4. Westman Industries Ltd. manufactures commercial linens for hotels and similar entities. It has been contacted by prospective customer that is outside its normal trading area, due to a strike by the employees of the major commercial linen manufacturer in that region. The customer wants to purchase 200 queen size bedspreads for its new hotel opening shortly. While the normal selling price for the chosen style is $170.00 per bedspread, the prospective customer wants a purchase price of $100.00 per bedspread. The following information is available regarding the standard cost to manufacture one queen size bedspread in the chosen style: Direct materials 2.0 metres @ $26/metre $52.00 Direct labour .75 hours @ $12/hour $ 9.00 Variable manufacturing overhead .75 hours @ $30/hour $22.5 0 Fixed manufacturing overhead .75 hours @ $ 50/hour $37.50 Variable selling expenses 5% of selling price Fixed selling expenses $ 6.00 Fixed manufacturing is allocated on the basis of direct labour hours, as is variable manufacturing overhead. As the prospective customer has approached Westman directly, the selling commission of 5% will not have to be paid to any salesperson. The prospective customer requires that the bedspreads be embroidered with their logo. Due to the large size of the logo, Westman Industries will have to purchase a special die for their equipment, at a cost of $1,000. In addition, this is expected to increase the direct labour by .25 hours per bedspread. The factory currently has excess capacity and can produce this order without disrupting production on other orders. Required: (total marks = 9) a) Should Westman Industries Ltd. accept this special order? Support your answer with the relevant calculations. b) What qualitative considerations are relevant to this decision? 7 2 5. The newly appointed manager of production at Ahi Company is the major shareholder's son, who has no business background at all. Year end has arrived, and you have been asked to assist the manager in the calculation and interpretation of production variances for the year. The following is the standard cost information for Westridge Company's only product: Direct materials, 2.5 kilograms at $8.00 S20. 00 Direct labour, 1.5 hours at $12.00/h our $18.00 Variable overhead, 1.5 hours at $6.50/direct labour hour S 9.75 Fixed overhead, 1.5 hours at $10.00 $15.00 Standard cost per unit $62.75 The company manufactured and sold 25,000 units of product during the year. A total of 64,000 kgs of material was purchased during the year at cost of $9.10 per metre. All of this material was used to manufacture the 25,000 units. The company records showed no beginning or ending inventories for the year. The company worked 36,200 direct labour hours during the year at a cost of $13.00 per hour. Variable and fixed oerhead costs are each applied to products on the basis of direct labour hours. Actual fixed overhead costs incurred were $371,000. The budgeted fixed overhead rate was calculated based on expected production of 22,000 units. Actual variable overhead costs were S246,350. 3 3 Required: (total marks = 17) a) Compute the direct materials price and quantity variances for the year. b) Compute the direct labour rate and efficiency variances for the year c) Compute the variable overhead spending and efficiency variances for the year. d) Compute the vuugereu Cu Uvereau cost for the year. 3 1 1 3 d) Compute the budgeted fixed overhead cost for the year. d) Compute the fixed overhead budget and volume variances for the year. 2 e) Explain to the shareholder's son what information is provided by each of the variable overhead variances. f) What is the most likely single explanation that accounts for both of the labour variances? Was this a good choice? 2 6. Stanton Industries Ltd. is considering an investment in a new product line. Current production utilizes only 75% of the manufacturing facility, so there is sufficient room in the existing building to manufacture the new product. The original cost of the manufacturing facility was $800,000, and it is being amortized over 20 years on a straight line basis. If the new product is produced, Stanton will have to invest $16,000 in new equipment and $4,500 in working capital. Stanton anticipates that net cash inflows of $3,600 will be received from the sale of the new product for a twelve year period. At the end of the twelve years, the working capital will be recovered, and the equipment is expected to have a salvage value of $2,000. Stanton requires a 14% rate of return on its investments. 6 4 Required: (total marks = 14) a) Using the net present value method of discounted cash flow analysis, determine whether Stanton should invest in this new product line. b) Describe two things, in addition to the number you just calculated, that should be taken into consideration by Stanton when making this investment decision. Make sure you make it clear why these are important to consider. 4 c) Determine the payback period for this investment. Under what circumstance would this project be accepted using the payback period as the decision tool? Describe two limitations to the payback period method. 7. There have been several trends in budgeting, including zero- based budgeting and participative budgeting. 4 Required: (total marks = 4) Describe two different advantages of participative budgeting. What is the major criticism of participative budgeting? 8. If a product line of the organization is generating a loss, it is a pretty clear indicator that the product should be discontinued. 22 3 Required: Do you agree or disagree with this statement? Support your