Flexible Overhead Budget Leno Manufacturing Company prepared the following factory overhead cost budget for the Press Department for October of the current year, during which it expected to require 10,000 hours of productive capacity in the department: Variable overhead cost: Indirect factory labor $90,000 Power and light 3,200 Indirect materials 25,000 Total variable overhead cost $118,200 Fixed overhead cost: Supervisory salaries $41,370 Depreciation of plant and equipment 26,000 Insurance and property taxes 16,550 Total fixed overhead cost 83,920 Total factory overhead cost $202,120 Assuming that the estimated costs for November are the same as for October, prepare a flexible factory overhead cost budget for the Press Department for November for 8,000, 10,000, and 12,000 hours of production. Round your interim computations to the nearest cent, if required. Enter all amounts as positive numbers. Leno Manufacturing Company Factory Overhead Cost Budget-Press Department For the Month Ended November 30 Direct labor hours 8,000 10,000 12,000 Variable overhead cost: Indirect factory labor $ $ $ Power and light Indirect materials Total variable factory overhead $ $ $ Fixed factory overhead cost: Supervisory salaries $ $ $ Depreciation of plant and equipment Insurance and property taxes Total fixed factory overhead $ $ $ Total factory overhead $ $ $

High-Low Method

The manufacturing costs of Ackerman Industries for the first three months of the year follow:

Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost. Round all answers to the nearest whole dollar.

High-Low Method

The manufacturing costs of Ackerman Industries for the first three months of the year follow:

Using the high-low method, determine (a) the variable cost per unit and (b) the total fixed cost. Round all answers to the nearest whole dollar.

Question 1

1. The table below shows the income and expenditure relating to a product in 2019 and 2020. Complete the table with the correct value in every empty cell, and present a finished version in your answer book.

Cost / Revenue Table 2019/2020

Three entrepreneurs were looking to start a new brewpub near Sacramento, California, called Roseville Brewing Company (RBC). Brewpubs provide two products to customers—food from the restaurant segment and freshly brewed beer from the beer production segment. Both segments are typically in the same building, which allows customers to see the beer-brewing process.

After months of research, the owners created a financial model that showed the following projections for the first year of operations:

In the process of pursuing capital through private investors and financial institutions, RBC was approached with several questions. The following represents a sample of the more common questions asked:

• What is the break-even point?

• What sales dollars will be required to make $120,000? To make $450,000?

• Is the product mix reasonable? (Beer tends to have a higher contribution margin ratio than food, and therefore product mix assumptions are critical to profit projections.)

• What happens to operating profit if the product mix shifts?

• How will changes in price affect operating profit?

• How much does a pint of beer cost to produce?

It became clear to the owners of RBC that the initial financial model was not adequate for answering these types of questions. After further research, RBC created another financial model that provided the following information for the first year of operations:

Required:

e. Perform a sensitivity analysis by answering the following questions:

1. What is the break-even point in sales dollars for RBC? (Round intermediate calculations to 3 decimal places and your final answer to the nearest whole dollar.)

2. What is the margin of safety for RBC? (Round intermediate calculations to 3 decimal places and your final answer to the nearest whole dollar.)

4. What sales dollars would be required to achieve an operating profit of $120,000? $450,000? (Round intermediate calculations to 3 decimal places and your final answers to the nearest whole dollar.)

Cape Fear Marine Mini Case

Sarah Connor was recently hired by Cape Fear Marine Company to assist the company with its short-term financial planning and to evaluate the firm’s financial performance. Sarah graduated from college five years ago with a degree in finance and had been employed in the treasury department of a large firm in Raleigh, North Carolina since then.

Kyle Reese founded Cape Fear Marine Company 15 years ago. The company’s operations are located near Wilmington, North Carolina. The firm is structured as an LLC. Cape Fear Marine manufactures a diverse line of boats, ranging from low-end fishing boats to high-end luxury craft. The company and its products have received high reviews for safety and reliability, as well as awards for customer satisfaction.

The marine products/boating industry is fragmented, with a number of manufacturers. As with any industry, there are market leaders, but the diverse nature of the industry ensures that no manufacturer dominates the market. The competition in the market, as well as the product cost, ensures that attention to detail is a necessity.

