In Class #1.1 Professional ethics and earnings...

In Class #1.1 Professional ethics and earnings management Day Corporation is a publishing company that produces trade magazines. The company’s stakeholders are awaiting the announcement of Day Corporation’s earnings for the fiscal year, which ends on December 31. Market analysts have predicted earnings to be around $1.34 per share. The CEO of Day Corporation expects earnings to be only $1.20 per share, and knows this will cause the price of the stock to drop. The CEO suggests the following ideas to various managers to try to increase reported earnings by the end of the fiscal year.

a) Delay recording of cancelled subscriptions for December until January. b) Wait until the new fiscal year to update the software on office computers. c) Recognize unearned subscription revenue (cash received in advance for magazines that

will be sent in the future) as revenue when received in the current month (just before fiscal year end) instead of booking as a liability.

d) Delay recording purchases of office supplies on account until after year end. e) Book advertising revenues that relate to January in December. f) Wait until after fiscal year end to do building repairs. g) Switch from declining balance to straight line depreciation to reduce depreciation

expense in the current year. Required 1 Why would Harvest Day Corporation’s CEO want to “manage” earnings? Required 2 Which of the items in a - g above are acceptable to Harvest Day’s controller? Which are unacceptable? Required 3 What should the controller do about the CEO’s suggestions? What should the controller do if the CEO refuses to change the suggestions?

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In Class #2.1 Classification of costs, manufacturing sector The Car Company Inc. assembles two types of cars (Coras and Geos). A separate assembly line is used for each type of car. Required Classify each of the following cost items as

a) Direct or Indirect (D or I) costs with respect to the type of car assembled (Coras or Geos.)

b) Variable or Fixed (V or F) costs with respect to how the total costs of the plant change as

the number of cars assembled changes. (If in doubt, select the cost type based on whether the total costs will change substantially if a large number of cars are assembled).

Cost Items D or I V or F

A. Cost of tires used on Geos

B. Salary of public relations manager for The Car Company plant

C. Annual awards dinner for Coras’ suppliers

D. Salary of engineer who monitors design changes on Geos

E. Freight costs of Coras engines shipped from Japan, to Edmonton

F. Electricity costs for The Car Company plant (single bill covers entire plant)

G. Wages paid to temporary assembly-line workers hired in periods of high production (paid on an hourly basis)

H. Annual fire-insurance policy cost for The Car Company plant

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In Class #2.2 Income statement and schedule of cost of goods manufactured The Powell Corporation has the following account balances (in millions):

For Specific Date For Year 2013 Direct materials, January 1, 2013 $ 15 Purchases of direct materials $ 390Work in process, January 1, 2013 10 Direct manufacturing labour 120Finished goods, January 1, 2013 70 Amortization – plant building and equipment 96Direct materials, December 31, 2013 20 Plant supervisory salaries 6Work in process, December 31, 2013 5 Miscellaneous plant overhead 42Finished goods, December 31, 2013 55 Revenues 1,140 Marketing, distribution, and customer-service costs 288 Plant supplies used 12 Plant utilities 36 Indirect manufacturing labour 60 Required 1 Prepare an income statement and a supporting schedule of cost of goods manufactured for the year ended December 31, 2013. Required 2 How would the answer to Required 1 be modified if you were asked for a schedule of cost of goods manufactured and sold instead of a schedule of cost of goods manufactured? Be specific. Required 3 Plant supervisory salaries are usually regarded as indirect costs. Under what conditions might some of these costs be regarded as direct costs? Give an example. Required 4 Suppose that both the direct materials used and the plant amortization were related to the manufacture of 1 million units of product.

What is the unit cost for the direct materials assigned to those units? What is the unit cost for plant building and equipment amortization? Assume that yearly

plant amortization is computed on a straight-line basis. Required 5 Assume that the historical, actual cost behaviour patterns for direct materials costs behave as a variable cost and amortization behaves as a fixed cost. Repeat the computations in Required 4, assuming that the costs are being predicted for the manufacture of 1.2 million units of product. How would the total costs be affected? Required 6 As a management accountant, explain concisely to the president why the unit costs differed in requirements 4 and 5.

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In Class #4.1 Allocation of manufacturing overhead and disposition of over-applied or under-applied Nicole Limited is a company that produces machinery to custom order. Its job costing system (using normal costing) has two direct cost categories (direct materials and direct labour) and one indirect cost pool (manufacturing overhead, allocated using a budgeted rate based on direct labour costs). The budget for 2013 was:

Direct labour $630,000Manufacturing overhead $441,000

At the end of 2013, two jobs were incomplete: Job #17 (total direct labour costs were $15,000) and Job #18 (total direct labour costs were $48,000). Machine hours totalled 318 hours for Job #17 and 654 hours for Job #18. Direct materials issued to Job #17 amounted to $30,600. Direct materials for Job # 18 totalled $56,800.

Total actual Manufacturing Overhead for the year was $406,200. Actual direct labour charges made to all jobs were $650,000, representing 25,000 direct labour-hours (DLHs).

There were no beginning inventories. In addition to the ending work-in-process, the ending finished goods showed a balance of $204,500 (including a direct labour cost component of $60,000). Sales for 2013 totalled $3,124,000, cost of goods sold was $2,200,000 and marketing costs were $523,900.

Nicole Limited prices jobs on a cost-plus basis. It currently uses a guideline of cost plus 40%. Required 1 Prepare a detailed schedule showing the ending balances in the inventories and cost of goods sold (before considering any under-applied or over-applied manufacturing overhead). Show also the manufacturing overhead allocated to these ending balances. Required 2 Compute the under-applied or over-applied manufacturing overhead for 2013. Required 3 Dispose of the under-applied or over-applied MOH computed in requirement 2 on the basis of:

a. Proration Approach - The ending balances (before proration) of work-in-process, finished goods, and cost of goods sold.

b. Adjusted Allocation Rate Approach - The allocated overhead amount (before proration) in the ending balances of work-in-process, finished goods, and cost of goods sold.

c. Immediate write off to Cost of Goods Sold Required 4 What is the effect on operating income resulting from the proration in Required 3(a), (b) and (c)? (i.e. which prorations provide the highest and lowest operating income?) Required 5 Calculate the cost of Job #18 if Nicole Limited had used the adjusted allocation rate approach to dispose of under-applied or over-applied manufacturing overhead in 2013.

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4.1 of 56

In Class #5.1 Cost Hierarchy Classifications The following outlines a number of activities related to operations at Nordan Manufacturing Ltd:

a) Engineers design new products b) Production workers set up machines c) Completed goods are inspected for quality assurance d) Direct materials are moved from inventory to the production line e) Raw materials are received from the supplier f) Regular equipment maintenance is performed g) The inventory management software is updated

Required 1 Classify each of the preceding activities as unit level, batch level, product level or facility-sustaining. Explain your answers. Required 2 Identify a possibly appropriate cost driver for each of the activities listed.

