financial management
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Final Exam BM 240 Financial Management Answer FOUR (4) of the following questions exhaustiv ely. Support your answer with computation in good form. 1) CC, Inc. manufactures a variety of heating and air conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to CC, Inc for P20 per unit. To evaluate this offer, CC, Inc. has gathered the following information relating to its own cost of producing the thermostat internally: Per Unit 15,000 units/ year Direct materials P6 P90,000.00 Direct labor 8 120,000.00 Variable manufacturing overhead 1 15,000.00 Fixed manufacturing overhead, traceable 5* 75,000.00 Fixed manufacturing overhead, common but allocated 10 150,000.00 total costs P30 P450,000.00 ======= ========== *Note: P 5 is 40% supervisory and 60% depreciation of special equipment (no resale value) Required: a) Assuming that the company has no alternative use for the facilitie s, now being used to produce the thermostat, should the outside supplier’s offer be accepted? b) Suppose that if the thermostats were purchased CC, Inc. could use the freed capacity to launch a new product. The segment margin of the new product would be P65,000.00 per year. Should CC, Inc. accept the offer to buy the thermostats from the outside supplier for P20 each? 2) Boyle’s Home Center, a retailing company, has two (2) departments, Bath and Kitchen. The company’s most recent monthly contribution format statement of income follows: Bath Dept. Kitchen Dept. Total Sales---------- -------------- ------------ P1,000,000 P4,000,000 P5,000,000 Variable expenses 300,000 1,600,000 1,900,000 Contribution margin 700,000 2,400,000 3,100,000 Fixed expenses 900,000 1,800,000 2,700,000 net operating income (200,000) 600,000 400,000 ========= ========= ========= A study indicates that P370 ,000 of the fixed expenses bein g charged to the Bath Department are sunk costs or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 10% decrease in the sales of the Kitchen Department. Required: if the Bath department is dropped, what will be the effect on the net operating income of the company as a whole? 3). Katiwasayan, Inc. has P2M in excess cash that it might invest in Marketable Securities. In order to buy and sell the securities, however, the firm must pay a transaction fee of P45,000. Required: a. Would you recommend purchasing the securities if they yield 12% annually and are held for: a. One month? b. Two months? c. Three months?
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Transcript of financial management
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Final ExamBM 240
Financial Management
Answer FOUR (4) of the following questions exhaustively. Support your answer with
computation in good form.1) CC, Inc. manufactures a variety of heating and air conditioning units. Thecompany is currently manufacturing all of its own component parts. An outsidesupplier has offered to sell a thermostat to CC, Inc for P20 per unit. To evaluatethis offer, CC, Inc. has gathered the following information relating to its own costof producing the thermostat internally:
Per Unit 15,000 units/ yearDirect materials P6 P90,000.00Direct labor 8 120,000.00Variable manufacturing overhead 1 15,000.00Fixed manufacturing overhead, traceable 5* 75,000.00
Fixed manufacturing overhead, commonbut allocated 10 150,000.00total costs P30 P450,000.00
======= ==========*Note: P 5 is 40% supervisory and 60% depreciation of special equipment (noresale value)Required:
a) Assuming that the company has no alternative use for the facilities, nowbeing used to produce the thermostat, should the outside suppliers offerbe accepted?
b) Suppose that if the thermostats were purchased CC, Inc. could use the
freed capacity to launch a new product. The segment margin of the newproduct would be P65,000.00 per year. Should CC, Inc. accept the offer tobuy the thermostats from the outside supplier for P20 each?
2) Boyles Home Center, a retailing company, has two (2) departments, Bathand Kitchen. The companys most recent monthly contribution format statement ofincome follows:
Bath Dept. Kitchen Dept. TotalSales------------------------------------ P1,000,000 P4,000,000 P5,000,000Variable expenses 300,000 1,600,000 1,900,000Contribution margin 700,000 2,400,000 3,100,000Fixed expenses 900,000 1,800,000 2,700,000
net operating income (200,000) 600,000 400,000========= ========= =========A study indicates that P370,000 of the fixed expenses being charged to the Bath
Department are sunk costs or allocated costs that will continue even if the BathDepartment is dropped. In addition, the elimination of the Bath Department would resultin a 10% decrease in the sales of the Kitchen Department.Required: if the Bath department is dropped, what will be the effect on the net operatingincome of the company as a whole?
3). Katiwasayan, Inc. has P2M in excess cash that it might invest inMarketable Securities. In order to buy and sell the securities, however, the firm
must pay a transaction fee of P45,000.
Required:a. Would you recommend purchasing the securities if they yield 12% annuallyand are held for:
a. One month?b. Two months?c. Three months?
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d. Six months?e. One year?
b. What minimum required yield would the securities have to return for the firm tohold them for three months?
4). XYZ Co.s product sells for P10 a unit of which P7 represents variablecosts before taxes including credit department costs. Current annual credit salesare P2.4 M. the firm is considering a more liberal extension of credit, which willresult is a slowing in the average collection period from one month to twomonths.
The relaxation in credit standards is expected to produce a 25% increasein sales. Assume that the firms required rate of return on investment is 20%before taxes. Bad debts losses will be 5% of incremental sales and collectionexpenses will increase by P20,000.
REQUIRED: Should the company liberalize its credit policy?
HYY Co. has 12% opportunity cost of capital and currently sells on terms n/20. Ithas a current annual sales of P10M, 80% of which are on credit. Current averagecollection period is 60 days. It is now considering to offer the terms of 2/10, n/30in order to reduce the collection period. It expects 60% of its customers to takeadvantage of the discount and the collection period to be reduced to 40 days.REUIRED: Should the company change its credit term from n/20 to 2/10, n/30?
5). You are given the following data and relationships for the BaguioCorporation:a. Orders can be placed only in multiples of 100 unitsb. Annual usage is 300,000 (assume a 50-week year )
c. The carrying cost is 30% of the purchase price of the goodsd. The purchase price is P10 per unite. The ordering cost is P50 per orderf. The desired safety stock is 1,000 units (exclusive of delivery-time stock)g. Delivery time is 2 weeks
REQUIRED:
Economic Order Quantity
How many orders will be placed annually?
At what inventory level should a reorder be made?
6).Brown company is a new firm just starting operations. The firm will
produce backpacks which will sell P22 per piece. Fixed costs are P500,000 per year.Variable costs are P2.00 per piece. The company expects to sell 50,000 unitsper year and its effective tax rate is 40%. Brown needs P2M to buildfacilities, obtain working capital and start operations. If Brown borrows money,
the interest charges will depend on the amount borrowed as follows:Amount borrowed percentage in debt capital structure int. rate on
borrowed200,000 10 9400,000 20 9.5600,000 30 10800,000 40 15
1M 50 191.2M 60 26Assume that stock can be sold at a price of P20 per share on the initial
offering regardless of how much debt the company uses. Then after the companybegins operating, its price will rise and will be determined as a multiples of itsearnings per share. The multiple (or the P/E ratio) will depend upon the capitalstructure as follows:
Debt/Assets Price/Earnings
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0 12.510 1220 11.530 1040 8
50 660 5
REQUIRED:a. What is Browns optimal capital structure, which maximizes stock price, as
measured by the debt/assets ratio?b. What is Browns degree of operating leverage at the expected level of sales?c. What is Browns degree of financial leverage at the expected level of sales?
End of exam
Prepared by:
DR. EVA U. CAMMAYO, CPASubject Professor
