PA6-1 Calculating Contribution Margin, Contribution Margin Ratio, Break-Even Point [LO 6-1, 6-2]

Hermosa, Inc., produces one model of mountain bike. Partial information for the company follows:

Required:
1. Complete the table. (Round your "Cost per Unit" answers to 2 decimal places.)

  
2. Calculate Hermosa’s contribution margin ratio and its total contribution margin at each sales level indicated in the table assuming the company sells each bike for $800. (Round your percentage answers to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))

4. Calculate Hermosa’s break-even point in units and sales revenue. (Round your answers to the nearest whole number.)

Mercury, Inc., produces cell phones at its plant in Texas. In recent years, the company’s market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market.

A year ago, the company’s cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury’s president, initiated an intense effort to improve product quality. Gomez set up a task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success.

After the first meeting of the task force, Holly Elsoe, manager of the Marketing Department, asked John Tran, production manager, what he thought of the proposed program. Tran replied, “I have reservations. Quality is too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements. I like to work with goals that I can see and count! I’m nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over.”

Mercury’s quality improvement program has now been in operation for one year. The company’s most recent quality cost report is shown below.

As they were reviewing the report, Elsoe asked Tran what he now thought of the quality improvement program. Tran replied. “I’m relieved that the new quality improvement program hasn’t hurt our bonuses, but the program has increased the workload in the Production Department. It is true that customer returns are way down, but the cell phones that were returned by customers to retail outlets were rarely sent back to us for rework.”

Required:

1. Expand the company’s quality cost report by showing the costs in both years as percentages of both total production cost and total quality cost. (Round your percentage answers to 1 decimal place (i.e 0.1234 should be entered as 12.3).)

Bansal Real Estate Company was founded 25 years ago by the current CEO, RanjitBansal.
The company purchases real estate, including land and buildings, and rents the property to
tenants. The company has shown a profit every year for the past 18 years, and the stock
holders are satisfied with the company’s management. Prior to BansalReal Estate Mr.
Bansal was CEO and founder of agro firm which was bankrupt because of debt financing.
So Mr. Bansal was against debt financing and therefore the Bansal Real Estate Company is
100% equity financed with 15 million shares outstanding and the stock currently trades at
Rs. 300 per share.
Bansal is evaluating a plan to purchase a huge tract of land near Kathmandu for Rs 900
million. The land will generate huge revenue so the pretax income will increase by Rs. 220
million in perpetuity. The new CFO Mr. Supreme has determined the current cost of capital
of the company is 12.5%. He feels that the company would be more valuable if it included
debt in its capital structure, so he is evaluating whether the company should issue debt to
entirely finance the new project. He thinks that the bond can be issued at par with coupon
rate of 8%. Based on some conversations with investment bank, he thinks that the 70%
equity and remaining debt would be optimal capital structure. He also thinks that higher
debt would be lowering the rating and cost would increase. The corporate tax rate is 40%.
a. If the Bansal wishes to maximize its total market value, would you recommend that it
issues debt or equity to finance land purchase? Explain
b. If the company issue debt then what would be the impact in price per share? If the
company issue equity rather thandebt, what would be the impact in price per share?

Comprehensive Master (Operating) Budget

Bee Gee Distributors, a wholesale company, is considering whether to open a new distribution center near Bowling Green, Ohio. The center would open January 1, 2020. The economic outlook is reasonable, but extensive advance planning is required if such a commitment is to be made. As a part of the planning process, The Board of Directors requires a Master (i.e. Operating) Budgetfor the center’s first quarter of operations(i.e. January, February & March of 2020).  In order to prepare anybudget, management must make reasonable assumptions about expected sales, inventory levels and cash flows.  

Required:  Your help is needed to construct the entire first quarter Master Budget based upon the following two pages of management assumptions:

SALES BUDGET: “What is the Profit Plan?”

        ** It all starts with a sales forecast **

a.     January sales are estimated to be $400,000 of which $100,000 (25%) will be cash and $300,000 will be on credit.  Management expects the above sales pattern to continue with an overall grow rate of 10% per month.  Prepare a sales budget.

b.     The company expects to collect 100% of the accounts receivable in the month following the month of the sale.  Prepare a schedule of expected cash receipts.

c.     Use the information developed above in requirements a and bto determine the amount of accounts receivable on the March 31 pro forma balance sheet and the amount of sales on the first quarter pro forma income statement.

_____________________________________________________________________

PURCHASES BUDGET: “What are our total needs, less what do we have”?

d.     Cost of goods sold will be 60% of sales.  Company policy is to budget an ending inventory balance equal to 25% of the next month’s projected cost of goods sold.  Prepare an inventory purchases budget.

