Exercise 1.1 (LO3) You Get What You Measure

A key idea in this book is that You get what you measure! Essentially, this means that performance measures have a great influence on the behavior of managers.

Required Select a company with which you are familiar. Identify three performance measures that the company might use. For each measure, identify a favorable outcome and an unfavorable outcome that might occur because the measure is use to evaluate manager performance.

Exercise 1.2 (LO2) Writing Sunk Cost Rachel Cook owns Campus Copies, a copy business with several high-speed copy machines. One is a color copier that was purchased just last year at a cost of $25,000. Recently a salesperson got Rachel to witness a demo of a new $23,000 color copier that promises higher speed and more accurate color representation. Rachel is interested but she cant get herself to trade in a perfectly good copier for which she paid $25,000 and replace it with one that will cost $23,000.

Required Write a paragraph explaining why the cost of the old copier is irrelevant to Rachels decision.

Exercise 1.3 (LO4) Ethics Guthrie Wilson is an accountant at Bellwether Systems, a company that sells and installs customer relationship management (CRM) systems. The company sells third-party software at cost plus 25 percent and charges a fee of $300 per hour of installation/integration time spent on each engagement. Recently Guthries boss asked him to charge 60 hours of time to the Bradley account when the time was actually worked servicing the IMG account. The rationale: Look, IMG is a struggling start-up and they can barely afford our service. We ran over our time estimate due to some unforeseen problems, and theyll balk if we charge them for all of our time. Bradley, on the other hand, is a highly profitable company, and were providing services that are going to make them even more profitable. Theyll have no problem with their bill.

Required Review the IMAs ethical standards in the appendix. What do the standards suggest that Guthrie should do to resolve the issue hes facing?

Exercise 1.4 (LO4) Information Age

The Wellington Hotel is a posh hotel in Manhattan that uses a

customer relationship management (CRM) system to track customer preferences and purchases. Provide two examples of specific information the CRM system might capture and how the hotel could use the information to enhance revenue and/or the customer experience.

Exercise 1.5 (LO1) Budgets

Megan Kelly is the chief financial officer of a chain of 25 drugstores.

Explain how she can use budgets in both planning profit and controlling operations.

Exercise 1.6 (LO1) Performance

Reports Which of the following statements related to performance reports is false?

a. Performance reports may provide a comparison of actual performance with planned performance.

b. Performance reports may provide a comparison of actual performance with performance in a prior

period.

c. If actual costs exceed planned costs in a performance report, this clearly indicates managerial

incompetence.

d. Performance reports are used to evaluate managers and the operations they control.

Exercise 1.7 (LO1) Performance Reports

At Designs by Deirdre, the budgeted income statement for the past year indicated sales of $600,000 and cost of sales of $400,000. Actual sales and cost of sales were $700,000 and $425,000, respectively. Should Deirdre Nelson, owner of the company, be concerned that cost of sales is $25,000 greater than planned? Explain the basis for your answer.

Exercise 1.8 (LO1) Financial versus Managerial Accounting

Bob Stevens is taking Managerial Accounting at State University next term and asked his friend, Summer Adams, who has already taken the course, to explain its focus. Are we going to learn more about balance sheets and income statements? Is it just an extension of the financial accounting course I had last year?

Required

Assume the role of Summer and explain the focus of managerial accounting and some of the ways it differs from financial accounting.

Exercise 1.9 (LO1) Financial versus Managerial Accounting Consider a large manufacturing company like Boeing that rewards its salesforce with bonuses based on sales. For this purpose, should the company record sales when orders are placed or, to be consistent with GAAP, wait until orders are delivered?

Exercise 1.10 (LO2) Cost Terms

Identify each of the following statements with fixed costs or variable costs by writing fixed or variable in the space provided.

______ a. A cost that varies in total with changes in the activity level.

______ b. A cost that varies on a per-unit basis with changes in the activity level.

______ c. A cost that remains fixed per unit with changes in the activity level.

______ d. A cost that remains fixed in total with changes in the activity level.

Exercise 1.11 (LO2) Cost Terms

Indicate whether each of the following costs is most likely a fixed cost or a variable cost by writing fixed or variable in the space provided.

______ a. Assembly labor.

______ b. The cost of material used in production.

______ c. Rent.

______ d. Depreciation.

______ e. Fuel cost at an airline.

Exercise 1.12 (LO2) Cost Terms Explain how a cost can be controllable at one administrative level and noncontrollable at another administrative level.

Exercise 1.13 (LO2, 3) Sunk Cost Peter Takesha, the manager of testing services at a medical diagnostics firm, purchased a new lab testing machine last year for $30,000. This year a new machine, which is faster and more reliable than Peters current model, is on the market. In deciding whether to purchase the new machine, should Peter consider how much he paid for the old machine? Should he consider the value of the old machine in the used equipment market?

