Hi

I need the answers for question 2 and and question 5

Assignment Questions Spring Semester 2017 Question 1 Cost function; breakeven; targeted profit; uncertainties and bias; interpretation Joe Davies is thinking about starting a company to produce carved wooden clocks. He loves making the clocks. He sees it as an opportunity to be his own boss, making a living doing what he likes best. Joe paid $300 for the plans for the first clock, and he has already purchased new equipment costing $2000 to manufacture the clocks. He estimates that it will cost $30 in materials (wood, clock mechanism, etc.) to make each clock. If he decides to build clocks full time, he will need to rent office and manufacturing space, which he thinks would cost $2500 per month for rent plus another $300 per month for various utility bills. Joe would perform all of the manufacturing and run the office, and he would like to pay himself a salary of $3000 per month so that he would have enough money to live on. Because he does not want to take time away from manufacturing to sell the clocks, he plans to hire two salespeople at a base salary of $1000 each per month plus a commission of $7 per clock. Joe plans to sell each clock for $225. He believes that he can produce and sell 300 clocks in December for Christmas, but he is not sure what the sales will be during the rest of the year. However, he is fairly sure that the clocks will be popular because he has been selling similar items as a sideline for several years. Overall, he is confident that he can pay all of his business costs, pay himself the monthly salary of $3000, and earn at least $4000 more than that per month. (Ignore income taxes.) Required (a) Perform analyses to estimate the number of clocks Joe would need to manufacture and sell each year for his business to be financially successful: (i) List all of the costs described and indicate whether each cost is (1) a relevant fixed cost, (2) a relevant variable cost or (3) not relevant to Joe's decision. (ii) Calculate the contribution margin per unit and the contribution margin ratio. (iii) (b) Write down the total cost function for the clocks and calculate the annual breakeven point in units and in revenues. (iv) How many clocks would Joe need to sell annually to earn $4000 per month more than his salary? Identify uncertainties about the CVP calculations: (i) (c) (d) (e) Explain why Joe cannot know for sure whether his actual costs will be the same dollar amounts that he estimated. In your explanation, identify as many uncertainties as you can. (Hint: For each of the costs Joe identified, think about reasons why the actual cost might be different than the amount he estimated.) (ii) Identify possible costs for Joe's business that he has not identified. List as many additional types of cost as you can. (iii) Explain why Joe cannot know for sure how many clocks he will sell each year. In your explanation, identify as many uncertainties as you can. Discuss whether Joe is likely to be biased in his revenue and cost estimates. Explain how uncertainties and Joe's potential biases might affect interpretation of the breakeven analysis results. Use the information you learned from the preceding analyses to write a memo to Joe with your recommendations. Attach to the memo a schedule showing relevant information. As appropriate, refer to the schedule in the memo. 1 Question 2 Allocating variable and fixed overhead in the service sector Prime Personal Trainers is a personal training service in Bankstown for people who want to work out at home. Prime offers two different types of services: Setup and Continuous Improvement. Setup services consist of several home visits by a personal trainer who specialises in determining the proper equipment for each client and helping the client set up a home gym. Continuous Improvement services provide daily, weekly, or biweekly home visits by trainers. Prime's accountant wants to create a job costing system for Setup services. She decides to use direct labour cost as the allocation base for variable overhead costs, and direct labour hours for fixed overhead cost. To estimate normal capacity, she calculates the average direct labour cost over the last several years. She estimates overhead by updating last year's overhead cost with expected increases in rent, supervisor's salaries, and so on. Following are her estimates (given in euros) for the current period. Inventories consist of exercise equipment and supplies that are used by Prime for new clients. The following information summarises operations during the month of October. A number of new jobs were begun in October, but only two jobs were completed: job 20 and job 22. Account balances on October 1: Purchases of equipment and supplies: Equipment and supplies requisitioned for clients: 2 Direct labour hours and cost: Labour costs: Office costs: Required a. What are the estimated allocation rates for fixed and variable overhead for the current period? b. What is the total overhead cost allocated to Job 20 in October? c. What is the total cost of job 20? d. Calculate the amounts of fixed and variable overhead allocated to jobs in October. e. Why would the accountant choose to use two cost pools instead of one? Will this method make a difference in client bills when the job includes more equipment and less labour than other jobs? 3 Question 3 Prepare cash budget from financial statements The Red Bean Company processes and distributes beans. The beans are packed in 500 gram-plastic bags and sold to grocery chains for $0.50 each in boxes of 100 bags. During March the entity anticipates selling 16 000 boxes (sales in February were 14 000 boxes). Typically, 80 per cent of the entity's customers pay within the month of sale, 18 per cent of the customer pay the month after, and 2 per cent of sales are never collected. The entity buys beans from local farmers. The farmers are paid $0.20 per 500 grams, cash. Most of the processing is done automatically. Consequently, most ($80 000) of the entity's factory overhead is depreciation expense. The entity advertises heavily. For March managers expect to publish $75 000 worth of advertisements in popular magazines. This amount is up from February's $60 000. The entity pays for 10 per cent of its advertising in the month the advertisements are run and 90 per cent in the following month. March's budgeted income statement and statement of cost of goods manufactured and sold follow. All costs and expenses are paid for as incurred unless specifically indicated otherwise. The entity will begin March with a cash balance of $25 000, and pays a monthly dividend of $15 000 to the owners. Required From the information provided, prepare a cash budget for March. 