Make-or-Buy Decision

Zion Manufacturing had always made its components in-house. However, Bryce Component Works had recently offered to supply one component, K2, at a price of $25 each. Zion uses 10,000 units of Component K2 each year. The cost per unit of this component is as follows:

Assume that 75% of Zion Manufacturing’s fixed overhead for Component K2 would be eliminated if that component were no longer produced.

Required:

1. CONCEPTUAL CONNECTION: If Zion decides to purchase the component from Bryce, by how much will operating income increase or decrease?
Increase $fill in the blank 2

Which alternative is better?

2. CONCEPTUAL CONNECTION: Briefly explain how increasing or decreasing the 75% figure affects Zion’s final decision to make or purchase the component.

As the percentage of avoidable fixed cost increases (above 75%), total relevant costs of making the component increase, causing the “purchase” decision to be   financially appealing (compared to the “make” option) than it was when the percentage was 75%. In other words, as the percentage increases, difference between the “purchase” and “make” options increases resulting in the “purchase” decision being even   attractive. Alternatively, as the percentage of avoidable fixed costs decreases, the “make” option eventually is   costly and   appealing financially as the “purchase” option. Finally, as the percentage of avoidable fixed cost decreases low enough and the total relevant costs of making the component decrease, the   option becomes the more financially appealing option

3. CONCEPTUAL CONNECTION: By how much would the per-unit relevant fixed cost have to decrease before Zion would be indifferent (i.e., incur the same cost) between “making” versus “purchasing” the component?
$fill in the blank 9

Understand you can only answer 1 question, but if you are able to answer them all I will guarantee a thumbs up.

Variable production cost per unit        $8

Variable S and A cost per unit            $2

Fixed overhead cost                           $150,000

Fixed selling and admin, cost             $200,000

Units produced                                   $50,000

Units sold                                            $48,000

Using full costing, the cost per unit is

A. $8

B. $11

C. $12

D. $9.05

Using variable costing, the cost of the ending inventory is:

A. $40,000

b. $22,000

C. $16,000

D. $24,000

Using variable costing, the contribution margin is

A. $576,000

B. 432,000

C. $336,000

d. $480,000

Using full costing, the gross margin is

A. $576,000

B. 432,000

C.336,000

D. $480,000

Total period costs under variable costing are

A. $350,000

B. $296,000

C.$446,000

D.$200,000

E10-4 Computing Issue Prices of Bonds Sold at Par, at a Discount, and at a Premium LO10-2, 10-4, 10-5

James Corporation is planning to issue bonds with a face value of $508,500 and a coupon rate of 6 percent. The bonds mature in 7 years and pay interest semiannually every June 30 and December 31. All of the bonds will be sold on January 1 of this year. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)

Required:

Compute the issue (sale) price on January 1 of this year for each of the following independent cases:

a. Case A: Market interest rate (annual): 4 percent.

b. Case B: Market interest rate (annual): 6 percent.

c. Case C: Market interest rate (annual): 8.5 percent.

12. There are many public policy reasons for the adverse possession doctrine. Select three.

a. Resolving boundary disputes

b. Resolving title concerns

c. Assuring property is put to productive use

d. Avoiding unnecessary paperwork

e. Moving to electronic record keeping

f. Assisting the poor in obtaining property

Snowbird Inc. (Snowbird) manufactures and sells one model of sleds. Snowbird’s accountant gathered the following information to prepare the budget for 2020:

Snowbird has a policy of maintaining finished goods inventory at the end of each quarter equal to 5% of the following quarter’s projected sales. There were 150 sleds in finished goods inventory at the start of 2020, with a total cost of $45,000. Materials and labour requirements for the sleds are:

Direct materials inventory on the first day of 2020 was 1,000 board-metres. Direct materials were originally purchased at $33 per board-metre. Prices have now risen to

$34 per board-metre. The desired ending materials inventory is 10% of the following quarter’s projected production needs.

Snowbird’s direct labourers are paid $16 per hour. Variable manufacturing overhead is allocated at the rate of $15 per direct labour hour. Fixed manufacturing overhead costs are budgeted at $186,240 for 2020. Snowbird uses first-in, first-out to account for its inventory flow.

Required:

Prepare the following budgets and schedules as part of the master budget for the first quarter of 2020:

1. Production budget
2. Direct materials purchase budget
3. Direct labour budget (
4. Manufacturing overhead budget
5. Ending finished goods inventory budget

Mercer Asbestos Removal Company removes potentially toxic asbestos insulation and related products from buildings. There has been a long-simmering dispute between the company’s estimator and the work supervisors. The on-site supervisors claim that the estimators do not adequately distinguish between routine work, such as removal of asbestos insulation around heating pipes in older homes, and nonroutine work, such as removing asbestos-contaminated ceiling plaster in industrial buildings. The on-site supervisors believe that nonroutine work is far more expensive than routine work and should bear higher customer charges. The estimator sums up his position in this way: “My job is to measure the area to be cleared of asbestos. As directed by top management, I simply multiply the square footage by $2.80 to determine the bid price. Since our average cost is only $2.585 per square foot, that leaves enough cushion to take care of the additional costs of nonroutine work that shows up. Besides, it is difficult to know what is routine or not routine until you actually start tearing things apart.”