Exercise 1.14 (LO2) Opportunity Costs Parrish Plumbing provides plumbing services to residential customers from Monday through Friday. Ken Parrish, the owner, believes that it is important for his employees to have Saturday and Sunday off to spend with their families. However, he also recognizes that this policy has implications for profitability, and he is considering staying open on Saturday.

Ken estimates that if his company stays open on Saturday, it can generate $2,500 of daily revenue each day for 52 days per year. The incremental daily costs will be $700 for labor, $500 for parts, $100 for transportation, and $200 for office staff. These costs do not include a share of monthly rent or a share of depreciation related to office equipment.

Ken is determined not to have employees work on Sunday, but he would like to know the opportunity cost of not working on Saturday. Provide Ken with an estimate of the opportunity cost, and explain why you do not have to consider rent or depreciation of office equipment in your estimate.

Exercise 1.15 (LO2) Opportunity Cost Zachary made plans to visit a friend in New York during the Memorial Day weekend. However, before the trip, his employer asked him if he would work overtime for 16 hours at $35 per hour during the weekend. What will be the opportunity cost if Zachary decides to visit his friend in New York?

Exercise 1.16 (LO2, 3) Incremental Analysis Wilmington Chemicals produces a chemical, PX44, which is used to retard fading in exterior house paint. In the past year, the company produced 200,000 gallons at a total cost of $1,200,000 ($6 per gallon). The company is currently considering an order for 15,000 gallons from a paint company in Canada. (To date, Wilmington has not sold the product in markets outside the United States.) Explain why the incremental cost associated with this order is likely to be less than $90,000.

Exercise 1.17 (LO3) Incremental Analysis In the past year, Williams Mold & Machine had sales of $7,000,000 and total production costs of $5,000,000. In the coming year, the company believes that sales and production can be increased by 25 percent, but this will require adding a second production shift to work from 4:00 p.m. to 1:00 a.m.

Required

a. Indicate three production costs that are likely to increase because of the addition of a second production shift.

b. Suggest a production cost that most likely will not increase when the second shift is added.

Exercise 12.2 (L02) Writing Write a paragraph explaining why in the calculation of a companys EVA, non-interest-bearing current liabilities are subtracted from the total assets to determine investment.

Exercise 12.3 (L01) Why Firms Decentralize The Lyndstorm Glass Company is a manufacturer of automotive glass and glass product used in the home. Discuss the advantages of forming two division (an Automotive division and a Home Products division) and allowing the division managers substantial decision-making autonomy.

Exercise 12.4 (L01) Responsibility Centers and Performance Measures Department managers at Nadaire Department Stores are allowed considerable discretion in sourcing and pricing products based on local tastes and competition. They are also responsible for staffing their departments.

Required

Suggest two financial performance measures that would be useful in evaluating the performance of department managers at Nadaire Department Stores.

Exercise 12.5 (L01) Responsibility Centers A major software company has established customer service centers in India, Ireland, and Israel to provide support to its U.S. customers with foreign operations. The prices that the company charges for software reflect estimated costs in operating the centers (i.e. there is no separate charge for service).

Required

How should these centers be organized: as cost centers, profit centers, or investment centers? Support your answer.

Exercise 12.6 (L01) Responsibility Centers Samson Software operates a training facility that offers classes in the use of its software products. Historically, the classes has been offered at a modest charge that cover the cost of the instructors salary but not overhead related to the training facility (e.g. janitorial cost, utilities, rent, and administration).

Latoya Johnsen had recently name director of customer training and she will be given considerable freedom in operating the training facility and marketing classes. Top management at Samson, however, has told Latoya that they want her operation to earn a before-tax profit of at least $500,000.

Required

Discuss the wisdom of requiring the training operation to earn a profit.

Exercise 12.7 (L02) Calculation ROI Davenport Mills is a division of Iowa Woolen Products. For the most recent year. Davenport had net income of $20,000,000. Included in income was interest expense of $1,400,000. The operations tax rate is 20 percent. Total assets of Davenport Mills are $235,000,000, current liabilities are $52,000,000, and $36,000,000 of the current liabilities are non-interest bearing.

Required

Calculate NOPAT, invested capital, and ROI for Davenport Mills. For ROI, round to two decimal places.

Exercise 12.8 (L02) Excel Calculating ROI For fiscal year 2020, LaundryMate Product had income follows:

Sales $55,000,000

Less:

Cost of goods sold $38,000,000

Selling and administrative expense $5,700,000

Interest expense $1,000,000

Income before taxes $9,900,000

Less income taxes $1,980,000

Net income $7,920,000

Total assets were $97,000,000 and non-interest-bearing current liabilities were $3,200,000. The company has a required rate of return on invested capital equal to 10 percent and a tax rate of 20 percent.

Required

Calculate NOPAT, invested capital, and ROI for LaundryMate Products, and comment on the companys profitability. For ROI, round to two decimal places.