4 Question 4 Cost-volume-profit pricing and standard cost variances Bramlett Company has several divisions, and just built a new plant with a capacity of 20 000 units of a new product. A standard costing system has been introduced to aid in evaluating managers' performance and for establishing a selling price for the new product. Bramlett currently faces no competitors in this product market. Managers price the product at standard variable and fixed manufacturing cost, plus 60 per cent mark-up. Managers hope this price will be maintained for several years. During the first year of operations, 1000 units per month will be produced. During the second year of operations, production is estimated to be 1500 units per month. In the first month of operations, employees were learning the processes, so direct labour hours were estimated to be 20 per cent greater than the standard hours allowed per unit. In subsequent months, employees were expected to meet the direct labour hours standards. Experience in other plants and with similar products led managers to believe that variable manufacturing costs would vary in proportion to actual direct labour dollars. For the first several years, only one product will be manufactured in the new plant. Fixed overhead costs of the new plant per year are expected to be $1 920 000 incurred evenly throughout the year. The standard variable manufacturing cost (after the break-in period) per unit of product has been set as follows: At the end of the first month of operations, the actual costs incurred to make 950 units of product were as follows: Bramlett managers want to compare actual costs to standard to analyse and investigate variances and take any corrective action. 5 Required (a) What selling price should Bramlett set for the new product according to the new pricing policy? Explain. (b) Using long-term standard costs, calculate all direct labour and manufacturing overhead variances. (c) Is it reasonable to use long-term standard costs to calculate variances for the first month of operations? Why? (d) Revise the variance calculations in part (b), using the expected costs during the first month of operations as the standard costs. (e) Provide at least two possible explanations for each of the following variances: (i) direct labour price variance (ii) direct labour efficiency variance (iii) variable overhead spending variance (iv) fixed overhead spending variance (f) The reasons for variances must be identified before conclusions and actions are decided upon. For two of the variance explanations you provided in part (e), explain what action(s) managers would most likely take. (g) Would it most likely be easier or more difficult to analyse the variances at the new plant compared to Bramlett's other plants? Explain. 6 Question 5 Foreign versus domestic production and comparative advantage Scott Mills was originally a producer of fabrics, but several years ago intense foreign competition led management to restructure the entity as a vertically integrated cotton garment manufacturer. Scott purchased spinning entity that produce raw yarn and fabricators that produce the final garment. The entity has both domestic and international operations. The domestic spinning and knitting operations are highly automated and use the latest technology. The domestic operations are able to produce cotton fabric for $1.52 per kilogram. The domestic fabricating operations are located exclusively in rural areas. Their locations keep total average labour costs to $16.40 per hour (including fringe benefits). The cost to ship products to the firm's distribution centre is $0.10 per kilogram. The entity's foreign subsidiary is a fabricating operation located in the Maldives, a group of islands near India. The average wage rate there is $0.70 per hour. The subsidiary purchases cotton fabric locally for $1.60 per kilogram. The finished products are shipped to Scott Mills' distribution centre in New South Wales at a cost of $1.80 per kilogram. Both the domestic and foreign subsidiary use the same amount of fabric per product. Scott Mills has been producing three products for the private label market: sweatshirts, dress shirts, and lightweight jackets. In the past the firm processed a new order at whichever fabricating plant had the next available capacity. However, projections for the next few years indicate that orders will far exceed capacity. Management wants each plant to specialise in one of the products. The plants are constrained by the amount of sewing time available in each. The domestic plant has 8000 hours of sewing machine time available per week, while the foreign subsidiary has 10 000 hours available per week. The domestic plant's variable overhead is charged to products at $4 per machine hour, while the subsidiary's variable overhead averages $1 per machine hour. The windcheaters require 1 kilogram of cotton fabric to produce, the dress shirts use 400 grams of fabric, and the jackets require 1 kilogram of fabric. The domestic plant has special-purpose equipment that allows workers to sew a sweatshirt in 6 minutes, a shirt in 15 minutes, and a jacket in one hour. The foreign plant's equipment constrains production to five sweatshirts per hour, three dress shirts per hour, or two jackets per hour. The wholesale prices are $8.76 each for the sweatshirts, $7.50 for the dress shirts, and $37 for the jackets. Required (a) Using only quantitative information, should the firm close its domestic operations and expand the foreign subsidiary? (b) Assuming that wages in the domestic operations remain constant, at what level of wages in the foreign subsidiary would the managers be indifferent between producing sweatshirts at one location versus the other? (c) Discuss qualitative factors, including ethical issues, that might influence the decision in part (a). (d) Discuss whether production quality is likely to be a bigger concern for products produced at the foreign subsidiary versus products produced in the domestic operation. (e) If demand for each product exceeds capacity, in which product should each plant specialise? (f) Management insists on manufacturing all three products to maintain good customer relations. If demand for each product exceeds capacity, management would prefer to specialise according to your answer to part (e). At which plant should management produce the third product? 7