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Appropriate Transfer Prices: Opportunity Costs Plains Peanut Butter Company recently acquired a peanutprocessing company that has a normal annual capacity of 4,000,000 pounds and that sold 2,700,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 1,700,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanutprocessing company are as follows: Direct materials $0.50 Direct labor 0.23 Variable overhead 0.14 Fixed overhead at normal capacity 0.20 Total $1.07 Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.07 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 2,700,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound. (a) Compute the annual gross profit for the Peanut Division using a transfer price of $2.00. $Answer 0 (b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.07. $Answer 0 (c) Which of the following is least likely to motivate the manager to take actions that will maximize corporate profits? Set the transfer price at 2.00 for all transfers. Set the transfer price at .87 for the first 1,200,000 lbs. transferred, and at 2.00 for the next 400,000 lbs. transferred. Set the transfer price at .87 for the first 1,300,000 lbs. transferred. None of the above. Set the transfer price at .87 for all transfers. Check ROI and Residual Income:Basic Computations Watkins Associated Industries is a highly diversified company with three divisions: Trucking, Seafood, and Construction. Assume that the company uses return on investment and residual income as two of the evaluation tools for division managers. The company has a minimum desired rate of return on investment of 10 percent with a 30 percent tax rate. Selected operating data for three divisions of the company follow. Trucking Division Seafood Division Construction Division Sales $1,300,000 $870,000 $900,000 Operating assets 650,000 290,000 360,000 Net operating income 101,000 52,000 62,000 (a) Compute the return on investment for each division. (Round answers to three decimal places.) Trucking ROI = Answer 0 Seafood ROI = Answer 0 Construction ROI = Answer 0 (b) Compute the residual income for each division. Residual Income Net operating income Minimum level Residual income Trucking $Answer Seafood $Answer 0 Answer 0 0 Answer 0 $Answer $Answer $Answer 0 Answer 0 Construction 0 0 $Answer 0 (c) Which of the following is an appropriate statement about the performance of the three divisions: Trucking has the superior performance. Seafood has the superior performance. Residual income is always superior to ROI for assessing performance. Which division has the superior performance depends on which performance evaluation metric is used to assess performance. Construction has the superior performance. Income Statements Segmented by Territory Script, Inc., has two product lines. The September income statements of each product line and the company are as follows: SCRIPT, INC. Product Line and Company Income Statements For Month of September Pens Pencils Total Sales $25,000 $30,000 $55,000 Less variable expenses (10,000) (12,000 (22,000) ) Contribution margin 15,000 18,000 Less direct fixed expenses (8,000) (6,000) (14,000) Product margin $7,000 $12,000 Less common fixed expenses 33,000 $19,000 (6,000) Net income $13,000 Pens and pencils are sold in two territories, Florida and Alabama, as follows: Florida Alabama Pen sales Pencil sales Total sales $11,000 $14,000 13,000 17,000 $24,000 $31,000 The preceding common fixed expenses are traceable to each territory as follows: Florida fixed expenses $2,000 Alabama fixed expenses 3,000 Home office administration fixed expenses 1,000 Total common fixed expenses $6,000 The direct fixed expenses of pens, $8,000, and of pencils, $6,000, cannot be identified with either territory. The company's accountants were unable to allocate any of the common fixed expenses to the various segments. Prepare income statements segmented by territory for September, including a column for the entire firm. Do not use negative signs with your answers. Script, Inc. Territory and Company Income Statements For the Month of September Florida Alabama Company Totals Sales: Pens $Answer $Answer $Answer 0 Answer Answer 0 Pencils Answer Answer 0 Answer 0 Total sales 0 0 0 Answer 0 0 Variable costs: Pens Answer Answer 0 Answer Answer 0 Pencils Answer Contribution margin Answer Answer Answer Answer Answer Territory margin Common fixed expenses: 0 Answer 0 Answer 0 Answer 0 0 $Answer Direct fixed expenses 0 0 0 Answer 0 0 0 Total Answer 0 $Answer 0 0 0 Answer 0 Script, Inc. Territory and Company Income Statements For the Month of September Florida Alabama Company Totals Answer Pens 0 Answer Pencils 0 Answer 0 Home office Answer 0 Total $Answer 0 Net income (b) Why are the direct expenses of one type of segment report not necessarily the direct expenses of another type of segment report? Because only fixed expenses are direct costs. Because management must decide which costs are direct and which are indirect. None of the above. Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product). Because direct expenses are all variable costs. Income Statements Segmented by Products Clay Consulting Firm provides three types of client services in three healthcarerelated industries. The income statement for July is as follows: Clay Consulting Firm Income Statement For Month of July Sales $900,000 Less variable costs (604,000) Contribution margin 296,000 Clay Consulting Firm Income Statement For Month of July Less fixed expenses Service Selling and administrative $70,000 65,000 (135,000) Net income $161,000 The sales, contribution margin ratios, and direct fixed expenses for the three types of services are as follows: Hospitals Physicians Nursing Care Sales $340,000 $260,000 $300,000 30% 40% 30% Direct fixed expenses of services $22,000 $17,000 $11,000 Allocated common fixed service expenses $1,000 $1,000 $1,500 Contribution margin ratio Prepare income statements segmented by client categories. Include a column for the entire firm in the statement. Clay Consulting Firm Product and Company Income Statements For the Month of July Hospitals $Answer Sales $Answer Answer Answer Answer Answer Answer Answer Answer Answer 0 Answer 0 Answer 0 0 0 0 Answer 0 Answer 0 0 0 Answer 0 Answer 0 0 0 0 Answer 0 Company Totals 0 0 Answer Allocated common costs $Answer Answer Answer Direct fixed expenses Nursing Care 0 0 Variable costs Product margin $Answer 0 Answer Contribution margin Physicians 0 Answer 0 0 Clay Consulting Firm Product and Company Income Statements For the Month of July Hospitals $Answer Product income Physicians $Answer 0 Nursing Care $Answer 0 Company Totals Answer 0 0 Unallocated common expenses: Selling and administrative Answer 0 Answer 0 Service (less allocated expenses/costs) Answer 0 Total $Answer 0 Net income ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had an operating income of $700,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent. (a) Compute the return on investment. (Round your answer to three decimal places.) Answer 0 (b) Compute the residual income. $Answer 0 (c) The Mustang Division has an opportunity to increase operating income by $200,000 with an $950,000 investment in assets. 1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your answer to three decimal places.) Answer 0 2. Compute the Mustang Division's residual income if the project is undertaken. $Answer 0 NPV and IRR: Unequal Annual Net Cash Inflows Salt River Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Initial investment $ (42,070) Operation Year 1 20,000 Year 2 30,000 Year 3 10,000 Salvage 0 (a) Using a discount rate of 14 percent, determine the net present value of the investment proposal. (Round to the nearest whole number.) $Answer (b) Determine the proposal's internal rate of return. (Round to the nearest whole percentage.) Answer % Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited is currently evaluating the following investment proposal: Time 0 Initial investment $ 250,000 Year 1 -- Year 2 Year 3 -- -- Year 4 -- Net operating cash inflows -- $ 100,000 $ 100,000 $ 100,000 $ 100,000 (a) Determine the proposal's payback period. Answer years (b) Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.) Answer % (c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. Round the answer to the nearest dollar. $Answer Time Value of Money: Basics Using Table 12A.1 and Table 12A.2 of this chapter, determine the answers to each of the following independent situations. (Round answers to the nearest whole number.) (a) The future value in three years of $1,000 deposited today in a savings account with interest compounded annually at 8 percent. $ Answer (b) The present value of $5,000 to be received in five years, discounted at 10 percent. $ Answer (c) The present value of an annuity of $9,000 per year for six years discounted at 10 percent. $ Answer (d) An initial investment of $14,904 is to be returned in eight equal annual payments. Determine the amount of each payment if the interest rate is 12 percent. $ Answer (e) A proposed investment will provide cash flows of $50,000, $10,000, and $7,000 at the end of Years 1, 2, and 3, respectively. Using a discount rate of 20 percent, determine the present value of these cash flows. Year 1 $ Answer Year 2 $ Answer Year 3 $ Answer (f) Find the present value of an investment that will pay $7,000 at the end of Years 10, 11, and 12. Use a discount rate of 12 percent. $ Answer NPV and IRR: Equal Annual Net Cash Inflows Apache Junction Company is evaluating a capital expenditure proposal that requires an initial investment of $44,190, has predicted cash inflows of $9,000 per year for 13 years, and has no salvage value. (a) Using a discount rate of 16 percent, determine the net present value of the investment proposal. (Round to the nearest whole number.) $Answer (b) Determine the proposal's internal rate of return. Answer % (c) What discount rate would produce a net present value of zero? Answer % Check Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal A Proposal B Proposal C Initial investment $ 45,000 $ 45,000 $ 45,000 Year 1 40,000 22,500 45,000 Year 2 5,000 22,500 Year 3 22,500 22,500 0 0 0 3 years 3 years 1 year Cash flow from operations Disinvestment Life (years) (a) Select the best investment proposal using the payback period, the accounting rate of return on initial investment, and the net present value criteria. Assume that the organization's cost of capital is 12 percent. Round accounting rate of return four decimal places. Round net present value to the nearest whole number. Use negative signs with your answers, when appropriate. Proposal A Payback period (years) Accounting rate of return Net present value Proposal B Answer Answer Answer Answer $Answer $Answer Proposal C Best proposal Answer Answer Answer Answer $Answer Answer (b) Factors explaining the differences in rankings include all of the following except: Net present value considers the timing of cash flows while payback considers only total cash flows. The accounting rate of return considers profitability while payback only considers the time required to recover the