KUMA makes three products X, Y, and Z. All three products must be offered for sale each month in order to provide a complete market service. The products are fragile and their quality deteriorates rapidly once they are manufactured.

The products are produced on two types of machine and worked on by a single grade of direct labour. Five direct employees are paid Ghc 8 per hour for a guaranteed minimum of 160 hours each per month.

All of the products are first molded on a machine type 1 and then finished and sealed on a machine type 2.

The machine hours requirements for each of the products are as follows.

The capacity of the available machine type 1 and 2 are 600 hours and 500 hours per month respectively.

Details of the selling price, unit cost and monthly demand for the three products are as follows

Although KUMA uses marginal costing and contribution analysis as the basis for its decisionmaking activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods inventories are valued in the monthly management accounts at full absorption cost.

Required:

1. Calculate the machine utilization rate for each machine each month and explain which of the machine is the bottleneck/limiting factor                                           (7 marks)
2. Using the current system of marginal costing and contribution analysis, calculate the profit maximizing monthly output of the three products.                               (8 marks)

"Wonderful! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well,” said Kim Clark, president of Martell Company. “Our $29,250 overall manufacturing cost variance is only 1.0% of the $2,925,000 standard cost of products made during the year. That's well within the 3% parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year." The company produces and sells a single product. The standard cost card for the product follows: Inputs (1) Standard Quantity or Hours (2) Standard Price or Rate Standard Cost (1) × (2) Direct materials 2.50 feet $ 3.30 per foot $ 8.25 Direct labor 2.3 hours $ 10 per hour 23.00 Variable overhead 2.3 hours $ 3.00 per hour 6.90 Fixed overhead 2.3 hours $ 5.00 per hour 11.50 Total standard cost per unit $ 49.65 The following additional information is available for the year just completed: The company manufactured 25,000 units of product during the year. A total of 60,000 feet of material was purchased during the year at a cost of $3.70 per foot. All of this material was used to manufacture the 25,000 units produced. There were no beginning or ending inventories for the year. The company worked 60,000 direct labor-hours during the year at a direct labor cost of $9.60 per hour. Overhead is applied to products on the basis of standard direct labor-hours. Data relating to manufacturing overhead costs follow: Denominator activity level (direct labor-hours) 55,000 Budgeted fixed overhead costs $ 275,000 Actual variable overhead costs incurred $ 186,000 Actual fixed overhead costs incurred $ 270,000 Required: 1. Compute the materials price and quantity variances for the year. 2. Compute the labor rate and efficiency variances for the year. 3. For manufacturing overhead compute: a. The variable overhead rate and efficiency variances for the year. b. The fixed overhead budget and volume variances for the year.

As a firm takes on more debt, its probability of bankruptcy_______. (Increases or Decreases) Other factors held constant, a firm whose earnings are relatively volatile faces a________(Greater or Lower) chance of bankruptcy. Therefore, when other factors are held constant, a firm whose earnings are relatively volatile should use_______(Less or More) debt than a more stable firm. When bankruptcy costs become more important, they __________(Increase or Reduce) the tax benefits of debt.

Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm’s unlevered beta is 1.25, and its cost of equity is 11.75%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.75%. The risk-free rate of interest (rRFrRF) is 3%, and the market risk premium (RP) is 7%. Green Goose’s marginal tax rate is 35%.

Green Goose is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table.

The salesman from Superfast Machines claims that if you trade-in your old machine for one of his new machines, you could save your company $60,000 a year. As his new machine costs $120,000 after the trade-in, the investment pays for itself in 2 years. Since the machine has a life of 3 years and a salvage value of $30,000, the salesman claims that this deal lets you use the machine for free in year 3 as well as receiving a $30,000 when the machine is sold. Having learnt about capital budgeting techniques, you are quite skeptical of his claims. Use the data below to do your own sums. • Cost of new machine $120,000 • Salvage value of machine at end of life $30,000 • Useful life 3 years • Operating cost savings $60,000 (excluding depreciation) from new machine • Depreciation policy Depreciate to zero
You have also obtained the following financial information regarding the company and the market.
Shares • Issued 2,000,000 shares. • Current share price = $10 • Company just paid a dividend of $1.20 per share. Dividends are expected to be maintained at this level for the foreseeable future. • Beta of shares = 1.0

Bonds • Issued 20,000, 5% coupon bonds with par value of $1,000 with remaining maturity of 10 years. • Bonds are currently selling at the par value.
Market • 10-year Treasury bond yield = 4% • 10-year AAA bond yield = 4.5% • 10-year AA bond yield = 5% • Expected return of the stock market = 12% • Corporate tax rate = 20% (a) Compute the cost of equity, cost of debt and the weighted average cost of capital.
(b) Explain which capital budgeting method the salesman is using when he claims that the machine pays for itself in 2 years. (c) Calculate the operating cash flows related to this project.
(d) Calculate the cash flows from assets for the project.
(e) Determine whether the machine should be bought.
(f) Discuss two (2) advantages of using the NPV versus the payback period.