To shed light on this controversy, the company initiated an activity-based costing study of all of its costs. Data from the activity-based costing system follow:

Required:

1. Perform the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. Using the activity rates you have computed, determine the total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system.

a. A routine 1,000-square-foot asbestos removal job.

b. A routine 2,000-square-foot asbestos removal job.

c. A nonroutine 2,000-square-foot asbestos removal job.

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

• Req 1

Perform the first-stage allocation of costs to the activity cost pools.

Req 2

Compute the activity rates for the activity cost pools.

Req 3A to 3C

Using the activity rates you have computed, determine the total cost and the average cost per thousand square feet of each of the following jobs according to the activity-based costing system. (Round the "Average Cost per thousand square feet" to 2 decimal places.)

a. A routine 1,000-square-foot asbestos removal job.
b. A routine 2,000-square-foot asbestos removal job.
c. A nonroutine 2,000-square-foot asbestos removal job.

Show less

Troy Engines, Ltd., manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to sell one type of carburetor to Troy Engines, Ltd., for a cost of $35 per unit. To evaluate this offer, Troy Engines, Ltd., has gathered the following information relating to its own cost of producing the carburetor internally:

*One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value).

Required:

1. Assuming the company has no alternative use for the facilities that are now being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier?

2. Should the outside supplier’s offer be accepted?

3. Suppose that if the carburetors were purchased, Troy Engines, Ltd., could use the freed capacity to launch a new product. The segment margin of the new product would be $170,000 per year. Given this new assumption, what would be the financial advantage (disadvantage) of buying 17,000 carburetors from the outside supplier?

4. Given the new assumption in requirement 3, should the outside supplier’s offer be accepted?

E10-8 Recording and Reporting a Bond Issued at a Discount (with Discount Account) LO10-4

Park Corporation is planning to issue bonds with a face value of $610,000 and a coupon rate of 7.5 percent. The bonds mature in 6 years and pay interest semiannually every June 30 and December 31. All of the bonds were sold on January 1 of this year. Park uses the effective-interest amortization method and also uses a discount account. Assume an annual market rate of interest of 8.5 percent. (FV of $1, PV of $1, FVA of $1, and PVA of $1) (Use the appropriate factor(s) from the tables provided. Round your final answer to whole dollars.)  

Required:

1. Prepare the journal entry to record the issuance of the bonds. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Prepare the journal entry to record the interest payment on June 30 of this year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

3. What bond payable amount will Park report on its June 30 balance sheet? (Enter all amounts with a positive sign.)

Managerial Accounting: Creating Value in a Dynamic Business Environment ex 2-28 page 64

Dr. Nicole Ergo is a professor of accounting at Becker University, i.e. an employer of Dr. Ergo. He has often scheduled to meet with his doctoral students at his house with four rooms. In his house, Dr. Ergo has dedicated two rooms for business related to classes he teaches. In these rooms, five computers are installed with electronic databases and statistic software, such as SPSS and SAS for doctoral students to carry out their research projects under the supervision of Dr. Ergo. Dr. Ergo has an office on campus but his office is too small to accommodate five computers and his doctoral students. Dr. Ergo calls you to determine whether he could deduct expenses related to his home office. Your memo should include a discussion of Section 280A.

Tax Memorandum to include:

Client Name and Tax Year:

Relevant Facts:

Specific Issues:

Citations to Relevant Authority (Support):

Discussion and Conclusions:

BE DETAILED IN YOUR RESPONSE.

The Righter Shoe Store Company prepares monthly financial statements for its bank. The November 30 and December 31, 2021, trial balances contained the following account information:

The following information also is known:

1. The December income statement reported $2,400 in supplies expense.
2. No insurance payments were made in December.
3. $12,000 was paid to employees during December for salaries.
4. On November 1, 2021, a tenant paid Righter $4,200 in advance rent for the period November through January. Deferred rent revenue was credited.

1. Using the above information for December, complete the T-accounts below. The beginning balances should be the balances as of November 30.
2. Using the above information, prepare the adjusting entries Righter recorded for the month of December.

Create a Balance Sheets for the following scenarios

Transaction 1 Receive Cash for service $5000

2 Accounts receivable $1500

3 Office equipment purchase $6500

4 Supplies on Accounts Payable $2000

5 Owner Capitol (input) $7000

6 Owner withdrawal $ 100

7 Paid for Services provided $3000

8 Office Salary paid $ 500

9 Utilities Paid $ 350

10 Office rent paid $ 500

Odette’s Oil Co. (OOC) produces high-quality olive oil and has implemented a standard costing system. Below is part of a standard cost card for one batch of oil:

Variable overhead is applied based on direct labour hours.