Classification Cost Drivers a Designing new products

b Setting up machines

c Quality inspection

d Moving materials

e Receiving raw materials

f Performing regular maintenance

g Updating inventory software

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In Class #5.2 Special order, activity-based costing The Medal Maker Company manufactures medals for winners of athletic events and other contests. Its manufacturing plant has the capacity to produce 12,000 medals each month; current production and sales are 9,000 medals per month. The company normally charges $200 per medal. Cost information for the current activity level is as follows:

Variable costs (vary with units produced): Direct materials $ 360,000 Direct labour 405,000 Variable costs (vary with number of batches): Setups, materials handling, and quality control 126,000* Fixed manufacturing costs 325,000 Fixed marketing costs 224,000 Total costs $1,440,000 *Costs of $126,000 are based on 180 batches at $700 per batch

Medal Maker has just received a special one-time-only order for 2,500 medals at $168 per medal. Accepting the special order would not affect the company’s regular business. Medal Maker makes medals for its existing customers in batch sizes of 50 medals (180 batches X 50 medals per batch = 9,000 medals). The special order requires Medal Plus to make the medals in batch sizes 100 medals (25 batches X 100 medals per batch = 2,500 medals). Required 1 Should Medal Plus accept this special order? Explain briefly. Required 2 Suppose plant capacity was only 10,000 medals (instead of 12,000 medals) each month. The special order must either be taken in full or rejected totally. Should Medal Plus accept the special order? Required 3 Refer to Required 1, assume that monthly capacity is 12,000 medals. Medal Plus is concerned that if it accepts the special order, its existing customers will immediately demand a price discount of $11 in the month in which the special order is being filled. They would argue that Medal Plus’s capacity costs are now being spread over more units and that existing customers should get the benefit of these lower costs. Should Medal Plus accept the special order under these conditions? Show all calculations.

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# units Equiv Unit

Units transferred out:

From WIP, opening

Started and completed

Units in ending WIP

Costs incurred during the period

Cost per Equivalent Unit

Cost of units transferred out:

Opening WIP:

Cost in Opening WIP

Costs to complete

Units started and completed:

Total cost of units transferred out

Cost of ending WIP:

FIFO Example

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In Class #17.1 FIFO method, equivalent units and unit costs, assigning costs Consider the following data for the Assembly Division of a satellite manufacturer:

Physical Units (satellites)

Direct Materials

Conversion Costs

Beginning work in process (May 1)* 8 $5,426,960 $1,001,440Started in May 2012 55 Completed during May 2012 51 Ending work in process (May 31)+ 12 Costs added during May 2012 $35,420,000 $15,312,000

*Degree of completion: direct materials 90%; conversion costs 40% +Degree of completion: direct materials 60%; conversion costs 30% The Assembly Division uses the FIFO method of process costing. Required 1 Analyze the physical flow of actual units in the Assembly Division by calculating (stating) the beginning WIP, started and completed, units transferred out and ending WIP. Required 2 Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule. Required 3 Calculate cost per equivalent unit for direct materials and conversion costs. Required 4 Summarize total costs to account for, and assign these costs to units completed and transferred out, and to units in ending work in process.

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# units DM Equiv Unit CC Equiv Unit


From WIP, opening


Units in ending WIP

- - -




Opening WIP:

Cost in Opening WIP

Costs to complete



Cost of ending WIP:

WIP

17.1 worksheet of 56

# units Equiv Unit


Units in ending WIP

Costs incurred




Cost of ending WIP:

WA Example of 56

In Class #17.2 Weighted-average method, equivalent units and unit costs, assigning costs Consider the following data for the Assembly Division of a satellite manufacturer:

Physical Units (satellites)

Direct Materials

Conversion Costs

Beginning work in process (May 1)* 8 $5,426,960 $1,001,440Started in May 2012 55 Completed during May 2012 51 Ending work in process (May 31)+ 12 Costs added during May 2012 $35,420,000 $15,312,000

*Degree of completion: direct materials 90%; conversion costs 40% +Degree of completion: direct materials 60%; conversion costs 30% The Assembly Division uses the weighted-average method of process costing. Required 1 Compute equivalent units for direct materials and conversion costs. Show physical units in the first column of your schedule. Required 2 Calculate cost per equivalent unit for direct materials and conversion costs. Required 3 Summarize total costs to account for, and assign these costs to units completed (and transferred out) and to units in ending work in process.

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Units in ending WIP

Costs incurred




Cost of ending WIP:

WIP

17.2 of 56

In Class #7.3 Transferred-in costs, weighed-average and FIFO Frito-Lay Inc. manufactures convenience foods, including potato chips and corn chips. Production of corn chips occurs in four departments: Cleaning, Mixing, Cooking, and Drying and Packaging. Consider the Drying and Packaging Department, where direct materials (packaging) is added at the end of the process. Conversion costs are added evenly during the process. Suppose the accounting records of a Frito-Lay plant provided the following information for corn chips in its Drying and Packaging Department during a weekly period (week 37):

Physical Units (cases)

Transferred-in Costs

Direct Materials

Conversion Costs

Beginning work-in-process, week 37* 1,250 $29,000 $0 $9,060 Transferred in during week 37 from Cooking Department 5,000

Completed during week 37 5,250 Ending Work-in-process, week 37+ 1,000 Costs added during week 37 $96,000 $25,200 $38,400

*Degree of completion: transferred in costs, 100%; direct materials ?% ; conversion costs 80% +Degree of completion: transferred in costs, ?%; direct materials ?%; conversion costs 40% Required 1 Using the weighted-average method, summarize the total Drying and Packaging department costs for week 37, and assign total costs to units completed (and transferred out) and to units in ending work in process. Required 2 Assume that the FIFO method is used for the Drying and Packaging department. Summarize the total Drying and Packaging department costs for week 37 and assign total costs to units completed and transferred out and to units in ending work in process using the FIFO method.

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# units TI Equiv

Unit DM Equiv

Unit CC Equiv

Unit


From WIP, opening


Units in ending WIP




Opening WIP:

Cost in Opening WIP

Costs to complete



Cost of ending WIP:

17.3 FIFO worksheet

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# units TI Equiv

Unit DM Equiv

Unit CC Equiv

Unit


Units in ending WIP

Costs incurred




Cost of ending WIP:

17.3 WA worksheet of 56

In Class #18.1 Normal and abnormal spoilage in units The following data, in physical units, describe a grinding process for January:

Work in process, beginning 19,000Started during current period 150,000To account for 169,000Spoiled units 12,000Good units completed and transferred out 132,000Work in process, ending 25,000Accounted for 169,000

Inspection occurs at the 100% completion stage. Normal spoilage is 5% of the good units passing inspection. Required 1 Compute the normal and abnormal spoilage in units. Required 2 Assume that the equivalent-unit cost of a spoiled unit is $10. Compute the amount of potential savings if all spoilage were eliminated, assuming that all other costs would be unaffected. Comment on your answer.

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In Class #18.2 Weighted-average method, spoilage Chipcity Inc. is a fast-growing manufacturer of computer chips. Direct materials are added at the start of the production process. Conversion costs are added evenly during the process. Some units of this product are spoiled as a result of defects not detectable before inspection of finished goods. Spoiled units are disposed of at zero net disposal value. Chipcity used the weighted-average method of process costing. Summary data for September 2013 are:

Physical Units (computer chips)

Direct Materials

Conversion Costs

Work in process, beginning inventory (Sept 1) 600 $96,000 $15,300 Degree of completion of beginning WIP 100% 30%Started during September 2,550 Good units completed and transferred out

during September 2,100 Work in process, ending inventory (Sept 30) 450 Degree of completion of ending WIP 100% 40%Total costs added during September $567,000 $230,400 Normal spoilage as a percentage of good units 15% Degree of completion of normal spoilage 100% 100%Degree of completion of abnormal spoilage 100% 100%

Required 1 For each cost category, compute equivalent units. Show physical units in the first column of your schedule. Required 2 Summarize total costs to account for, calculate cost per equivalent unit for each cost category, and assign total costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process. Required 3 Redo the question using the FIFO method of process costing.