investment. The net present value method considers the cost of capital while the payback method does not discount future cash flows. While the accounting rate of return explicitly considers the cost of the asset as part of annual depreciation the net present value method considers the cost of the asset as part of the initial investment. Check Cash Disbursements Assume that Waycross Manufacturing manages its cash flow from its home office. Waycross controls cash disbursements by category and month. In setting its budget for the next six months, beginning in July, it used the following managerial guidelines: Category Guidelines Purchases Payroll Pay 90 percent in current month and 10 percent in following month. Loan Payments Pay half in current and half in following month. Pay total amount due each month. Predicted activity for selected months follow: Category May June July August Purchases $30,000 $48,000 $52,000 $54,000 Payroll 100,000 130,000 140,000 100,000 Loan Payments 10,000 10,000 12,000 12,000 Prepare a schedule showing cash disbursements by account for July and August. Waycross Manufacturing Schedule of Cash Disbursements For the Months of July and August July August $Answer $Answer 0 53000 Accounts payable Answer Answer 0 104000 Payroll Answer Answer 12000 12000 Loan payments $Answer $Answer 201000 Total 169000 Cash Budget The Peoria Supply Company sells for $30 one product that it purchases for $20. Budgeted sales in total dollars for next year are $720,000. The sales information needed for preparing the July budget follows: Month Sales Revenue May $30,000 June 44,000 July 49,000 August 50,000 Account balances at July 1 include these: Cash $20,000 Merchandise inventory 15,000 Accounts receivable (sales) 24,000 Accounts payable (purchases) 13,000 The company pays for onehalf of its purchases in the month of purchase and the remainder in the following month. Endofmonth inventory must be 50 percent of the budgeted sales in units for the next month. A 2 percent cash discount on sales is allowed if payment is made during the month of sale. Experience indicates that 50 percent of the billings will be collected during the month of sale, 40 percent in the following month, 6 percent in the second following month, and 4 percent will be uncollectible. Total budgeted selling and administrative expenses (excluding bad debts) for the fiscal year are estimated at $174,000 , of which onehalf is fixed expense (inclusive of a $20,000 annual depreciation charge). Fixed expenses are incurred evenly during the year. The other selling and administrative expenses vary with sales. Expenses are paid during the month incurred. (Round your answers to the nearest whole number.) (a) Prepare a schedule of estimated cash collections for July. Peoria Supply Company Schedule of Cash Collections For the Month of July $Answer 0 Current month's sales Peoria Supply Company Schedule of Cash Collections For the Month of July $Answer 17600 Previous month's sales $Answer 0 Two months' prior sales $Answer 43410 Total cash collections (b) Prepare a schedule of estimated July cash payments for purchases. Peoria Supply Company Schedule of Cash Payments for Purchases For the Month of July $Answer 0 Current month's purchases Beginning accounts payable Answer 0 Peoria Supply Company Schedule of Cash Payments for Purchases For the Month of July $Answer 0 Total cash payments (c) Prepare schedules of July selling and administrative expenses, separately identifying those requiring cash disbursements. Peoria Supply Company Schedule of Selling and Administrative Expenses and Cash Disbursements For the Month of July Total Cash Selling and administrative expenses: $Answer 0 Fixed $Answer 0 Cash payment Variable Answer Answer 0 0 Peoria Supply Company Schedule of Selling and Administrative Expenses and Cash Disbursements For the Month of July Total Cash $Answer $Answer 0 0 Total expenses and cash disbursements (d) Prepare a cash budget in summary form for July. Peoria Supply Company Cash Budget For the Month of July $Answer 0 Cash receipts Cash disbursements: $Answer 0 Merchandise Selling and administrative Answer Answer 0 0 Peoria Supply Company Cash Budget For the Month of July $Answer 0 Excess receipts (disbursements) Developing a Master Budget for a Merchandising Organization Peyton Department Store prepares budgets quarterly. The following information is available for use in planning the second quarter budgets for 2010. PEYTON DEPARTMENT STORE Balance Sheet March 31, 2010 Assets Liabilities and Stockholders' Equity Cash $2,000 Accounts payable $26,000 Accounts receivable 25,000 Dividends payable 17,000 Inventory 30,000 Rent payable 1,000 2,000 Stockholders' equity 40,000 Total liabilities and equity $84,000 Prepaid Insurance Fixtures 25,000 Total assets $84,00 0 Actual and forecasted sales for selected months in 2010 are as follows: Month Sales Revenue January $80,000 February 50,000 March 40,000 April 50,000 May 60,000 June 70,000 July 90,000 Month Sales Revenue August 80,000 Monthly operating expenses are as follows: Wages and salaries $27,000 Depreciation 100 Utilities 1,000 Rent 1,000 Cash dividends of $17,000 are declared during the third month of each quarter and are paid during the first month of the following quarter. Operating expenses, except insurance, rent, and depreciation are paid as incurred. Rent is paid during the following month. The prepaid insurance is for five more months. Cost of goods sold is equal to 50 percent of sales. Ending inventories are sufficient for 120 percent of the next month's sales. Purchases during