Cavco Industries of Phoenix Arizona produces manufactured housing for the 21st century that rivals the construction and design elements found in traditional site built homes. In business for over 40 years Cavco sells manufactured homes, camping cabins, and park model homes under 400 square feet in size and commercial buildings. The company has several hundred floor plans to choose from or it can customize floor plans to fit the design specifications of the buyer. Sales have risen about 7% annually over the past 3 years.

Cavco relies on lean manufacturing and just in time inventory management techniques at its 3 manufacturing facilities. With thousands of stock keeping units direct materials inventory turns over every week. The most expensive inventory items consist of wood and wood products, steel, drywall abd petroleum based products. There are about 50 different stations in the main assembly lines. On Cavco's production floor. They are fed daily by subsidiary job shops close by such as the in house cabinet making shop and flooring shop. Nothing is ever made to stock so the bills of materials coming from independent dealer orders drive the release of direct materials onto the floor at each station in assembly.

At each plant the manager schedules production so tightly that there is rarely downtime at any station in an assembly line. Efficiency is so consistent that budgeted direct materials and direct manufacturing labor usually match the actual costs incurred at month end. Instead of computing a budgeted overhead allocation rate at the beginning of the year and adjusting at year end the company applies actual plant overhead. This consists of
1-Utilities
2-Engineering
3-Purchasing
4-Plant manager salaries

This is done each month so managers can see how they did and make adjustments before the next month's production activities get too far along. Once each home section is completed it is driven out of the plant by independent shippers title passes to the dealer sales revenue is booked and the home is taken to its destination. With no unsold finished goods in stock at month end the only materials to account for each month are those not yet released into production and those in work in process inventory.

QUESTION 1
Assume Cavco has dedicated one of its manufacturing plants to building camping cabins. Budgeted annual fixed manufacturing costs for this facility are $2,000,000 and include the items listed in the case. The amount will remain the same even though shifts per day and days worked per week may fluctuate. The master budget for 2006 is based on one shift production of 2 camping cabins per day over a 4 day work week. The plant is closed on Mondays for building and equipment maintenance. The company also shuts down production for one week in July and one week at the end of December. Normal capacity utilization is based on one shift production of 2 cabinets per day 5 days per week throughout the year. If every camping cabin built in this plant takes the same amount of time to complete what is the 2006 budgeted fixed manufacturing overhead cost rate per cabin under theoretical capacity, practical capacity, normal capacity utilization, and master budget capacity utilization?

A kitchen appliance manufacturer is deciding whether or not to introduce a new product. Management has identified three possible demand regimes, with associated projected income for the first year of operation. In addition, if the company decides to produce the new product, it can do so by using its existing facilities, which will cost it $3,500,000 in renovations; or build a new facility, which will cost $6,500,000. Expanding will allow it to make more product and so its potential sales can be higher. The following table contains a summary of management expectations:

The company believes that if the new product is not introduced, in the first year of operation the company will lose $10,500,000 in sales to competitors in a high demand regime, $1,500,000 in a medium demand regime, and $0 in a low demand regime.

(a) Construct a payoff table and decision tree for this problem.

(b) Using the expected value approach, what should the company do?

(c) The company finds itself in a difficult financial situation. How does this information affect your recommendation in part (b)?

(d) A consulting company claims it can perform a more thorough market research study. In your opinion, should this study be performed?

(e) The company has the option of constructing a new facility after 1 year of operation. In your opinion, which conditions would warrant an expansion after year 1?

A kitchen appliance manufacturer is deciding whether or not to in- troduce a new product. Management has identified three possible demand regimes, with associated projected income for the first year of operation. In addition, if the company decides to produce the new product, it can do so by using its existing facilities, which will cost it $3,500,000 in renovations; or build a new facility, which will cost $6,500,000. Expanding will allow it to make more product and so its potential sales can be higher. The following table contains a summary of management expectations:

The company believes that if the new product is not introduced, in the first year of operation the company will loose $10,500,000 in sales to competitors in a high demand regime, $1,500,000 in a medium demand regime, and $0 in a low demand regime.