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# units TI Equiv Unit DM Equiv

Unit CC Equiv

Unit


normal spoilage on units transferred out

abnormal spoilage

normal spoilage on units in WIP

Units in ending WIP

Costs incurred



Normal spoilage

Normal spoilage


Abnormal Spoilage:

TI

CC

Cost of ending WIP:

normal spoilage

WIP


In Class #18.3 Weighted-average method, inspection at 80% completion Alberta Manufacturing is a furniture manufacturer with two departments: Moulding and Finishing. The company uses the weighted-average method of process costing. In August, the following data were recorded for the Finishing department: Units of beginning work-in-process inventory 12,500 Percentage completion of beginning work-in-process units 25% Costs of direct materials in beginning work in process $ 0 Units started 87,500 Units completed 62,500 Units in ending inventory 25,000 Percentage completion of ending work-in-process units 95% Spoiled units 12,500 Total costs added during current period: Direct materials $819,000 Direct labour $794,500 Manufacturing overhead $770,000 Work in process, beginning: Transferred-in costs $103,625 Conversion costs $ 52,500 Cost of units transferred in during current period $809,375 Conversion costs are added evenly during the process. Direct materials costs are added when production is 90% complete. The inspection point is at the 80% stage of production. Normal spoilage is 10% of all good units that pass inspection. Spoiled units are disposed of at zero net disposal value. Required For August, summarize total costs to account for, and assign these costs to units completed and transferred out (including normal spoilage), to abnormal spoilage, and to units in ending work in process.

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Units transferred out

Normal spoilage

Abnormal spoilage

Units in ending WIP

Costs incurred



Good units transferred out

Normal spoilage


Abnormal spoilage

Cost of ending WIP:

WIP




From WIP, opening


Normal spoilage

Abnormal spoilage

Units in ending WIP




Opening WIP:

Cost in Opening WIP

Costs to complete


Normal spoilage


Abnormal spoilage

Cost of ending WIP:

WIP

18.3 worksheet

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In Class #18.4 Spoilage and job costing Bamber Kitchens produces a variety of items in accordance with special job orders from hospitals, plant cafeterias, and university dormitories. An order for 2,500 cases of mixed vegetables costs $6.00 per case: direct materials $3.00; direct labour $2.00; and manufacturing overhead allocated $1.00. The manufacturing overhead rate includes a provision for normal spoilage. Consider each of the following requirements independently: Required 1 Assume that a labourer dropped 200 cases. Suppose that part of the 200 cases could be sold to a nearby pig farm for $200 cash.

Is this considered normal or abnormal spoilage? How would the sale of these cases be dealt with (i.e. what would the journal entry be?) What is the unit cost of the remaining 2,300 cases?

Required 2 Refer to the original data. Tasters at the company reject 200 of the cases. The 200 cases are sold for $400 cash. Assume this rejection rate is considered normal. a) If the rejection is attributable to exacting specifications of this job how would the sale of

these cases be dealt with (i.e. what would the journal entry be?) What is the unit cost of the remaining 2,300 cases?

b) If the rejection is characteristic of the production process and is not attributable to this specific job how would the sale of these cases be dealt with (i.e. what would the journal entry be?) What is the unit cost of the remaining 2,300 cases?

c) Comment on the difference, if any, in the unit cost of the remaining cases.

Required 3 Refer to the original data. Tasters at the company reject 200 of the cases as they had insufficient salt. The 200 cases can be placed in a vat, salted and reprocessed into jars. This operation, which is considered normal, will cost $200. Assume this rejection rate is considered normal. a) If the additional cost was incurred because of the exacting specifications of this particular

job, how would the $200 be dealt with (i.e. what would the journal entry be?) What is the unit cost of the 2,500 cases?

b) If the additional cost occurs regularly because of difficulty in seasoning, how would the $200 be dealt with (i.e. what would the journal entry be?) What is the unit cost of the 2,500 cases?

c) Comment on the difference, if any, in the unit cost of the cases.

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In Class #18.5 For each of the following independent cases, determine the information requested. a. At the start of the period, 8,000 units were in the work in process inventory and 6,000 units

were in the ending inventory. During the period, 19,000 units were transferred out to the next department. Materials and conversion costs are added evenly throughout the production process. FIFO costing is used. How many units were started this period?

b. In the beginning inventory 4,100 units were 40 percent complete with respect to conversion

costs. During the period, 3,500 units were started. In the ending inventory, 3,250 units were 20 percent complete with respect to conversion costs. How many units were transferred out? Weighted average costing is used.

c. Beginning inventory amounted to 500 units. This period 2,250 units were started and

completed. At the end of the period, the 1,500 units in inventory were 30 percent complete. Using FIFO costing, the equivalent production for the period was 2,800 units. What was the percentage of completion of the beginning inventory?

d. The ending inventory included $8,700 for conversion costs. During the period, 4,200

equivalent units were required to complete the beginning inventory, and 6,000 units were started and completed. The ending inventory represented 1,000 equivalent units of work this period. FIFO costing is used. What were the total conversion costs incurred this period?

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In Class #14.1 Single-rate versus dual-rate methods, support division The Ontario power plant that services all manufacturing departments of Ontario Engineering has a budget for the coming year. This budget has been expressed in the following monthly terms:

Manufacturing Department

Needed at Practical Capacity Production

Level (kilowatt-hours)

Average Expected Monthly Usage (kilowatt-hours)

Mississauga 10,000 8,000 Cambridge 20,000 9,000 Burlington 12,000 7,000 Brantford 8,000 6,000 Total 50,000 30,000

The expected monthly costs for operating the power plant during the budget year are $15,000: $6,000 variable and $9,000 fixed. Required 1 Assume that a single cost pool is used for the power plant costs. What budgeted amounts will be allocated to each manufacturing division if (a) the rate is calculated based on practical capacity and costs are allocated based on practical capacity and (b) the rate is calculated based on expected monthly usage and costs are allocated based on expected monthly usage? Required 2 Assume the dual-rate method is used with separate cost pools for the variable and fixed costs. Variable costs are allocated on the basis of expected monthly usage. Fixed costs are allocated on the basis of practical capacity. What budgeted amounts will be allocated to each manufacturing division? Why might you prefer the dual-rate method?

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In Class #14.2 Support division cost allocation; direct, step-down, and reciprocal methods Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support divisions – Administrative Services (AS) and Information Systems (IS) – and two operating divisions – Government Consulting (Govt) and Corporate Consulting (Corp). For the first quarter of 2013, Phoenix’s cost records indicate the following:

Support Operating

Total AS IS Govt. Corp. Budgeted overhead costs before any interdepartment cost allocations $600,000 $2,400,000 $8,756,000 $12,452,000 $24,208,000Support work supplied by AS

(budgeted head count) 25% 40% 35% 100%Support work supplied by IS

(budgeted computer time) 10% 30% 60% 100% Required 1 Allocate the two support divisions` costs to the two operating divisions using the following methods:

a. Direct method b. Step-down method (allocate AS first) c. Step-down method (allocate IS first) d. Reciprocal method using linear equations and then repeated iterations.