any given month are paid in full during the following month. All sales are on account, with 50 percent collected during the month of sale, 40 percent during the next month, and 10 percent during the month thereafter. Money can be borrowed and repaid in multiples of $1,000 at an interest rate of 12 percent per year. The company desires a minimum cash balance of $2,000 on the first of each month. At the time the principal is repaid, interest is paid on the portion of principal that is repaid. All borrowing is at the beginning of the month, and all repayment is at the end of the month. Money is never repaid at the end of the month it is borrowed. (a) Prepare a purchases budget for each month of the second quarter ending June 30, 2010. Peyton Department Store Monthly Purchase Budget Quarter Ending June 30, 2010 April May $Answer June $Answer 31000 Total $Answer 36000 $Answer 47000 114000 Budgeted purchases (b) Prepare a cash receipts schedule for each month of the second quarter ending June 30, 2010. Do not include borrowings. Peyton Department Store Schedule of Monthly Cash Receipts Quarter Ending June 30, 2010 April May $Answer June $Answer 46000 Total $Answer 54000 $Answer 64000 164000 Total cash receipts (c) Prepare a cash disbursements schedule for each month of the second quarter ending June 30, 2010. Do not include repayments of borrowings. Peyton Department Store Schedule of Monthly Cash Disbursements Quarter Ending June 30, 2010 April May $Answer June $Answer 72000 Total $Answer 60000 $Answer 65000 197000 Total cash disbursements (d) Prepare a cash budget for each month of the second quarter ending June 30, 2010. Include budgeted borrowings and repayments. Only use negative signs, if needed, for: excess receipts over disbursements, balance before borrowings and cash balances (beginning and ending). Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April Cash balance, beginning $Answer May June $Answer 2000 Total $Answer 2000 $Answer 2000 2000 Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April May June Answer Answer Answer 54000 46000 Total Answer 64000 164000 Receipts Answer Answer Answer 60000 72000 Answer 65000 197000 Disbursements Answer Answer -26000 Answer -6000 Answer -1000 -33000 Excess receipts over disb. Answer Answer -24000 Balance before borrowings Answer -4000 Answer 1000 -31000 Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April May June Answer Answer Answer 6000 26000 Total 1000 Answer 33000 Borrowings Answer Answer 0 Answer 0 Answer 0 0 Loan repayments $Answer $Answer $Answer 2000 2000 2000 $Answer 2000 Cash balance, ending (e) Prepare an income statement for each month of the second quarter ending June 30, 2010. Only use negative signs to show net losses in income. Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April May $Answer $Answer 50000 Sales June Total $Answer 60000 $Answer 70000 180000 Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April Answer May Answer 25000 June Answer 30000 Total Answer 35000 90000 Cost of sales Answer Answer 25000 Answer 30000 Answer 35000 90000 Gross profit Operating expenses: Answer Answer 27000 Answer 27000 Answer 27000 81000 Wages and salaries Answer Answer 100 Answer 100 Answer 100 300 Depreciation Answer Answer 1000 Utilities Answer 1000 Answer 1000 3000 Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April May Answer Answer 1000 June Answer 1000 Total Answer 1000 3000 Rent Answer Answer 400 Answer 400 Answer 400 1200 Insurance Answer Answer 260 Answer Answer 320 0 0 Interest Answer Answer 29760 Answer 29820 Answer 0 0 Total expenses $Answer -4760 $Answer $Answer 180 Net income (f) Prepare a budgeted balance sheet as of June 30, 2010. $Answer 0 0 Peyton Department Store Budgeted Balance Sheet June 30, 2010 Assets Liabilities and Equity $Answer $Answer 2000 Cash 47000 Merchandise payable Answer Answer 41000 Accounts receivable 17000 Dividend payable Answer Answer 54000 Inventory 1000 Rent payable Answer Answer 800 33000 Prepaid insurance Loans payable Answer Answer 24700 Fixtures Total assets 0 Interest payable $Answer Stockholders' equity 122500 Answer 0 Peyton Department Store Budgeted Balance Sheet June 30, 2010 Assets Liabilities and Equity $Answer 122500 Total liab. & equity Appropriate Transfer Prices: Opportunity Costs Plains Peanut Butter Company recently acquired a peanutprocessing company that has a normal annual capacity of 4,000,000 pounds and that sold 2,700,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 1,700,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanutprocessing company are as follows: Direct materials $0.50 Direct labor 0.23 Variable overhead 0.14 Fixed overhead at normal capacity 0.20 Total $1.07 Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.07 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 2,700,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound. (a) Compute the annual gross profit for the Peanut Division using a transfer price of $2.00. $Answer 0 (b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.07. $Answer 0 (c) Which of the following is least likely to motivate the manager to take actions that will maximize corporate profits? Set the transfer price at 2.00 for all transfers. Set the transfer price at .87 for the first 1,200,000 lbs. transferred, and at 2.00 for the next 400,000 lbs. transferred. Set the transfer price at .87 for the first 1,300,000 lbs. transferred. None of the above. Set the transfer price at .87 for all transfers. Check ROI and Residual Income:Basic Computations Watkins Associated Industries is a highly diversified