Note: For March analysis needs, Aprilcost of goods sold is expected to be $314,000.

2. Calculate the value of a periodic inventory using the four cost methods:

          Assume the beginning inventory as of January 1 consisted of 500 units that were purchased for $8.25 each. During the month, three new purchases were made. The first purchase consisted of 700 units costing $8.50 each, the second purchase had 800 units costing $9.00 each, and the third purchase had 600 units costing $9.50 each.  

Units              Cost per Unit                      

Beg. inventory, January 1             500                 @ $8.25

First purchase                                  700                 @ $8.50

Second purchase                             800                 @ $9.00

Third purchase                                 600                 @ $9.50

Total                                               2,600              

At the end of the month, ending inventory shows 700 units.

Compute the following for each of the methods:

1. Cost of goods sold

2. The cost of ending inventory

a. Specific identification: Of the units sold, 300 were from the beginning inventory, 600 from the first purchase, 700 from the second purchase, and 300 from the third purchase.   (Show your work)

b. First-in, first-out (FIFO): (Show your work)

c. Weighted-average: (Show your work)

d. Last-in, first-out (LIFO): (Show your work)

Builder Products, Inc., uses the weighted-average method in its process costing system. It manufactures a caulking compound that goes through three processing stages prior to completion. Information on work in the first department, Cooking, is given below for May:

Required:

1. Compute the equivalent units of production for materials and conversion for May.

2. Compute the cost per equivalent unit for materials and conversion for May.

3. Compute the cost of ending work in process inventory for materials, conversion, and in total for May.

4. Compute the cost of units transferred out to the next department for materials, conversion, and in total for May.

5. Prepare a cost reconciliation report for May.

• Required 1
• Required 2
• Required 3
• Required 4
• Required 5

Compute the equivalent units of production for materials and conversion for May.

• Required 2
• Required 3
• Required 4
• Required 5

Compute the cost per equivalent unit for materials and conversion for May. (Round your answers to 2 decimal places.)

Compute the cost of ending work in process inventory for materials, conversion, and in total for May. (Round your intermediate calculations to 2 decimal places.)

Compute the cost of units transferred out to the next department for materials, conversion, and in total for May. (Round your intermediate calculations to 2 decimal places.)

Prepare a cost reconciliation report for May. (Round your intermediate calculations to 2 decimal places.)

The Maverick company uses a job-order costing system with a single plantwide predetermined overhead rate based on direct labor hours. the company based its predetermined overhead rate for the current year on the following data.

Estimated total direct labor hours :        $2,800

Estimated total fixed MOH cost :         $35,000

Estimated variable MOH per direct labor hour : $2.34

Recently, Job D3 was completed with the following characteristics :

# of units in the job :       14

total direct labor hours:   200

direct material cost : $16,500

direct labor cost : $36,000

using the above info, calculate the following ( do not round answers)

1- estimated total MOH ?

2- predetermined overhead rate ?

3- applied manufacturing overhead for job D3

4- total job D3 cost ?

5- job D3 product cost ?

Natalie owns a condominium near Cocoa Beach in Florida. This year, she incurs the following expenses in connection with her condo:

During the year, Natalie rented out the condo for 94 days, receiving $22,500 of gross income. She personally used the condo for 50 days during her vacation.

Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property. Assume 365 days in the current year.

a. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo (assuming she itemizes deductions before considering deductions associated with the condo)?

b. What is the total amount of itemized deductions Natalie may deduct in the current year related to the condo?

c. If Natalie’s basis in the condo at the beginning of the year was $210,000, what is her basis in the condo at the end of the year?

d. Assume that gross rental revenue was $4,500 (rather than $22,500). What amount of for AGI deductions may Natalie deduct in the current year related to the condo?

Natalie owns a condominium near Cocoa Beach in Florida. This year, she incurs the following expenses in connection with her condo:

During the year, Natalie rented out the condo for 85 days, receiving $22,750 of gross income. She personally used the condo for 39 days during her vacation.

Assume Natalie uses the Tax Court method of allocating expenses to rental use of the property. Assume 366 days in the current year. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

a. What is the total amount of for AGI (rental) deductions Natalie may deduct in the current year related to the condo?

b. What is the total amount of itemized deductions Natalie may deduct in the current year related to the condo?

c. If Natalie’s basis in the condo at the beginning of the year was $178,000, what is her basis in the condo at the end of the year?

d. Assume that gross rental revenue was $4,550 (rather than $22,750). What amount of for AGI deductions may Natalie deduct in the current year related to the condo?