To get Sarah started with her analysis, Kyle has provided the following financial data. Sarah has gathered the industry ratios for the boat manufacturing industry.

a.   Calculate all of the ratios listed in the industry table for Cape Fear Marine.

b.   Compare the performance of Cape Fear Marine with the industry as a whole. For each ratio, comment on why it might be viewed as a positive or negative relative to the industry. Don’t just say it is positive or negative, or that it is positive because it is greater than the median. Tell me briefly why it is negative or positive: e.g., the firm’s debt is greater than the median and is too high because too much debt increases the probability of bankruptcy.

Tasmanian Motor Rental (TMR) is set up as a proprietary company in car rental industry and is considering whether to enter the discount rental car market in Tasmania. This project would involve the purchase of 100 used late model, mid-sized cars at the average price of $13,500. In order to reduce their insurance costs, TMR will have a LoJack Stolen Vehicle Recovery System installed in each car at a cost of $1,200 per vehicle. The rental car operation projected by TMR will have two locations: one near Hobart airport and the other near Launceston airport. At each location, TMR owns an abandoned lot and building where it could store its vehicles. If TMR does not undertake the project, the lots can be leased to an auto-repair company for $80,000 per year (Total amount for both lots). The $25,000 annual maintenance cost (total for both lots) will be paid by TMR whether the lots are leased or used for this project. This discount rental car business is expected to result in a fall in its regular car rental business by $20,000 per year.

For taxation purposes, the useful life of the cars is determined to be five years and they will be depreciated using the straight-line depreciation method over 5 years with no residual values at the end. It is assumed that the cars will first be used at the beginning of the next financial year: 1 July 2020.

Before starting this new operation, TMR will need to redevelop and renovate the buildings at each airport locations. This is expected to cost $250,000 for both locations. Assume that TMR is not able to claim any annual tax deduction for the capital expenditure to the renovation of the building until the business is sold. TMR has also budgeted marketing costs what will be spent immediately to promote the new business and during the first two years of operation to boost the sales. The estimated costs are $30,000 per year. These costs are fully tax deductible in the year they are incurred. In addition, if the project is undertaken, a total new injection of $250,000 in net working capital will be required. There will be no additional working capital required from the commencement of the operation until the end of the project. The initial networking capital will be recovered in full by the end of year 5.

Revenue projections from the car rental for the next five years are as follows:

Operating variable costs associated with the new business represent 8% of revenue. Annual operating fixed costs (excluding depreciation) are $520 per vehicle. Existing administrative costs are $400,000 per annum. As a result of the new operation, these administrative costs will increase by 15%. The company is subject to a tax rate of 27.5% on its profits.

Catherine, the company CFO would like you to help her examine the viability of the project for the next five years, taking into consideration the projections of sales and operations costs prepared by company’s accountants.

Given the risk associated with the project, she believes it is reasonable to use the cost of equity for the evaluation of this project. TMR’s equity beta is estimated to be 1.1, the Treasury bond yield is 2% and the market risk premium is 10%.

Based on the information in the case study, Catherine has asked you to write a report to TMR’s management advising them as to the best course of action regarding this project. Your report should address the following specific questions asked by TMR’s management:

1. Determine the initial investment cash flow and estimate all cash flows associated with the project over 5 years. It is assumed that where relevant, capital expenditures are expended throughout the year, while cash flows relating to revenue and operating costs occur at the end of the year. You will need to broadly describe the method used for determining those cash flows.
2. Calculate the project’s payback period. Assuming the business will continue at the end of year 5 so ignore the possible terminal value of all assets (Car fleet and premises). Ignore the time value of money for this calculation. Briefly comment on your results.

Which of the following is not a characteristic of long run equilibrium in a monopolistically competitive​ market?

A.

Marginal revenue equals marginal cost.

B.

Selling price is greater than marginal cost.

C.

Production is at minimum average total cost.

D.

Selling price equals average total cost.

• Freisleven Corporation has undertaken a cost study of its operations. One area of concern to the company is the total cost of labor, particularity the cost of employee benefits. Prepare and defend a list of the different kinds of costs that a company might incur as part of its “total package” salary cost.