Required 2 Compare and explain differences in the support division costs allocated to each operating division. Which method do you prefer? Why? Required 3 What approaches might be used to decide the sequence in which to allocate support divisions when using the step-down method?

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In Class #14.3 Cost allocation to divisions Forber Bakery makes baked goods for grocery stores, and has three divisons: Bread, Cake , and Doughnuts. Each division is run and evaluated separately, but the main headquarters incurs costs that are indirect costs for the divisions. Costs incurred in the main headquarters are:

Human resources (HR) costs $1,900,000Accounting departments costs 1,400,000Rent and amortization 1,200,000Other 600,000Total costs $5,100,000

The Forber upper management currently allocates this cost to the divisions equally. One of the division managers has done some research on activity-based costing and proposes the use of different allocation bases for the different costs-number of employees for HR costs, total revenues for accounting division costs, square metres of space for rent and amortization costs, and equal allocation among the divisions of “other” costs. Information about the three divisions follows:

Bread Cake Doughnuts Total revenues $20,900,000 $4,500,000 $13,400,000 Direct costs 14,500,000 3,200,000 7,250,000 Segment margin $ 6,400,000 $1,300,000 $ 6,150,000 Number of employees 400 100 600 Square metres of space 10,000 4,000 6,000

Required 1 Allocate the indirect costs of Forber to each division equally. Calculate division operating income after allocation of headquarters costs. Required 2 Allocate headquarters costs to the individual divisions using the proposed allocation bases. Calculate the division operating income after allocation. Comment on the allocation bases used to allocate headquarters costs. Required 3 Which division manager do you think suggested this new allocation? Explain briefly. Which allocation do you think is “better”?

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In Class #15.1 Usefulness of joint cost allocation Roundtree Chocolates manufactures and distributes chocolate products. It purchases cocoa beans and processes them into two intermediate products:

Chocolate powder liquor base Milk chocolate liquor base

These two intermediary products become separately identifiable at a single splitoff point. Every 500 kilograms of cocoa beans yields 20 four-litre contains of chocolate powder liquor base and 30 four-litre contains of milk chocolate liquor base.

The chocolate powder liquor base is further processed into chocolate powder. Every 20 containers of chocolate powder liquor base yield 200 kilograms of chocolate powder. The milk chocolate liquor base is further processed into milk chocolate. Every 30 containers of milk chocolate liquor base yields 340 kilograms of milk chocolate.

The following is an overview of the manufacturing operations at Roundtree Chocolates:

Joint Costs Separable Costs Cocoa Beans Splitoff Point Production and sales data for August 2013 are as follows:

Cocoa beans processed, 5,000 kilograms Costs of processing cocoa beans to splitoff point (including purchase of beans) = $12,000

Production Sales Unit Selling Price

Chocolate powder 2,000 kilograms 2,000 kilograms $4.80 per kilogram Milk chocolate 3,400 kilograms 3,400 kilograms $6.00 per kilogram

The August 2013 separable costs of processing chocolate powder liquor base into chocolate powder are $5,100. The August 2013 separable costs of processing milk chocolate liquor base into milk chocolate are $10,500. Roundtree fully processes both of its intermediate products into chocolate powder or milk chocolate. There is an active market for these intermediate products. In August 2013, Roundtree could have sold the chocolate powder liquor base for $25.20 a container and milk chocolate liquor base for $3120 a container.

Chocolate Powder Liquor

Base

Processing

Processing

Milk Chocolate Liquor base

Processing

Chocolate Powder

Milk Chocolate

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Required 1 Calculate how the joint costs of $12,000 would be allocated between chocolate powder liquor base and milk chocolate liquor base under each of the following methods: (a) sales value at splitoff, (b) physical measure (containers), (c) estimated NRV, and (d) constant gross margin percentage NRV. Required 2 What are the gross margin percentage of chocolate powder and milk chocolate under each methods (a), (b), (c), and (d) in requirement 1? Required 3 Could Roundtree Chocolates have increased its operating income by a change in its decision to fully process both of its intermediate products?

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In Class #15.2 Estimated net realizable value method, byproducts, governance The Princess Corporation grows, processes, packages, and sells three joint apple products:

(a) sliced apples that are used in frozen pies, (b) applesauce, and (c) apple juice.

The skin of the apple, processed as animal feed, is treated as a byproduct.

Princess uses the estimated NRV method to allocate costs of the joint process to its joint products. The byproduct is inventoried at its selling price when produced; the net realizable value of the byproduct is used to reduce the joint production costs before the splitoff point. Details of Princess’s production process are presented here:

The apples are washed and the skin is removed in the Cutting Department. The apples are then cored and trimmed for slicing. The three joint products and the by-products are recognizable after processing in the Cutting Department. Each product is then transferred to a separate department for final processing.

The trimmed apples are forwarded to the Slicing Department, where they are sliced and frozen. Any juice generated during the slicing operation is frozen with the slices.

The pieces of apple trimmed from the fruit are processed into applesauce in the Crushing Department. The juice generated during this operation is used in the applesauce.

The core and any surplus apple pieces generated from the Cutting Department are pulverized into a liquid in the Juicing Department. There is a loss equal to 8% of the weight of the good output produced in this department.

The outside skin is chopped into animal feed and packaged in the Feed Department. It can be kept in cold storage until needed.

A total of 270,000 kilograms of apples entered the Cutting Department during November. The following schedule shows the costs incurred in each department, the proportion by weight transferred to the four final processing departments, and the selling prices of each end product.

Processing Data and Costs, November 2013

Departments Costs Incurred

Proportion of Transferred to

Department

Selling Price per Kilogram of Final

Product Cutting $ 72,000 Slicing 13,536 33% $0.96 Crushing 10,260 30% 0.66 Juicing 3,600 27% 0.48 Feed 840 10% 0.12 Total $100,236 100% $2.22

The Princess Corporation classifies animal feed as a byproduct. The byproduct is inventoried at its selling price when produced; the net realizable value of the product is used to reduce the joint production costs before the splitoff point. Before 2013, Princess classified both apple juice and animal feed as byproducts. These byproducts were not recognized in the accounting system until sold. Revenues from their sale were treated as a revenue item at the time of sale.

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The Princess Corporation uses a “management by objectives” basis to compensate its managers. Every six months, managers are given “stretch” operating-income-to-revenue ratio targets. They receive no bonus if the target is not met and a fixed amount if the target is met or exceeded. Required 1 The Princess Corporation uses the estimated NRV method to determine inventory cost of its joint products; byproducts are reported on the balance sheet at their selling price when produced. For the month of November 2013, calculate the following:

a. The output for apple slices, applesauce, apple juice, and animal feed, in kilograms. b. The estimated NRV at the splitoff point for each of the three joint products. c. The amount of the cost of the Cutting Department assigned to each of the three joint

products and the amount assigned to the byproduct in accordance with corporate policy. d. The gross margins in dollars for each of the three joint products.

Required 2 Comment on the significance to management of the gross margin dollar information by joint product for planning and control purposes, as opposed to inventory costing purposes. Required 3 Assume that Princess managers aim to maximize their bonuses over time. What byproduct method (the pre-2013 method or the 2013 method) would the manager prefer? Required 4 How might a controller gain insight into whether the manager of the Apple Products division is “abusing” the accounting system in an effort to maximize his or her bonus? Required 5 Describe an accounting system for the Princess Corporation that would reduce “gaming” behaviour by managers with respect to accounting rules for byproducts.