(a) Construct a payoff table and decision tree for this problem.
(b) Using the expected value approach, what should the company do?
(c) The company finds itself in a difficult financial situation. How does this information affect your recommendation in part (b)?
(d) A consulting company claims it can perform a more thorough market research study. In your opinion, should this study be performed?
(e) The company has the option of constructing a new facility after 1 year of operation. In your opinion, which conditions would warrant an expansion after year 1?

Below are transactions related to Bridgeport Company. (a) The City of Pebble Beach gives the company 5 acres of land as a plant site. The fair value of this land is determined to be $77,400. (b) 13,000 shares of common stock with a par value of $51 per share are issued in exchange for land and buildings. The property has been appraised at a fair value of $774,000, of which $192,100 has been allocated to land and $581,900 to buildings. The stock of Bridgeport Company is not listed on any exchange, but a block of 100 shares was sold by a stockholder 12 months ago at $66 per share, and a block of 200 shares was sold by another stockholder 18 months ago at $59 per share. (c) No entry has been made to remove from the accounts for Materials, Direct Labor, and Overhead the amounts properly chargeable to plant asset accounts for machinery constructed during the year. The following information is given relative to costs of the machinery constructed. Materials used $11,850 Factory supplies used 944 Direct labor incurred 16,040 Additional overhead (over regular) caused by construction of machinery, excluding factory supplies used 2,680 Fixed overhead rate applied to regular manufacturing operations 60% of direct labor cost Cost of similar machinery if it had been purchased from outside suppliers 47,320

Prepare journal entries on the books of Bridgeport Company to record these transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

The data in the following two questions are taken from assignment 4 page 296 of Merdith & Shafer. The Dubai based construction company Blue Ocean Towers uses a constant flow of in total 15,000 solar panels per year, which it buys from King Kong. Blue Ocean Towers receives the ordered panels from King Kong’s regional distribution center. The ordering cost per delivered order are 50 USD, and the holding cost for Blue Ocean Towers are 1.5 USD per panel per year.

Question 1. Calculate the EOQ for Solar Panels for Blue Ocean Towers.

As a result of implementing Sun Kong’s coloring innovation, King Kong offers Blue Ocean Towers to switch to buying colored panels. The colors red, yellow, and blue are available for the same price as the original panel for a period of 12 months. As King Kong will have to set up the coloring machines, the ordering costs for the red and green solar panels will be four times higher than for the regular panels, at 200 USD per order.

Question 2. Calculate the EOQ for Colored Solar Panels for Blue Ocean Towers. Briefly interpret the change in quantity when compared to the answer to Question 1.

Question 3. Blue Ocean Towers experiences that demand for the colored panels is less stable than for the original ones, causing risks for going out of stock. What inventory replenishment do you advise them to use in this situation.

Luxed Construction Ltd (LCL) is a large manufacturing firm with two products in its product mix – SP General and SP Special. LCL produces Component LMN that is used in the manufacture of both its products. LCL’s 2018 books contain the following per unit cost of producing Component LMN:

                              Direct materials                            $ 149

                              Direct labor                                   $ 131

                              Variable overhead                         $ 109

                              Fixed overhead                              $ 120

                                    Total                                        $509

Sydney Sussex Manufacturing’s (SSM) production manager approached LCL offering it a sale of 4100 Component LMN at a price of $461 each, a price less than the LCL’s per unit in-house manufacturing cost of $509. If LCL management agrees to the offer, it will be able to avoid only 40% of its fixed overhead costs. The decision under consideration for LCL’s management is whether to accept or reject SSM’s offer.

Required: Showing all necessary calculations/steps, work out for LCL:

1. The relevant Variable costs, relevant Fixed costs and relevant Total costs for the decision under consideration at LCL.
2. LLC’s production manager approached you as the company’s management accountant asking you to evaluate SSM’s offer and help him make a decision as to whether LLC should accept or reject SSM’s offer. Show your calculations/working out on both the alternatives and suggest financially the best one to the production manager.
3. Briefly explain any four ‘qualitative factors’ that LLC needs to take into consideration before opting for one of the two alterative under requirement A.