A Business Dilemma

Subway, the fast food restaurant franchise, announced in early 2018 it planned to bring back the “$5 Footlong” promotion. Hundreds of Subway franchise owners protested the promotion saying that they cannot afford to sell the footlong sub sandwiches for $5. You'll want to review the Subway webpage featured in the Chapter 8 module.

Assume that the costs related to a Subway footlong and a Subway franchise include the following

Question #1:  Bob owns a subway franchise and he is furious at the thought of offering $5.00 footlongs. His comment was “they cost us $5.41 each so we will be upside down on each sub sold. I’ll lose my shirt!”. Do you agree or disagree with Bob that this idea should be immediately rejected without any further analysis? If you don’t agree with Bob, why do you think further analysis is required?  

Question #2: What are the relevant and irrelevant costs in this pricing decision? (hint: there are 6 relevant costs)

Question #3: Can you think of any other reasons/factors besides the costs listed above that might be relevant to the pricing decision to offer the $5.00 footlongs? Use your imagination.

Ghost, Inc., has no debt outstanding and a total market value of $273,600. Earnings before interest and taxes, EBIT, are projected to be $43,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 17 percent higher. If there is a recession, then EBIT will be 28 percent lower. The company is considering a $145,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 7,600 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.

c-1. Calculate return on equity (ROE) under each of the three economic scenarios before any debt is issued. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Assume the firm has a tax rate of 21 percent.  

c-2. Calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

c-3. Calculate the return on equity (ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

c-4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Assets (Market value = Book value) $3,000,000 EBIT $500,000 Cost of equity, rS 10% Stock price, P0 $15 Shares outstanding, n0 200,000 Tax rate, T 40% Unlevered beta 1.0 The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rS, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time. a) What effect would this use of leverage have on the value of the firm? Calculate the value of the company with a new level of debt. Also, calculate the value of equity and debt in U.S. dollars. b) The problem provides the new cost of equity. Use the cost of equity formula of M&M Proposition II with taxes to show that the new cost of equity is approximately 11%. c) What would be the price of Rivoli’s stock after announcing the recapitalization? d) Calculate the number of shares purchased during the recapitalization, the number of remaining shares outstanding. Also, prove that market capitalization of equity is equal to the number of shares outstanding times the price per share you calculated from part (c). Your answer to this question (market capitalization of equity) should be equal to the value of equity you calculated in part (a). e) What happens to the firm’s earnings per share after the recapitalization? Calculate EPS before and after the recapitalization. f) Calculate the beta of the company after the recapitalization (with debt), using the Hamada formula. g) The $500,000 EBIT given previously is actually the expected value from the following probability distribution: Probability EBIT 0.1 ($100,000) 0.2 200,000 0.4 500,000 0.2 800,000 0.1 1,100,000 Determine the times-interest-earned ratio for each probability. What is the probability of not covering the interest payment at the 30% debt level?

MAT 117 Problem Set 1                               Name: ___________________________

Directions: Show all work and explain your thinking as you solve these problems or write the explanations. Each problem is worth five points.

1. Below are definitions of different math number concepts. Write the concept that goes with each description. (no explanation needed for this problem only).

2. Explain the difference between the expressions 6x⁰ and (6x)⁰. If there is no difference, explain why.

Grading: 2 points: Worked out Problem Mathematically; 3 points: Explanation

3. For a recent year, the United States consumed about 1.0 x 10⁴ of petroleum per second. (Source: U.S. Energy Information Administration)

How many gallons of petroleum did the United States use that year?

Show work for all intermittent steps and Explain each step used to get your answer.

Grading: 1 point: Correct Answer; 2 points: Work; 2 points: Explanation

4. State whether the following statement is true and explain why or why not: A trinomial is always a higher degree than a monomial. Give an example proving your answer is correct.

Grading: 2 points: Correct Answer; 2 points: Explanation; 1 point: Example

5. Explain why x+ 7 is a polynomial, but x+7 is not a polynomial.

Grading: 5 points: Complete explanation

Smoky Mountain Corporation makes two types of hiking boots—Xtreme and the Pathfinder. Data concerning these two product lines appear below:   

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:    

Required:

1. Compute the product margins for the Xtreme and the Pathfinder products under the company’s traditional costing system. (Do not round your intermediate calculations.)

2. The company is considering replacing its traditional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):   
   .

Compute the product margins for the Xtreme and the Pathfinder products under the activity-based costing system. (Negative product margins should be indicated with a minus sign. Round your intermediate calculations to 2 decimal places.)

3. Prepare a quantitative comparison of the traditional and activity-based cost assignments. (Do not round intermediate calculations. Round your "Percentage" answer to 1 decimal place. (i.e. .1234 should be entered as 12.3))