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In Class #15.3 Joint cost allocation, process further or sell byproducts Memory Manufacturing Company (MMC) produces memory modules in a two-step process: chip fabrication and module assembly. In chip fabrication, each batch of raw silicon wafers yields 500 standard chips and 500 deluxe chips. Chips are classified as standard or deluxe on the basis of their density (the number of memory bits on each chip). Standards chips have 500 memory bits per chip, and deluxe chips have 1,000 memory bits per chip. Joint costs to process each batch are $24,000. In module assembly, each batch of standard chips is converted into standard memory modules at a separately identified cost of $1,000 and then sold for $8,500. Each batch of deluxe chips is converted into deluxe memory modules at a separately identified cost of $1,500 and then sold for $25,000. Required 1 Allocate joint costs of each batch to deluxe modules and standard modules using (a) the NRV method, (b) the constant gross margin percentage NRV method, and (c) the physical measure method, based on the number of memory bits. Which method should MMC use? Required 2 MMC can process each batch of 500 standard memory modules to yield 400 DRAM modules at an additional cost of $1,600. The selling price per DRAM module would be $26. Assume MMC uses the physical method. Should MMC sell the standard memory modules or the DRAM modules?

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In Class #7.1 Direct materials and manufacturing labour variances, solving unknowns On May 1, 2013, Bovar Company began the manufacture of a new Internet paging device known as Dandy. The company installed a standard costing system to account for manufacturing costs. The standard costs for a unit of Dandy are as follows: Direct materials (3 kg at $5 per kg) $15.00 Direct labour (0.5 hours at $20 per hour) 10.00 Manufacturing overhead (75% of direct labour costs) 7.50 $32.50 The following data were obtained from Bovar’s records for the month of May:

Debit Credit Revenues $125,000Accounts payable at May 31 (for May’s purchases of direct materials)

68,250

Unfavourable FavourableDirect materials price variance $3,250 Direct materials efficiency variance 2,500 Direct labour price variance 1,900 Direct labour efficiency variance 2,000 Actual production in May was 4,000 units of Dandy, and actual sales in May were 2,500 units. The amount shown for direct materials price variance applies to materials purchased during May. There was no beginning inventory of materials on May 1, 2013. Required Compute each of the following items for Bovar for the month of May. Show your computations.

1. Standard direct labour hours (DLHs) allowed for actual output achieved. 2. Actual direct labour hours (DLHs) worked 3. Actual direct labour wage rate. 4. Standard quantity of direct materials allowed (in kg) 5. Actual quantity of direct materials used (in kg) 6. Actual quantity of direct materials purchased (in kg) 7. Actual direct materials price per kg.

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In Class #7.2 Direct-materials variances, long-term agreement with supplier For its manufacturing facility in Montreal, Quebec, Metalmoulder has a long-term contract with Osaka Metals. Metalmoulder manufactures large-scale machining systems that are sold to other industrial companies. Each machining system has a sizable direct materials cost, consisting primarily of the purchase price of a metal compound. Osaka will supply to Metalmoulder up to 2,400 kilograms of metal per month at a fixed purchase price of $144 per kilogram for each month in 2013. For purchases above 2,400 kilograms in any month, Metalmoulder renegotiates the price for the additional amount with Osaka Metals (or another supplier). The standard price per kilogram is $144 for each month in the January to December 2013 period. Production data, direct materials actual usage in dollars, and direct materials actual price per kilogram for the January to May 2013 period, are

Number of Machining

Systems Produced Total Actual Direct

Materials Usage

Avg Actual Direct Materials Purchase Price per Kilogram of

Metal January 10 $290,880 $144.00February 12 343,872 144.00March 18 530,712 151.20April 16 474,317 153.60May 11 304,128 144.00

The average actual direct materials purchase price is for all units purchased in that month. Assume that (a) the direct materials purchased in each month are all used in that month and (b) each machining system is started and completed in the same month. The Montreal facility is one of three plants that Metalmoulder operates to manufacture large-scale machining systems. The other plants are in Worcester, U.K. and Tokyo, Japan. Required 1 Assume that Metalmoulder’s standard materials input per machining system is 198 kilograms of metal. Compute the direct materials price variance and direct materials efficiency variance for each month of the January to May 2013 period. Required 2 How does the signing of a long-term agreement with a supplier – an agreement that includes a fixed-purchase-price clause-affect the interpretation of a materials price variance?

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In Class #7.3 Direct materials rate, efficiency, mix and yield variances Greenwood Inc. manufactures apple products such as apple jelly and applesauce. It makes applesauce by blending Tolman, Golden Delicious, and Ribston apples. Budgeted costs to produce 100,000 kilograms of applesauce in November 2013 are as follows: 45,000 kilograms of Tolman apples at $0.32 per kilogram $14,400180,000 kilograms of Golden Delicious apples at $0.28 per kilogram 50,40075,000 kilograms of Ribston apples at $0.24 per kilogram 18,000 Actual costs in November 2013 are: 62,000 kilograms of Tolman apples at $0.30 per kilogram $18,600155,000 kilograms of Golden Delicious apples at $0.28 per kilogram 43,40093,000 kilograms of Ribston apples at $0.22 per kilogram 20,460 Required 1 Calculate the total direct materials price and efficiency variances for November 2013. Required 2 Calculate the total direct materials mix and yield variances for November 2013. Required 3 Comment on your results in requirements 1 and 2.

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In Class #7.4 Comprehensive variance analysis Aunt Molly’s Old Fashioned Cookies bakes cookies for a chain of retail stores. The company’s best-selling cookie is Chocolate Nut Supreme, which is marketed as a gourmet cookie and regularly sells for $9.60 per kilogram. The standard input cost per kilogram of Chocolate Nut Supreme, based on Aunt Molly’s normal monthly production of 400,000 kilograms, is calculated as follows:

Cost Item Standard Quantity Unit Cost

Total Cost

Direct materials:

Cookie mix 625 g $0.384 per kg $0.24Milk chocolate 312.5 g $2.88 per kg 0.90Almonds 62.5 g $9.60 per kg 0.60

$1.741,000 = 1 kg Direct labour

Mixing 1 minute $17.28 per hour $0.288Baking 2 minutes $21.60 per hour 0.720

$1.008 Aunt Molly’s management accounting, Karen Blair, prepares monthly budget reports based on these standard costs. Presented here is April’s report, which compares budgeted and actual performance.

Performance Report April 2013

Budget Actual Variance

Units (in kilograms)* 400,000 450,000 50,000FRevenue $3,840,000 $4,266,000 $426.000 FDirect material $696,000 $1,017,365 $321,365 UDirect labour $403,200 $453,600 $50,400 U* Units produced and sold

Usage Report

April 2013

Cost Item Quantity Actual Cost Direct materials:

Cookie mix 290,000 kg $111,360Milk chocolate 161,720 kg $621,005Almonds 29,688 kg $285,000

Direct labour Mixing 450,000 minutes 129,600Baking 800,000 minutes 288,000

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Required 1: Compute the following variances:

a. Selling-price variance b. Material-price variance c. Material efficiency variance d. Labour price variance e. Labour efficiency variance

Required 2: What explanations might exist for the variances in requirement 1?