company with three divisions: Trucking, Seafood, and Construction. Assume that the company uses return on investment and residual income as two of the evaluation tools for division managers. The company has a minimum desired rate of return on investment of 10 percent with a 30 percent tax rate. Selected operating data for three divisions of the company follow. Trucking Division Seafood Division Construction Division Sales $1,300,000 $870,000 $900,000 Operating assets 650,000 290,000 360,000 Net operating income 101,000 52,000 62,000 (a) Compute the return on investment for each division. (Round answers to three decimal places.) Trucking ROI = Answer 0 Seafood ROI = Answer 0 Construction ROI = Answer 0 (b) Compute the residual income for each division. Residual Income Net operating income Minimum level Residual income Trucking $Answer Seafood $Answer 0 Answer 0 0 Answer 0 $Answer $Answer $Answer 0 Answer 0 Construction 0 0 $Answer 0 (c) Which of the following is an appropriate statement about the performance of the three divisions: Trucking has the superior performance. Seafood has the superior performance. Residual income is always superior to ROI for assessing performance. Which division has the superior performance depends on which performance evaluation metric is used to assess performance. Construction has the superior performance. Income Statements Segmented by Territory Script, Inc., has two product lines. The September income statements of each product line and the company are as follows: SCRIPT, INC. Product Line and Company Income Statements For Month of September Pens Pencils Total Sales $25,000 $30,000 $55,000 Less variable expenses (10,000) (12,000 (22,000) ) Contribution margin 15,000 18,000 Less direct fixed expenses (8,000) (6,000) (14,000) Product margin $7,000 $12,000 Less common fixed expenses 33,000 $19,000 (6,000) Net income $13,000 Pens and pencils are sold in two territories, Florida and Alabama, as follows: Florida Alabama Pen sales Pencil sales Total sales $11,000 $14,000 13,000 17,000 $24,000 $31,000 The preceding common fixed expenses are traceable to each territory as follows: Florida fixed expenses $2,000 Alabama fixed expenses 3,000 Home office administration fixed expenses 1,000 Total common fixed expenses $6,000 The direct fixed expenses of pens, $8,000, and of pencils, $6,000, cannot be identified with either territory. The company's accountants were unable to allocate any of the common fixed expenses to the various segments. Prepare income statements segmented by territory for September, including a column for the entire firm. Do not use negative signs with your answers. Script, Inc. Territory and Company Income Statements For the Month of September Florida Alabama Company Totals Sales: Pens $Answer $Answer $Answer 0 Answer Answer 0 Pencils Answer Answer 0 Answer 0 Total sales 0 0 0 Answer 0 0 Variable costs: Pens Answer Answer 0 Answer Answer 0 Pencils Answer Contribution margin Answer Answer Answer Answer Answer Territory margin Common fixed expenses: 0 Answer 0 Answer 0 Answer 0 0 $Answer Direct fixed expenses 0 0 0 Answer 0 0 0 Total Answer 0 $Answer 0 0 0 Answer 0 Script, Inc. Territory and Company Income Statements For the Month of September Florida Alabama Company Totals Answer Pens 0 Answer Pencils 0 Answer 0 Home office Answer 0 Total $Answer 0 Net income (b) Why are the direct expenses of one type of segment report not necessarily the direct expenses of another type of segment report? Because only fixed expenses are direct costs. Because management must decide which costs are direct and which are indirect. None of the above. Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product). Because direct expenses are all variable costs. Income Statements Segmented by Products Clay Consulting Firm provides three types of client services in three healthcarerelated industries. The income statement for July is as follows: Clay Consulting Firm Income Statement For Month of July Sales $900,000 Less variable costs (604,000) Contribution margin 296,000 Clay Consulting Firm Income Statement For Month of July Less fixed expenses Service Selling and administrative $70,000 65,000 (135,000) Net income $161,000 The sales, contribution margin ratios, and direct fixed expenses for the three types of services are as follows: Hospitals Physicians Nursing Care Sales $340,000 $260,000 $300,000 30% 40% 30% Direct fixed expenses of services $22,000 $17,000 $11,000 Allocated common fixed service expenses $1,000 $1,000 $1,500 Contribution margin ratio Prepare income statements segmented by client categories. Include a column for the entire firm in the statement. Clay Consulting Firm Product and Company Income Statements For the Month of July Hospitals $Answer Sales $Answer Answer Answer Answer Answer Answer Answer Answer Answer 0 Answer 0 Answer 0 0 0 0 Answer 0 Answer 0 0 0 Answer 0 Answer 0 0 0 0 Answer 0 Company Totals 0 0 Answer Allocated common costs $Answer Answer Answer Direct fixed expenses Nursing Care 0 0 Variable costs Product margin $Answer 0 Answer Contribution margin Physicians 0 Answer 0 0 Clay Consulting Firm Product and Company Income Statements For the Month of July Hospitals $Answer Product income Physicians $Answer 0 Nursing Care $Answer 0 Company Totals Answer 0 0 Unallocated common expenses: Selling and administrative Answer 0 Answer 0 Service (less allocated expenses/costs) Answer 0 Total $Answer 0 Net income ROI and Residual Income: Impact of a New Investment The Mustang Division of Detroit Motors had an operating income of $700,000 and net assets of $4,000,000. Detroit Motors has a target rate of return of 16 percent. (a) Compute the return on investment. (Round your answer to three decimal places.) Answer 0 (b) Compute the residual income. $Answer 0 (c) The Mustang Division has an opportunity to increase operating income by $200,000 with an $950,000 investment in assets. 