President Dwight Eisenhower is credited with the establishment of a national network of controlledaccess roadways–now simply called “Interstates”–authorized under the Federal Aid Highway Act of 1956. The road construction and growing popularity of highway travel presented an opportunity for PQMaps, which created and sold maps for highway drivers. The paper maps were printed in color and folded for drivers’ convenience. In 1960, the PQMap’s total cost curve was given by 15 + 0.6Q + 0.01Q 2 where Q was measured in standard bulk units of printed material. PQMap’s marginal cost was 0.6 + 0.02Q.

12. What was the firm-level supply curve for PQMap?

13. Suppose there were 5 map printing companies operating in the U.S. in 1960. All of the firms are price-takers. What was the market-level supply curve for highway maps?

14. Suppose that the market demand for printed maps in 1960 is given by 9300 − 722P. What was the equilibrium price and quantity of highways maps in America in 1960?

15. Suppose that you are an analyst who is interested in the map production industry. You already have the equilibrium price and quantity data for 1960. As you do more research, you find recent a statistic for the market. You learned that, in 2015, roughly 1,200 bulk units of paper highway maps were sold at a price of $6. What must have happened in the map printing market between 1960 and 2015? You can speculate, but you must justify your argument. (Hint: Start with a graph.)

The plant asset and accumulated depreciation accounts of Pell Corporation had the following balances at December 31, 2017:

Transactions during 2018 were as follows:

1. On January 2, 2018, machinery and equipment were purchased at a total invoice cost of $345,000, which included a $7,200 charge for freight. Installation costs of $44,000 were incurred.
2. On March 31, 2018, a small storage building was donated to the company. The person donating the building originally purchased it three years ago for $36,000. The fair value of the building on the day of the donation was $23,000.
3. On May 1, 2018, expenditures of $67,000 were made to repave parking lots at Pell’s plant location. The work was necessitated by damage caused by severe winter weather.
4. On November 1, 2018, Pell acquired a tract of land with an existing building in exchange for 10,000 shares of Pell's common stock that had a market price of $39 per share. Pell paid legal fees and title insurance totaling $40,000. Shortly after acquisition, the building was razed at a cost of $52,000 in anticipation of new building construction in 2019.
5. On December 31, 2018, Pell purchased a small storage building by giving $16,950 cash and an old automobile purchased for $26,500 in 2014. Depreciation on the old automobile recorded through December 31, 2018, totaled $15,200. The fair value of the old automobile was $5,450.

2. Change all of the numbers in the data area of your worksheet so that it looks like this:

If your formulas are correct, you should get the correct answers to the following questions.

(a) What is the break-even in dollar sales?

(b) What is the margin of safety percentage?

(c) What is the degree of operating leverage? (Round your answer to 2 decimal places.)

3. Using the degree of operating leverage and without changing anything in your worksheet, calculate the percentage change in net operating income if unit sales increase by 20%.

4. Confirm your calculations in Requirement 3 above by increasing the unit sales in your worksheet by 20% so that the Data area looks like this:

(a) What is net operating income? (Negative amount should be indicated by a minus sign.)

(b) By what percentage did the net operating income increase?

5. Thad Morgan, a motorcycle enthusiast, has been exploring the possibility of relaunching the Western Hombre brand of cycle that was popular in the 1930s. The retro-look cycle would be sold for $13,000 and at that price, Thad estimates 800 units would be sold each year. The variable cost to produce and sell the cycles would be $9,100 per unit. The annual fixed cost would be $2,808,000.

a. What is the break-even in unit sales?

b. What is the margin of safety in dollars?

c. What is the degree of operating leverage? (Round your answer to 2 decimal places.)

Thad is worried about the selling price. Rumors are circulating that other retro brands of cycles may be revived. If so, the selling price for the Western Hombre would have to be reduced to $11,500 to compete effectively. In that event, Thad would also reduce fixed expenses to $2,472,000 by reducing advertising expenses, but he still hopes to sell 800 units per year.

d. What would the net operating income be in this situation? (Negative amount should be indicated by a minus sign.)