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In Class #7.5 Price and efficiency variances, problems in standard-setting, benchmarking New Fashions Inc. manufactures shirts for retail chains. Andy Jorgenson, the controller, is becoming increasingly disenchanted with New Fashions’ standard costing system. The budgeted and actual amounts for direct materials and direct manufacturing labour for June 2012 were as follows:

Budgeted Amounts

Actual Amounts

Shirts manufactured 6,000 6,732Direct material costs $30,000 $30,294Direct material units (rolls of cloth) 600 612Direct manufacturing labour costs $27,000 $27,693Direct manufacturing labour-hours (DMLH) 1,500 1,530 There were no beginning or ending inventories of materials. Standard costs are based on a study of the operations conducted by an independent consultant six months earlier. Jorgenson observes that, since that study, he has rarely seen an unfavourable variance of any magnitude. He notes that even at their current output levels, the workers seem to have a lot of time for sitting around and gossiping. Jorgenson is concerned that the production manager, Charlie Fenton, is aware of this but does not want to tighten up the standards because the lax standards make his performance look good. Required 1 Compute the price and efficiency variances of New Fashions for direct materials and direct manufacturing labour in June 2013. Required 2 Describe the types of actions the employees at New Fashions may have taken to reduce the accuracy of the standards set by the independent consultant. Why would employees take those actions? Is this behaviour ethical? Required 3 If Jorgenson does nothing about the standard costs, will his behaviour violate any of the ethical conduct characteristics described in Chapter 1? Required 4 What actions should Jorgenson take? Required 5 Jorgenson can obtain benchmarking information about the estimated costs of New Fashions’ major competitors from Benchmarking Clearing House (BCH). Discuss the pros and cons of using the BCH information to compute the variances in requirement 1.

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In Class #8.1 Coverage of manufacturing overhead, standard cost system The Singapore division of a Canadian telecommunications company uses a standard cost system for its machine-based production of telephone equipment. The company applies overhead on the basis of Machine Hours. Data regarding production during June are as follows: Actual Variable overhead costs $186,120 Variable overhead POR (per standard MH allowed for actual output) $14.40 Actual Fixed overhead costs $481,200 Budgeted Fixed overhead $468,000 Budgeted machine-hours 15,600 Standard machine-hours allowed per unit of output 0.30 Actual machine-hours used 15,960 Actual units of output 49,200 Ending work-in-process inventory 0 Required 1 Calculate all manufacturing overhead variances. Verify your calculations with the Variance Flow-Charts. Required 2 Describe how individual variable overhead items are controlled from day to day. Also, describe how individual fixed overhead items are controlled.

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In Class #8.2 Overhead variance, missing information Dvent budgets 18,000 machine hours for the production of computer chips in August 2013. The budgeted variable overhead rate is $6 per machine-hour. At the end of August there is a $375 favourable rate variance for variable overhead and a $1,575 unfavourable rate variance for fixed overhead. For the computer chips produced, 14,850 machine-hours are budgeted and 15,000 machine-hours are actually used. Total actual overhead costs are $120,000. Required 1 Compute efficiency and flexible-budget variances for Dvent’s variable overhead in August 2013. Will variable overhead be over-applied or under-applied? By how much? Required 2 Compute production-volume and flexible-budget variances for Dvent’s fixed overhead in August 2013. Will fixed overhead be over-applied or under-applied? By how much?

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In Class #8.3 Flexible-budget variances David James is a cost accountant and business analyst for Doorknob Design Company (DDC), which manufactures expensive brass doorknobs. DDC uses two direct cost categories: direct materials and direct labour. James feels that manufacturing overhead is most closely related to material usage. Therefore, DDC allocates manufacturing overhead to production based upon kilograms of materials used. At the beginning of 2013, DDC budgeted production of 100,000 doorknobs and adopted the following standards for each doorknob:

Input Cost/Doorknob Direct materials (brass) 0.5 kg @ $20/kg $10.00 Direct manufacturing labour 0.25 hours @ $30/hour 7.50 Manufacturing overhead: Variable $10/kg x 0.5 kg 5.00 Fixed $5/kg x 0.5 kg 2.50 Standard cost per doorknob $25.00 Actual results for April 2013 were: Production 95,000 doorknobs Direct materials purchased 50,000 kg at $22/kg Direct materials used 45,000 kg Direct manufacturing labour 20,000 hours for $650,000 Variable manufacturing overhead $400,000 Fixed manufacturing overhead $350,000 Required 1 For the month of April, compute the following variances, indicating whether each is favourable (F) or unfavourable (U).

a. Direct materials price variance (based on purchases) b. Direct materials efficiency variance c. Direct manufacturing labour price variance d. Direct manufacturing labour efficiency variance e. Variable manufacturing overhead rate variance f. Variable manufacturing overhead efficiency variance g. Production-volume variance h. Fixed manufacturing overhead rate variance

Required 2 Can James use any of the variances to help explain any of the other variances? Give examples.

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In Class #8.4 Overhead variances A large metropolitan health-care complex, General Hospital, has had difficulty controlling its accounts receivable. Costs currently available from the information system are inaccurate and have led to gross errors in reports to the various government funding agencies which has indicated that the hospital appears to be operating at a deficit. The hospital administration is concerned that the poor quality of information could lead to their replacement. With the participation of the billing department, a set of standard costs and standard amounts was developed for 2013. These standard costs can be used in a flexible budget with separate variable-cost and fixed-cost categories. The output unit is defined to be a single bill. The accountant of General Hospital provides you with the following for April 2013: Variable overhead costs, allowance per standard hour $ 12 Fixed overhead flexible budget variance $ 240 F Total budgeted overhead costs for the bills prepared $ 27,000 Production-volume variance $ 1,080 F Variable cost rate variance $ 2,400 U Variable cost efficiency variance $ 2,400 F Standard hours allowed for the bills prepared 1,800 labour hours Required Compute the following

1. Actual hours of input used 2. Fixed overhead budget 3. Fixed overhead allocated 4. Budgeted fixed overhead rate per hour 5. Denominator level in hours

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In Class #16.1 Revenue Variances The Cross Company produces and sells two product lines with the following budgeted revenues and expenses: X Y Expected total industry sales (units) 76,800 136,000 Expected Cross Company sales (units) 7,680 34,000

Budgeted selling price per unit $160 $200

Budgeted CM/Unit $90 $125

Actual results for 2013 included: Actual total industry sales 100,000 145,000 Actual Cross Company Sales 12,000 31,900 Actual selling price (per unit) $150 $205 Required Calculate all revenue variances.

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In Class #11.1 Sportway, Inc., is a wholesale distributor supplying a wide range of moderately priced sporting equipment to large chain stores. About 60 percent of Sportway's products are purchased from other companies, while the remainder of the products are manufactured by Sportway. The company's Plastics Department is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct labour capacity at available workstations. Following are the selling price and costs associated with Sportway's tackle boxes.

Selling price per box $86.00 Costs per box: Molded plastic $ 8.00 Hinges, latches, handle 9.00 Direct labour ($15/hour) 18.75 Manufacturing overhead 12.50 Selling and administrative expenses 17.00 65.25 Profit per box $20.75

Because Sportway believes it could sell 12,000 tackle boxes if it had sufficient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68 per box delivered to Sportway's facility.