1. Compute the Mustang Division's return on investment if the project is undertaken. (Round your answer to three decimal places.) Answer 0 2. Compute the Mustang Division's residual income if the project is undertaken. $Answer 0 NPV and IRR: Unequal Annual Net Cash Inflows Salt River Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Initial investment $ (42,070) Operation Year 1 20,000 Year 2 30,000 Year 3 10,000 Salvage 0 (a) Using a discount rate of 14 percent, determine the net present value of the investment proposal. (Round to the nearest whole number.) $Answer (b) Determine the proposal's internal rate of return. (Round to the nearest whole percentage.) Answer % Payback Period, IRR, and Minimum Cash Flows The management of Mesquite Limited is currently evaluating the following investment proposal: Time 0 Initial investment $ 250,000 Year 1 -- Year 2 Year 3 -- -- Year 4 -- Net operating cash inflows -- $ 100,000 $ 100,000 $ 100,000 $ 100,000 (a) Determine the proposal's payback period. Answer years (b) Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.) Answer % (c) Given the amount of the initial investment, determine the minimum annual net cash inflows required to obtain an internal rate of return of 16 percent. Round the answer to the nearest dollar. $Answer Time Value of Money: Basics Using Table 12A.1 and Table 12A.2 of this chapter, determine the answers to each of the following independent situations. (Round answers to the nearest whole number.) (a) The future value in three years of $1,000 deposited today in a savings account with interest compounded annually at 8 percent. $ Answer (b) The present value of $5,000 to be received in five years, discounted at 10 percent. $ Answer (c) The present value of an annuity of $9,000 per year for six years discounted at 10 percent. $ Answer (d) An initial investment of $14,904 is to be returned in eight equal annual payments. Determine the amount of each payment if the interest rate is 12 percent. $ Answer (e) A proposed investment will provide cash flows of $50,000, $10,000, and $7,000 at the end of Years 1, 2, and 3, respectively. Using a discount rate of 20 percent, determine the present value of these cash flows. Year 1 $ Answer Year 2 $ Answer Year 3 $ Answer (f) Find the present value of an investment that will pay $7,000 at the end of Years 10, 11, and 12. Use a discount rate of 12 percent. $ Answer NPV and IRR: Equal Annual Net Cash Inflows Apache Junction Company is evaluating a capital expenditure proposal that requires an initial investment of $44,190, has predicted cash inflows of $9,000 per year for 13 years, and has no salvage value. (a) Using a discount rate of 16 percent, determine the net present value of the investment proposal. (Round to the nearest whole number.) $Answer (b) Determine the proposal's internal rate of return. Answer % (c) What discount rate would produce a net present value of zero? Answer % Check Ranking Investment Proposals: Payback Period, Accounting Rate of Return, and Net Present Value Presented is information pertaining to the cash flows of three mutually exclusive investment proposals: Proposal A Proposal B Proposal C Initial investment $ 45,000 $ 45,000 $ 45,000 Year 1 40,000 22,500 45,000 Year 2 5,000 22,500 Year 3 22,500 22,500 0 0 0 3 years 3 years 1 year Cash flow from operations Disinvestment Life (years) (a) Select the best investment proposal using the payback period, the accounting rate of return on initial investment, and the net present value criteria. Assume that the organization's cost of capital is 12 percent. Round accounting rate of return four decimal places. Round net present value to the nearest whole number. Use negative signs with your answers, when appropriate. Proposal A Payback period (years) Accounting rate of return Net present value Proposal B Answer Answer Answer Answer $Answer $Answer Proposal C Best proposal Answer Answer Answer Answer $Answer Answer (b) Factors explaining the differences in rankings include all of the following except: Net present value considers the timing of cash flows while payback considers only total cash flows. The accounting rate of return considers profitability while payback only considers the time required to recover the investment. The net present value method considers the cost of capital while the payback method does not discount future cash flows. While the accounting rate of return explicitly considers the cost of the asset as part of annual depreciation the net present value method considers the cost of the asset as part of the initial investment. Check Cash Disbursements Assume that Waycross Manufacturing manages its cash flow from its home office. Waycross controls cash disbursements by category and month. In setting its budget for the next six months, beginning in July, it used the following managerial guidelines: Category Guidelines Purchases Payroll Pay 90 percent in current month and 10 percent in following month. Loan Payments Pay half in current and half in following month. Pay total amount due each month. Predicted activity for selected months follow: Category May June July August Purchases $30,000 $48,000 $52,000 $54,000 Payroll 100,000 130,000 140,000 100,000 Loan Payments 10,000 10,000 12,000 12,000 Prepare