The production and costing information for the last year has just arrived on OOC’s controller’s desk. The information shows that 20,000 batches of oil were produced. OOC purchased 408,000 kilograms of direct materials at a total cost of $4,386,000. Total direct labour was $1,700,400, and total hours worked were 109,000. Actual variable overhead for the year was $946,120.

Required:

Calculate the following variances:

1. Direct materials price variance
2. Direct labour efficiency variance
3. Variable overhead rate variance

Locate an recent current event that has to do with auditing in some way and share it with the class.  How will this event impact the auditing profession going forward and what are concerns you had after reading about this event?

Gopher Gulch Corp. is a little two-store retailer operating in a local market. Its problem is that one store in the company is losing money while the other one is making money, based on company financial reports, causing the company as a whole to lose money. The most recent income statement for Gopher Gulch Corp. is given below:

                                      Store 1                       Store 2                           Total
Sales                                        $976,000                  $1,145,000                     $2,121,000

Variable costs                         (593,000)                     (685,000)                    (1,278,000)
Contribution margin                383,000                     460,000                          843,000

Traceable fixed costs            (470,000)                     (269,000)                        (739,000)

Store segment margin             ( 87,000)                    191,000                           104,000
Common fixed costs               (116,000)                       (85,000)                         (201,000)

Net operating income (loss)   $(203,000)                   $ 106,000                      $ (97,000)

Because of its poor showing, Gopher Gulch Corp. officials are considering closing Store 1. However, management and the workers at Store 1 say, “Not so fast!” A study by a consultant hired by Gopher Gulch Corp. officials show that if Store 1 is closed, 39 percent of its traceable fixed costs will continue unchanged. The study also shows that closing Store 1 would result in a 28 percent decrease in sales in Store 2. The company allocates common fixed costs, such as your corporate officials’ salaries and advertising costs, to the stores on the basis of square footage of the stores. Management and workers at Store 1 claim that Store 1 is being unfairly targeted for closure.

Your uncle, the CEO of Gopher Gulch Corp., knows that you are a student in the prestigious Delta State University Integrated Master of Business Administration (IMBA) Program, and so has turned to you for advice on what to do.

Required

• Compute Gopher Gulch Corp’s total net operating income (loss) if Store 1 is closed. (Hint: The answer will entail determining the lost contribution margins for Store 1 and Store 2 offset by the amount of fixed costs shed by closing Store 1. Pay close attention to the percentages listed above.)

• Compare the total net income (loss) when the two stores are open with the total net operating income (loss) when only Store 2 is open. Is the total net operating income greater (total net operating loss smaller) when two stores are open or when only Store 2 is open?

• Based on your calculations above, what should you tell your uncle regarding Store 1? In other words, should Store 1 be closed or do store management and workers have a basis for their claims and both stores should remain open?

• Given the profit or loss overall for the company, what is your recommendation to your uncle regarding the capital invested in Gopher Gulch Corp.? In other words, “eyeball” the value of the assets of the company versus the profit (loss) generated by those assets. Should the company continue to operate one (or both) stores, or should the company get what money it can for the assets and invest that money elsewhere (such as in another business, bonds, stocks, T-bills, etc.)?

Ok, you are this “hotshot” turn-around specialist who will soon have a Delta State University IMBA degree. For you to turn around your uncle’s company as a retail operation, you must get a handle on the company’s costs -- variable, traceable fixed, and common fixed.

Required

• Variable costs for each store individually is what percentage of that store’s sales revenue?

• Total fixed costs for each store individually is what percentage of total sales revenue for that store?

• Do fixed costs for each store individually appear to be reasonable, unreasonable, or cannot be determined. Explain your answer.

• Is net operating income as a percentage of sales revenue for Store 2 “reasonable?” Explain your answer.

• Traceable fixed costs for each store individually is what percentage of the individual store’s sales revenue?

• What percentage of total company sales revenue does each store provide?

• What percentage total common fixed costs for Gopher Gulch Corp. is charged individually to each of the stores?

• Does the allocation of common fixed costs to each store appear to be equitable in light of the sales revenue generated individually by each store?

• On what basis do you believe that common costs should be allocated in Gopher Gulch Corp.? (Be specific.)

• Based on your review of various costs for each of the stores individually, why do you think Store 1 has a net operating loss?

• As a turnaround specialist, what steps do you recommend to turn Gopher Gulch Corp. around into a profitable retail company? (Be specific.)

• Do the costs relative to sales revenue appear to your “practiced professional eye” to be excessive, low, or within a “reasonable range”?

• Analyze the distribution of the costs between the two stores. Do you see anything that seems awry?

• What effect does what you identified in the question immediately before this one have on determination of store operating costs?

• In answering the questions above, you have examined sales revenue, various categories of cost, costs relative to sales revenue, the distribution of costs between stores, and the contribution margins of each store. After doing all of these analyses, what is your advice to your uncle on how best to make Gopher Gulch Corp. profitable, or is that not even possible?