Bart Johnson, Sportway's product manager, has suggested that the company could make better use of its Plastics Department by manufacturing skateboards. To support his position, Bart has a market study that indicates an expanding market for skateboards and a need for additional suppliers. He believes that Sportway could expect to sell 17,500 skateboards annually at a price of $45 per skateboard. Bart's estimate of the costs to manufacture the skateboards follows:

Selling price per skateboard $45.00 Costs per skateboard: Molded plastic $5.50 Wheels, hardware 7.00 Direct labor ($15/hour) 7.50 Manufacturing overhead 5.00 Selling and administrative expenses 9.00 34.00 Profit per skateboard $11.00

In the Plastics Department, Sportway uses direct labor hours as the application base for manufacturing overhead. Included in the manufacturing overhead for the current year is $50,000 of factory-wide, fixed manufacturing overhead that has been allocated to the Plastics Department. For each unit of product that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, an allocated $6 fixed overhead cost per unit for distribution is included in the selling and administrative expenses for all products. Total selling and administrative expenses for the purchased tackle boxes would be $10 per unit. Required In order to maximize the company's profitability, prepare an analysis based on the data presented that will show which product or products Sportway, Inc., should manufacture and/or purchase. It should also show the associated financial impact. Support your answer with appropriate calculations.

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In Class #13.1 Balanced Scorecard Following is a random order listing of perspectives, strategic objectives and performance measure for the balanced scorecard. For each perspective, select those strategic objectives from the list that best relate to it. For each strategic objective, select the most appropriate performance measure(s) from the list. Perspectives Strategic Objectives Performance Measures

Internal business process Acquire new customers Percentage of defective product units

Customer Increase shareholder value Return on assets

Learning and growth Retain customers Number of patents

Financial Improve manufacturing quality Employee turnover rate

Develop profitable customers Net income

Increase proprietary products Customer profitability

Increase information-system capabilities

Percentage of processes with real-time feedback

Enhance employee skills Return on sales

On-time delivery by suppliers Average job-related training hours per employee

Increase profit generated by each salesperson

Return on equity

Introduce new product Percentage of on-time deliveries by suppliers

Minimize invoice error rate Product cost per unit

Profit per salesperson

Percentage of error-free invoices

Customer cost per unit

Earnings per share

Number of new customers

Percentage of customers retained

Number of products

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In Class #19.1 Methods of Analyzing Quality Control Problems Plum Corporation manufactures and sells computers and related equipment (scanners, monitors, etc.). Plum has been diligently working through its many business processes to ensure total quality management (TQM) principles have been applied to all areas. The CEO of Plum had suggested that Accounts Payable, as part of cash management, was not a significant factor, but the Controller has decided to review the area anyway. Required 1 What would Plum Corporation classify as failures in accounts payable? Required 2 Give examples of prevention activities that could reduce failure in accounts payable?

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In Class #21.1 DCF, accrual accounting rate of return, working capital, evaluation of performance Edilcan Inc. has been offered an automated special-purpose welder (robot) for $60,000. The machine is expected to have a useful life of eight years with a terminal disposal price of $12,000. Savings in cash operating costs are expected to be $15,000 per year. However, additional working capital is needed to keep the welder running efficiently and without stoppages. Working capital includes mainly argon gas, wires, and tips. These items must continually be replaced so that an investment of $5,000 must be maintained in them at all times, but this investment is fully recoverable (will be “cashed in”) at the end of the useful life. Edilcan’s required rate of return is 14%. Required 1

a. Compute the net present value b. Compute the internal rate of return c. Compute the accrual accounting rate of return based on the net initial investment.

Assume straight-line amortization. Required 2 You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF model?

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In Class #21.2 NPV, IRR and sensitivity analysis Crumbly Cookie Company is considering expanding by buying a new (additional) machine that costs $42,000, has zero terminal disposal value, and has a ten-year useful life. It expects the annual increase in cash revenues from the expansion to be $23,000 per year. It expects additional annual costs to be $16,000 per year. Its cost of capital is 6%. Ignore taxes. Required 1 Calculate the net present value and internal rate of return for this investment. Required 2 Assume the finance manager of Crumbly Cookie Company is not sure about the cash revenues and costs. The revenues could be anywhere from 10% higher to 10% lower than predicted. Assume cash costs are still $16,000 per year. What are NPV and IRR at the high and low points for revenue?

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In Class #21.3 Net present value, internal rate of return, sensitivity analysis Francesca Freed wants a Burg-N-Fry franchise. The buy-in is $500,000. Burg-N-Fry headquarters tells Francesca that typical annual operating costs are $160,000 (cash) and that she can bring in “as much as” $260,000 in cash revenues per year. Burg-N-Fry headquarters also wants her to pay 10% of her revenues to them per year. Francesca wants to earn at least 8% on the investment, because she has to borrow the $500,000 at a cost of 6%. Use a 12-year window, and ignore taxes. Required 1 Find the NPV and IRR of this investment, given the information that Burg-N-Fry has given Francesca. Required 2 Francesca is nervous about the “as much as” statement from Burg-N-Fry, and worries that the cash revenues will be lower than $260,000. Repeat requirement 1 using revenues of $220,000. Required 3 Francesca thinks she should try to negotiate a lower payment to the Burg-N-Fry headquarters, and also thinks that if revenues are lower than $260,000 her costs might also be lower by about $10,000. Repeat requirement 2 using $150,000 as annual cash operating cost and a payment to Burg-N-Fry of only 6% of sales revenues. Required 4 Discuss how the sensitivity analysis will affect Francesca’s decision to buy the franchise. Why don’t you have to recalculate the internal rate of return if you change the desired (discount) interest rate?

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In Class #21.4 Relevant costs, capital budgeting, strategic decision Wilcox is a family-owned company that has been making microwaves for almost 20 years. The company’s production line includes 10 models, ranging from a basic model to a deluxe stainless steel model. Most of its sales are through independently owned retailers in medium-sized towns in central Canada, giving the microwaves an image of high quality and price. However, industry sales have been stagnant and those of Wilcox have been falling in the past two years due to the Asian brands. Currently Wilcox sells 75,000 units per year at an average price of $120 each with variable unit costs of $60 (of which materials is $30). As a result, Wilcox is operating its plant at about 75% of a one-shift capacity, although in their “golden years” in the early 1990s they were operating at 75% of a two-shifts capacity. In the spring of 2009 Oh Mart, a chain of large supermarkets, approached Wilcox’s CEO and asked about the possibility of producing microwaves for them. The microwaves will be sold under the Oh Mart house brand, called Top Line. They are offering a five-year contract that could be automatically extended on a year-to-year basis, unless one party gives the other at least three months’ notice that it does not wish to extend the contract. The deal is for 24,000 units per year with a unit price of $90 each. Oh Mart does not want title on a microwave to pass from Wilcox to Oh Mart until the microwave is shipped to a specific Oh Mart store. Additionally, Oh Mart wants the Top Line microwaves to be somewhat different in appearance from Wilcox’s other microwaves. These requirements would increase Wilcox’s purchasing, inventorying, and production costs. In order to be able to give an answer to Oh Mart, knowing that they had no room to negotiate, Wilcox managers gathered the following information:

1. First-year costs of producing Top Line microwaves:

Materials (includes items specific to Oh Mart models) $40Labour (same as with regular microwaves) $20Overhead at 100% of labour (50% is variable; the 100% rate is based

on a volume of 100,000 units per year) $20Total unit cost $80

2. Related added inventories (the cost of financing them is estimated to be close to 15% per

year):

Materials Two-month supply (a total of 4,000 units) Work-in-process 1,000 units, half completed (but all materials for them issued) Finished goods 500 units (awaiting next carload lot shipment to an Oh Mart central

warehouse in Concord, Ontario)

3. Impact on Wilcox’s regular sales. Wilcox’s sales over the next two years are expected to be about 75,000 units a year if they forgo the Oh Mart deal, based on the CEO estimates after launching a new “top of the line” microwave. If Wilcox accepts the deal, it would lose about 5,000 units of the regular sales volume a year, since their retail distribution is quite strong in Oh Mart market regions. These estimates do not include the possibility that a few of Wilcox’s current dealers might drop their line if they find out that Wilcox is making microwaves for Oh Mart with a lower selling price.

