APPLICATION PROBLEMS:

All work must be shown to receive any credit

Question 26:Learned Corporation recorded the following transactions for the just completed month.

a.$80,000 in raw materials were purchased on account.

b.$71,000 in raw materials was requisitioned for use in production. Of this amount, $62,000 was for direct materials and the remainder was for indirect materials.

c.Total labor wages of $112,000 were incurred. Of this amount, $101,000 was for direct labor and the remainder was for indirect labor.

d.Additional manufacturing overhead costs of $175,000 were incurred.

Required:

Record the above transactions in journal entries.

Question 27:Midwest Industrial Products Corporation makes two products, Product H and Product L. Product H is expected to sell 50,000 units next year and Product L is expected to sell 10,000 units. A unit of either product requires 0.2 direct labor hours.

The companys total manufacturing overhead for the years is expected to be $1,920,000.

Required:

1.The company currently applies manufacturing overhead to products using direct labor-hours as the allocation base. If this is followed, how much overhead cost would be applied to each product? Compute both the overhead cost per unit and the total amount of overhead cost that would be applied to each product. (In other words, how much overhead cost is applied

to a unit of Product H? Product L? How much overhead cost is applied in total to all the units of Product H? Product L?)

2.Management is considering an activity-based costing system and would like to know what impact this change might have on product costs. For purposes of discussion, it has been suggested that all of the manufacturing overhead be treated as a product-level cost. The total manufacturing overhead would be divided in half between the two products, with $960,000 assigned to Product H and $960,000 assigned to Product L.

If this is followed, how much overhead cost per unit would be applied to each product?

3.Explain the impact on unit product costs of the switch in costing systems.

Question 28:Data concerning a recent periods activity in the Prep Department, the first processing department in a company that uses processing costs, appear below.

Material

Conversion

Equivalent units of production in ending work in process

2,000

800

Cost per equivalent unit

$13.86

$4.43

A total of 20,100 units were completed and transferred to the next processing department during the period.

Required:

Compute the cost of the units transferred to the next department during the period and the cost of the ending work in process inventory.

Question 29:Harris Company manufactures and sells a single product. A partially completed schedule of the companys total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given below:

Units Produced and Sold

30,000

40,000

50,000

Total Costs:

Variable costs

$180,000

?

?

Fixed costs

300,000

?

?

Total Costs

?

?

Cost per unit:

Variable cost

?

?

?

Fixed cost

?

?

?

Total cost per unit

?

?

?

Required:

1.Complete the schedule of the companys total and unit costs above.

2.Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format Income Statement for the year.

Question 30:Whirly Corporations most recent Income Statement is shown below:

Total

Per Unit

Sales (10,000 units)

$350,000

$35.00

Variable expenses

200,000

20.00

Contribution Margin

150,000

$15.00

Fixed expenses

135,000

Net Operating income

$ 15,000

Required:

Prepare a new contribution format Income Statement under each of the following conditions (consider each case independently):

1.The sales volume increases by 100 units.

2.The sales volume decreases by 100 units.

3.The sales volume is 9,000 units.

Question 31:Silver Company makes a product that is very popular as a Mothers Day gift. Thus, peak sales occur in May of each year, as shown in the companys sales budget for the second quarter given below:

April

May

June

Total

Budgeted sales (all on account)

$300,000

$500,000

$200,000

$1,000,000

From past experience, the company has learned that 20% of a months sales are collected in the month of the sale, another 70% are collected in the month following the sale, and the remaining 10% are collected in the second month following the sale. Bad debts are negligible and can be ignored. February sales totaled $230,000, and March sales totaled $260,000.

Required:

1.Prepare a schedule of expected cash collections from sales, by month and in total for the second quarter.

2.Assume that the company will prepare a budgeted balance sheet as of June 30. Compute the accounts receivable as of that date.

Question 32:Puget Sound Divers is a company that provides diving services such as underwater ship repairs to clients in the Puget Sound area. The companys planning budget for May appears below:

Puget Sound Divers

Planning Budget

For the Month Ended May 31

Budgeted diving-hours (q)

100

Revenue ($365.00q)...

$36,500

Expenses

Wages and salaries ($8,000 + 125.00q)..

$20,500

Supplies ($3.00q)

300

Equipment rental ($1,800 + $32.00q).

5,000

Insurance ($3,400)..

3,400

Miscellaneous ($630 + $1.80q)..

810

Total expense.

$30,010

Net operating income.

$ 6,490

Required:

During May, the companys activity was actually 105 diving-hours. Prepare a flexible budget for that level of activity.

Question 33:Alyeski Tours operates day tours of coastal glaciers in Alaska on its tour boat the Blue Glacier. Management has identified two cost drivers the number of cruises and the number of passengers that it uses in its budgeting and performance reports. The company publishes a schedule of day cruises that it may supplement with special sailings if there is sufficient demand. Up to 80 passengers can be accommodated on the tour boat. Data concerning the companys cost formulas appear below:

Fixed Cost

Per Month

Cost per

Cruise

Cost per

Passenger

Vessel operating costs..

$5,200

$480.00

$2.00

Advertising..

$1,700

Administrative costs

$4,300

$ 24.00

$1.00

Insurance.

$2,900

For example, vessel operating costs should be $5,200 per month plus $480 per cruise plus $2 per passenger. The companys sales should average $25 per passenger. The companys planning budget for July is based on 24 cruises and 1,400 passengers.

