Cost Accounting questions 2-6

2. Cost Estimation (10 Points)

Caboose Company manufactures locomotive engines. The company is attempting to predict its maintenance costs more accurately. Maintenance costs are a mixed cost. Maintenance costs and machine hours for the first 4 months of 2016 are as follows:

Month	Maintnance cost	Machine hours
Jan	$50,320	1,340
Feb	60,210	1,580
March	58,005	1,450
April	62,370	1,840

Required: Using the high-low method, calculate unit variable cost and monthly fixed costs.

3. Cost Estimation (10 Points)

Williams Equipment Inc. produced a pilot run of 20 units of a recently developed motor used in the finished products. The pilot run required an average of 12 direct labor hours per motor. Williams has an 80% learning curve on the direct labor hours needed to produce new motors.

Required: Calculate the average direct labor hours per unit for the first 640 motors (including the pilot run) produced.

4. CVP Analysis (30 Points)

Bill & Ruths Sandwich Shop is seeking to sell new franchises for its business. The company is in the process of developing a business plan to present to potential investors. Following are various projected cost data for a typical sandwich shop:

Lease of store space	$500/month
Equipment lease	$500/month
License	$240/year
Advertising	2.5% gross sales revenue
Royalty	8% of gross sales revenue
Salaries	$2,000/month
Utilities	$400/month
Insurance	$1,500/year

The average order (sandwich) sells for $4, with food cost of $2.

Required:

1. What is the contribution of each order (sandwich) toward covering fixed expenses?

2. What is the projected monthly breakeven point in units (round your answer up, to nearest whole unit)?

3. A potential franchisee has a target before - tax profit (B) of $2,000 per month. What level of sales (in units and in dollars, per month) must be achieved to meet the franchisee's profit goal (round up, to nearest whole unit)?

4. This potential franchisee has a target after - tax profit (A) of $1,800 per month. To achieve this profit objective, what level of sales (in units and in dollars, per month) must be achieved if the tax rate, t , is 35% (roundup to nearest whole unit)?

5. Prepare a contribution income statement based on question #4.

6. Increase advertising to 3% of gross sales revenue, which will increase sales to $20,000 per month. What is the effect on profit before tax?

5. Budgeting (45 Points)

(a) SchoolDude, Inc. expects sales of 20,000 units of T1 in September. T1 is its most popular highperformance desktop model. The sales manager is confident that, between October and December, the total sales will experience a 50% growth rate each month from the month before. Each unit requires 40 sets of the Alpha-5 chip. The firm has a policy to maintain inventory at the end of each month equal to 1% of the following month's estimated sales. The same policy applies to the chips and components required to assemble the finished product.

Required:

1. What is the budgeted production (in units) for each of the months September, October, and November?

2. How many sets of Alpha-5 does the company plan to purchase in September and in October?

(b) Information pertaining to FSI Limited budgeted sales revenue for the first quarter of the coming year is presented below.

	Jan	Feb	March
Cash sales	120,000	160,000	275,000
Credit sales	330,000	440,000	275,000
Total sale	450,000	600,000	550,000

Management estimates that four percent of credit sales are likely to be uncollectible. Of the collectible credit sales, 60% are expected to be collected in the month of sale and the remainder in the month following the month of sale.

Required: Calculate total budgeted cash receipts for February.

(c) Thompson Tax Services (TTS) provides tax-planning services to its clients. The company billed 5,000 hours at $100 per hour for the year just completed. TTS, in planning next year's operations, is focusing on increasing the company's share of the market. It proposes to do that by hiring more tax specialists and by lowering its billing rate by 20% for work done by these new specialists. TTS estimates that revenues generated from existing staff would increase in total by 40% as a result of the new billing policy and that the additional specialists will provide billings of 3,000 hours (at the reduced rate) during the coming year.

Required: Compute the budgeted revenue amount for next year based on TTS's plans and projections.

6. Capital Investment (25 Points)

Nelson, Inc. purchased a $500,000 machine for their manufacturing plant. The machine is expected to have 10 years useful life with no salvage value. The company has been paying 30% for federal, state, and local income taxes. Nelson uses straight line depreciation. Nelson uses a 12% discount rate in evaluating capital investments. The investment is subject to taxes and the pretax operating cash inflows are as follows:

Year Pretax Cash Inflows

1 $50,000

2 $80,000

3 $120,000

4 $200,000

5 $240,000

6 $300,000

7 $270,000

8 $240,000

9 $120,000

10 $40,000

a) What is the basic payback period for the proposed investment, rounded to the nearest tenth of a year? Present computations.

b) What is the net present value for the proposed investment, rounded to the nearest thousand dollars? Present computations.

c) What is the present value payback period, rounded to the nearest tenth of a year? Present computations.

d) What is the internal rate of return, rounded to the nearest whole percentage?

e) What is the modified internal rate of return, rounded to the nearest tenth of a percent? Present computations.