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Required 1 Determine if the proposal of Oh Mart will increase Wilcox’s operating income in the next year. Required 2 Calculate the total value of the contract (suppose there is no renewal after the 5th year). Required 3 On the basis of the net present value criterion, should Wilcox Microwaves accept the offer? Required 4 Estimate the strategic consequences of accepting the proposal (consider the current situation of the industry, Wilcox positioning, image, distribution, and production issues).

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In Class #22.1 Total project versus differential approach, income taxes A specialized automobile parts manufacturer is considering the acquisition of a new machine. The new machine is far more efficient than the present machine. It would cost $87,600, would cut annual cash operating costs from $72,000 to $48,000, and would have zero terminal disposal price at the end of its useful life of three years. The applicable income tax rate is 30%. The after-tax required rate of return is 14%.

The current machine has been used for one year. It will have no useful economic life after three more years. It cost $105,600 when acquired, has a current disposal price of $39,200, and has a residual disposal price of $7,200.

These machines qualify for a capital cost allowance rate of 20%, declining balance.

Required Using the net present value method, show whether the new machine should be purchased (a) under a total-project approach and (b) under a differential approach.

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In Class #22.2 Excess present value index The ChipTech Company is considering the acquisition of four capital investment projects. The projects under consideration are mutually exclusive. The company is considering buying new design equipment for which each project is identified as Design Pro and Easychip. Also under consideration are two other capital investments which internally are referenced as projects C and D. The following table describes the financial characteristics of these projects:

Project

Present Value of Cash Inflows at 14% Required

Rate Return Net Initial Investment

Design Pro $900,000 $600,000 Easychip 1,260,000 900,000 Project C 702,000 540,000 Project D 384,000 240,000

Required 1 For each project, calculate (a) the net present value and (b) the excess present value index. On the basis of the excess present value index only, should ChipTech choose Design Pro or Easychip? Required 2 Supposing ChipTech must choose one of Design Pro or Easychip, and supposing ChipTech has a capital investment budget of $1,140,000, which projects should ChipTech choose? Required 3 Comment on your answers to requirements 1 and 2.

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In Class #22.3 Equipment replacement, no income taxes Pro Chips is a manufacturer of prototype chips based in Dublin, Ireland. Next year, in 2013, Pro Chips expects to deliver 552 prototype chips at an average price of $80,000. Pro Chips’ marketing vice president forecasts growth of 60 prototype chips per year through 2019. That is, demand will be 552 in 2013, 612 in 2014, 672 in 2015, and so on.

The plant cannot produce more than 540 prototype chips annually. To meet future demand, Pro Chips must either modernize the plant or replace it. The old equipment is fully depreciated and can be sold for $3,600,000 if the plant is replaced. If the plant is modernized, the costs to modernize it are to be capitalized and depreciated over the useful life of the updated plant. The old equipment is retained as part of the modernize alternative. The following data on the two options are available:

Modernize Replace Initial investment in 2013 $33,600,000 $58,800,000 Terminal disposal value in 2019 $6,000,000 $14,400,000 Useful life 7 years 7 years Total annual cash operating costs per prototype chip $62,000 $56,000

Pro Chips uses straight-line depreciation, assuming zero terminal disposal value. For simplicity, we assume no change in prices or costs in future years. The investment will be made at the beginning of 2013, and all transactions thereafter occur on the last day of the year. Pro Chips’ required rate of return is 12%.

There is no difference between the modernize and replace alternatives in terms of required working capital. Pro Chips has a special waiver on income taxes until 2019. Required 1 Sketch the cash inflows and outflows of the modernize and replace alternatives over the 2013 to 2019 period. Required 2 Calculate payback period for the modernize and replace alternatives. Required 3 Calculate net present value of the modernize and replace alternatives. Required 4 What factors should Pro Chips consider in choosing between the alternatives?

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In Class #22.4 Equipment replacement, income taxes Assume the same facts as in Problem 22.3, except that the plant is located in Kamloops, B.C. Pro Chips has no special waiver on income taxes. It pays a 30% tax rate on all income. Proceeds from sales of equipment above book value are taxed at the same 30% rate. Required 1 Prepare a schedule of relevant after-tax cash inflows and outflows of the modernize and replace alternatives over the 2013 to 2019 period. Required 2 Calculate net present value of the modernize and replace alternatives. Required 3 Suppose Pro Chips is planning to build several more plants .It wants to have the most advantageous tax position possible. Pro Chips has been approached by Spain, Malaysia, and Australia to construct plans in their countries. Use the data in Problem 22-27 and this problem to briefly describe in qualitative terms in income tax features that would be advantageous to Pro Chips.

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In Class #22.5 Ranking of capital budgeting projects, alternative selection methods, capital rationing Conglomerates has not yet told Sam Pilon what the total amount of funds available for capital projects at Firthing Manufacturing will be, except for the after-tax required rate of return being 12%. Pilon, division president of Firthing, is preparing the 2013 capital budget for submission to corporate headquarters at Conglomerates Inc. Each project is considered to have the same degree of risk. Projects A and D are mutually exclusive: either one can be chosen, not both/ When analyzing projects, Firthing assumes that any budgeted amount not spent on the identified projects will be invested at the after-tax required rate of return, and funds released at the end of a project can be reinvested at the hurdle rate. Further information about each of the se projects is presented in the following schedule: Firthing Manufacturing Proposed Capital Projects

Project A Project B Project C Project D Project E Project F Capital Investment $127,200 $240,000 $168,000 $192,000 $172,800 $156,000Net present value at 12%

$83,620 $28,528 $(12,274) $89,249 $7,232 $83,416

Excess present value index (profitability index)

1.66 1.12 0.93 1.46 1.04 1.53

Internal rate of return 35% 15% 9% 22% 14% 26%Payback period 2.2 years 4.5 years 3.9 years 4.3 years 2.9 years 3.3 yearsEconomic life 6 years 8 years 5 years 8 years 6 years 8 years Required 1 Assume that Firthing Manufacturing has no budget restrictions for capital expenditures and wants to maximize its value to Conglomerates. Identify the capital investments projects that Firthing should include in the capital budget it submits to Conglomerates Inc. Explain the basis for your selection. Required 2 Ignore your response to requirement 1. Assume that Conglomerates Inc. has specified that Firthing Manufacturing will have a restricted budget for capital expenditures, and that Firthing should select the projects that maximize the company’s value. Identify the capital investment projects Firthing should include in its capital expenditures budget, and explain the basis for your selections, if the budget is (a) $540,000 and (b) $600,000

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In Class #1.1 Professional ethics and earnings...

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