Required:

Prepare the companys planning budget for July.

Question 34:Provide the missing data in the following table for a distributor of martial arts products:

Division

Alpha

Bravo

Charlie

Sales

$?

$11,500,000

$?

Net operating income.

$?

$ 920,000

$210,000

Average operating assets

$800,000

$?

$?

Margin

4%

?

7%

Turnover.

5

?

?

Return on investment (ROI)...

?

20%

14%

Question 35:Commercial Services.com Corporation provides business-to-business services on the Internet. Data concerning the most recent year appear below:

Sales..

$3,000,000

Net operating income

$150,000

Average operating assets..

$750,000

Required:

Consider each question below independently. Carry out all computations to two decimal points.

1.Compute the companys return on investment (ROI).

2.The entrepreneur who founded the company is convinced that sales will increase next year by 50% and that net operating income will increase by 200%, with no increase in average operating assets. What would be the companys ROI?

3.The chief financial officer of the company believes a more realistic scenario would be a $1,000,000 increase in sales, requiring a $250,000 increase in average operating assets, with a resulting $200,000 increase in net operating income. What would be the companys ROI?

Question 36:Delta Company produces a single product. The cost of producing and selling a single unit of this product at the companys normal activity level of 60,000 units per year is:

Direct materials

$5.10

Direct labor...

$3.80

Variable manufacturing overhead

$1.00

Fixed manufacturing overhead.

$4.20

Variable selling and administrative expense

$1.50

Fixed selling and administrative expense.

$2.40

The normal selling price is $21 per unit. The companys capacity is 75,000 units per year. An order has been received from a mail-order house for 15,000 units at a special price of $14.00 per unit. This order would not affect regular sales.

Required:

If the order is accepted, by how much will annual profits be increased or decreased? (The order will not change the companys total fixed costs.)

Question 37:Bed & Bath, a retailing company has two departments, Hardware and Linens. The companys most recent monthly contribution format Income Statement follows:

Department

Total

Hardware

Linens

Sales..

$4,000,000

$3,000,000

$1,000,000

Variable expenses..

1,300,000

900,000

400,000

Contribution margin..

2,700,000

2,100,000

600,000

Fixed expenses..

2,200,000

1,400,000

800,000

Net operating income (loss)..

$ 500,000

700,000

$ (200,000)

A study indicates that $340,000 of the fixed expenses being charged to Linens are sunk costs or allocated costs that will continue even if the Linens Department is dropped. In addition, the elimination of the Linens Department will result in a 10% decrease in the sales of the Hardware Department.

Required:

If the Linens Department is dropped, what will be the effect on the net operating income of the company as a whole?

Question 38:Information on four investment proposals is given below:

Investment Proposal

A

B

C

D

Investment required

$(90,000)

$(100,000)

$(70,000)

$(120,000)

Present value of cash inflows

126,000

138,000

105,000

160,000

Net present value

$ 36,000

$ 38,000

$ 35,000

$ 40,000

Life of the project

5 years

7 years

6 years

6 years

Required:

1.Compute the project profitability index for each investment proposal.

2.Rank the proposals in terms of preference.

Question 39:Comparative financial statement data for Carmono Company follow:

2009

2008

Cash..

$ 3

$ 6

Account receivable...

22

24

Inventory.

50

40

Plant and equipment.

240

200

Less accumulated depreciation.

(65)

(50)

Total asset

$250

$220

Accounts payable.

$ 40

$ 36

Common stock.

150

145

Retained Earnings

60

39

Total Liabilities and stockholders equity

$250

$220

For 2009, the company reported net income as follows:

Sales..

$ 275

Cost of goods sold.

150

Gross Margin.

125

Selling and administrative expenses.

90

Net Income

$ 35

Dividends of $14 were declared and paid during 2009.

Required:

Using the indirect method, prepare a statement of cash flows for 2009.

Question 40:The financial statements for Castile Products, Inc. are given below:

Castile Products, Inc.

Balance Sheet

December 31

Assets

Current Assets:

Cash..

$ 6,500

Accounts receivable, net..

35,000

Merchandise inventory.

70,000

Prepaid expenses...

3,500

Total current assets..

115,000

Property and equipment, net

185,000

Total assets

$300,000

Liabilities and Stockholders Equity

Liabilities:

Current liabilities

$ 50,000

Bonds payable, 10%......................................

80,000

Total Liabilities.

130,000

Stockholders equity:

Common stock $5 par value..

$ 30,000

Retained Earnings..

140,000

Total stockholders equity

170,000

Total liabilities and equity

$300,000

Castile Products

Income Statement

For the Year Ended December 31

Sales

$420,000

Cost of goods sold..

292,500

Gross Margin..

127,500

Selling and administrative expenses.

89,500

Net operating income

38,000

Interest expense.

8,000

Net income before taxes.

30,000

Income taxes (30%)...

9,000

Net Income

$ 21,000

Account balances at the beginning of the year were: accounts receivable $25,000, inventory $60,000. All sales were on account.

Required:

Compute financial ratios as follows:

1.Gross margin percentage

2.Current ratio

3.Acid-test ratio

4.Debt-to-equity ratio

5.Average collection period

6.Average sale period

7.Times interest earned ratio

8.Book value per share