenses to attend his junior year at State University. Finally, Laureen paid $1,250 for herself to attend seminars at a community college to help her improve her job skills. (Leave no answer blank. Enter zero if applicable.)

c. Laureen’s AGI is $45,000 and Laureen paid $12,100 (not $1,750) for Ryan to attend graduate school (i.e., his fifth year, not his junior year).

-American opportunity tax credit? _______

Lifetime learning credit?_______

5.This year Luke has calculated his gross tax liability at $2,240. Luke is entitled to a $3,060 nonrefundable personal tax credit, a $1,830 business tax credit, and a $820 refundable personal tax credit. In addition, Luke has had $2,850 of income taxes withheld from his salary. (Input the amount as a positive value.)

What is Luke’s net tax due or refund?

6.

In 2020, Zach is single with no dependents. He is not claimed as a dependent on another’s return. All of his income is from salary and he does not have any for AGI deductions.

What is his earned income credit in the following alternative scenarios? Use Exhibit 8-10. (Round your intermediate calculations to whole dollar amount. Round your final answer to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

d. Zach is 24 years old and his AGI is $4,100.

What is the earned income credit?_____

7.

Julie paid a day care center to watch her two-year-old son while she worked as a computer programmer for a local start-up company.

What amount of child and dependent care credit can Julie claim in each of the following alternative scenarios? Use Exhibit 8-9

a. Julie paid $2,180 to the day care center and her AGI is $50,000

What is the child & dependent care credit?___

Top executive officers of Tildon Company, a merchandising firm, are preparing the next year’s budget. The controller has provided everyone with the current year’s projected income statement.

Cost of goods sold is usually 70 percent of sales revenue, and selling and administrative expenses are usually 10 percent of sales plus a fixed cost of $30,000. The president has announced that the company’s goal is to increase net income by 15 percent.

Required

The following items are independent of each other:

A. Prepare a pro forma income statement. What percentage increase in sales would enable the company to reach its goal?

B. The market may become stagnant next year, and the company does not expect an increase in sales revenue. The production manager believes that an improved production procedure can cut cost of goods sold by 2 percent. Prepare a pro forma income statement still assuming the President's goal to increase net income by 15 percent. Calculate the required reduction in selling & administrative expenses to achieve the budgeted net income.

C. The company decides to escalate its advertising campaign to boost consumer recognition, which will increase selling and administrative expenses to $230,000. With the increased advertising, the company expects sales revenue to increase by 15 percent. Assume that cost of goods sold remains a constant proportion of sales. Prepare a pro forma income statement. Will the company reach its goal?