a schedule showing cash disbursements by account for July and August. Waycross Manufacturing Schedule of Cash Disbursements For the Months of July and August July August $Answer $Answer 0 53000 Accounts payable Answer Answer 0 104000 Payroll Answer Answer 12000 12000 Loan payments $Answer $Answer 201000 Total 169000 Cash Budget The Peoria Supply Company sells for $30 one product that it purchases for $20. Budgeted sales in total dollars for next year are $720,000. The sales information needed for preparing the July budget follows: Month Sales Revenue May $30,000 June 44,000 July 49,000 August 50,000 Account balances at July 1 include these: Cash $20,000 Merchandise inventory 15,000 Accounts receivable (sales) 24,000 Accounts payable (purchases) 13,000 The company pays for onehalf of its purchases in the month of purchase and the remainder in the following month. Endofmonth inventory must be 50 percent of the budgeted sales in units for the next month. A 2 percent cash discount on sales is allowed if payment is made during the month of sale. Experience indicates that 50 percent of the billings will be collected during the month of sale, 40 percent in the following month, 6 percent in the second following month, and 4 percent will be uncollectible. Total budgeted selling and administrative expenses (excluding bad debts) for the fiscal year are estimated at $174,000 , of which onehalf is fixed expense (inclusive of a $20,000 annual depreciation charge). Fixed expenses are incurred evenly during the year. The other selling and administrative expenses vary with sales. Expenses are paid during the month incurred. (Round your answers to the nearest whole number.) (a) Prepare a schedule of estimated cash collections for July. Peoria Supply Company Schedule of Cash Collections For the Month of July $Answer 0 Current month's sales Peoria Supply Company Schedule of Cash Collections For the Month of July $Answer 17600 Previous month's sales $Answer 0 Two months' prior sales $Answer 43410 Total cash collections (b) Prepare a schedule of estimated July cash payments for purchases. Peoria Supply Company Schedule of Cash Payments for Purchases For the Month of July $Answer 0 Current month's purchases Beginning accounts payable Answer 0 Peoria Supply Company Schedule of Cash Payments for Purchases For the Month of July $Answer 0 Total cash payments (c) Prepare schedules of July selling and administrative expenses, separately identifying those requiring cash disbursements. Peoria Supply Company Schedule of Selling and Administrative Expenses and Cash Disbursements For the Month of July Total Cash Selling and administrative expenses: $Answer 0 Fixed $Answer 0 Cash payment Variable Answer Answer 0 0 Peoria Supply Company Schedule of Selling and Administrative Expenses and Cash Disbursements For the Month of July Total Cash $Answer $Answer 0 0 Total expenses and cash disbursements (d) Prepare a cash budget in summary form for July. Peoria Supply Company Cash Budget For the Month of July $Answer 0 Cash receipts Cash disbursements: $Answer 0 Merchandise Selling and administrative Answer Answer 0 0 Peoria Supply Company Cash Budget For the Month of July $Answer 0 Excess receipts (disbursements) Developing a Master Budget for a Merchandising Organization Peyton Department Store prepares budgets quarterly. The following information is available for use in planning the second quarter budgets for 2010. PEYTON DEPARTMENT STORE Balance Sheet March 31, 2010 Assets Liabilities and Stockholders' Equity Cash $2,000 Accounts payable $26,000 Accounts receivable 25,000 Dividends payable 17,000 Inventory 30,000 Rent payable 1,000 2,000 Stockholders' equity 40,000 Total liabilities and equity $84,000 Prepaid Insurance Fixtures 25,000 Total assets $84,00 0 Actual and forecasted sales for selected months in 2010 are as follows: Month Sales Revenue January $80,000 February 50,000 March 40,000 April 50,000 May 60,000 June 70,000 July 90,000 Month Sales Revenue August 80,000 Monthly operating expenses are as follows: Wages and salaries $27,000 Depreciation 100 Utilities 1,000 Rent 1,000 Cash dividends of $17,000 are declared during the third month of each quarter and are paid during the first month of the following quarter. Operating expenses, except insurance, rent, and depreciation are paid as incurred. Rent is paid during the following month. The prepaid insurance is for five more months. Cost of goods sold is equal to 50 percent of sales. Ending inventories are sufficient for 120 percent of the next month's sales. Purchases during any given month are paid in full during the following month. All sales are on account, with 50 percent collected during the month of sale, 40 percent during the next month, and 10 percent during the month thereafter. Money can be borrowed and repaid in multiples of $1,000 at an interest rate of 12 percent per year. The company desires a minimum cash balance of $2,000 on the first of each month. At the time the principal is repaid, interest is paid on the portion of principal that is repaid. All borrowing is at the beginning of the month, and all repayment is at the end of the month. Money is never repaid at the end of the month it is borrowed. (a) Prepare a purchases budget for each month of the second quarter ending June 30, 2010. Peyton Department Store Monthly Purchase Budget Quarter Ending June 30, 2010 April May $Answer June $Answer 31000 Total $Answer 36000 $Answer 47000 114000 Budgeted purchases (b) Prepare a cash receipts schedule for each month of the second quarter ending June 30, 2010. Do not include borrowings. Peyton Department Store Schedule of Monthly Cash Receipts Quarter Ending June 30, 2010 April May $Answer June $Answer 46000 Total $Answer 54000 $Answer 64000 164000 Total cash receipts (c) Prepare a cash disbursements schedule for each month of the second quarter ending June 30, 2010. Do not include repayments of borrowings. Peyton Department Store Schedule of Monthly Cash Disbursements Quarter Ending June 30, 2010 April May $Answer June $Answer 72000 Total $Answer 60000 $Answer 65000 197000 Total cash disbursements (d) Prepare a cash budget for each month of the second quarter ending June 30, 2010. Include budgeted borrowings and repayments. Only use negative signs, if needed, for: excess receipts over disbursements, balance before borrowings and cash balances (beginning and ending). Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April Cash balance, beginning $Answer May June $Answer 2000 Total $Answer 2000 $Answer 2000 2000 Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April May June Answer Answer Answer 54000 46000 Total Answer 64000 164000 Receipts Answer Answer Answer 60000 72000 Answer 65000 197000 Disbursements Answer Answer -26000 Answer -6000 Answer -1000 -33000 Excess receipts over disb. Answer Answer -24000 Balance before borrowings Answer -4000 Answer 1000 -31000 Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April May June Answer Answer Answer 6000 26000 Total 1000 Answer 33000 Borrowings Answer Answer 0 Answer 0 Answer 0 0 Loan repayments $Answer $Answer $Answer 2000 2000 2000 $Answer 2000 Cash balance, ending (e) Prepare an income statement for each month of the second quarter ending June 30, 2010. Only use negative signs to show net losses in income. Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April May $Answer $Answer 50000 Sales June Total $Answer 60000 $Answer 70000 180000 Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April Answer May Answer 25000 June Answer 30000 Total Answer 35000 90000 Cost of sales Answer Answer 25000 Answer 30000 Answer 35000 90000 Gross profit Operating expenses: Answer Answer 27000 Answer 27000 Answer 27000 81000 Wages and salaries Answer Answer 100 Answer 100 Answer 100 300 Depreciation Answer Answer 1000 Utilities Answer 1000 Answer 1000 3000 Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April May Answer Answer 1000 June Answer 1000 Total Answer 1000 3000 Rent Answer Answer 400 Answer 400 Answer 400 1200 Insurance Answer Answer 260 Answer Answer 320 0 0 Interest Answer Answer 29760 Answer 29820 Answer 0 0 Total expenses $Answer -4760 $Answer $Answer 180 Net income (f) Prepare a budgeted balance sheet as of June 30, 2010. $Answer 0 0 Peyton Department Store Budgeted Balance Sheet June 30, 2010 Assets Liabilities and Equity $Answer $Answer 2000 Cash 47000 Merchandise payable Answer Answer 41000 Accounts receivable 17000 Dividend payable Answer Answer 54000 Inventory 1000 Rent payable Answer Answer 800 33000 Prepaid insurance Loans payable Answer Answer 24700 Fixtures Total assets 0 Interest payable $Answer Stockholders' equity 122500 Answer 0 Peyton Department Store Budgeted Balance Sheet June 30, 2010 Assets Liabilities and Equity $Answer 122500 Total liab. & equity Answer a Appropriate transfer price opportuity costs Peanut Division Transfer price Total Variable costs CM per unit Units at normal capacity Total CM Les Fixed costs Gross Profit b Transfer pounds Sale pounds Transfer Price Sales Revenue Total Less Total costs Gross Profit c $ $ $ $ 2.00 0.87 1.13 4,000,000 pounds 4,520,000 800,000 3,720,000 1,700,000 2,300,000 1,819,000 4,600,000 6,419,000 5,080,000 1,339,000 Set transfer price at 2.00 for all transfers ROI and Residual Income Basisc Computation a Operating Assets Sales Net operating Income a ROI b Net operating Income Minimum Level Residual Income c Trucking Seafood Construction 650,000 290000 360000 1,300,000 870000 900000 101,000 52000 62000 15.538% 17.931% 17.222% Trucking Seafood Construction 101,000 52000 62000 65,000 29,000 36,000 36,000 23,000 26,000 Which division has the superior performance depends on which performance evaluation metric is used to assess performance. Income Statement Segment by teritory a Florida Sales Less Variable expenses Contribution Margin Direct Fixed expenses Product/ Territory Margin Common Fixed Expenses Net Income b Total Pen 11,000 4,400 6,600 Pencil 13000 5200 7,800 6,600 7,800 6,600 7,800 24,000 9,600 14,400 2000 12,400 6000 6,400 Albama Pen 14000 5,600 8,400 Pencil 17000 6800 10,200 8,400 10,200 8,400 10,200 Sales Varisble Costs Contribution margin Direct Fixed Expenses Product margin Allocated Common Cost Product Income Unallocated Common expenses Selling and administrative Service less allocated expenses/cost Total net income b 31,000 12,400 18,600 3000 15,600 3000 12,600 Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product). Income Statements Segmented by Products a Total Hospital Physician Nursing Total 340,000 260000 300000 238,000 156,000 210,000 102,000 104,000 90,000 22,000 17000 11000 80,000 87,000 79,000 1,000 1000 1500 79,000 86,000 77,500 900,000 604,000 296,000 50,000 246,000 3,500 242,500 66500 65000 111,000 ROI and Residual Income: Impact of a New Investment Return on Investment 17.500% Operating Income Less minimum Residual income 700,000 640,000 60,000 c 1 Return on Investment 18.182% 2 Operating Income Less minimum Residual income 900,000 792,000 108,000 Company 55,000 22,000 33,000 5,000 28,000 15000 13,000 NPV and IRR: Unequal Annual Net Cash Inflows a Year 0 1 2 3 NPV b Cash Flows (42,070) 20,000 30,000 10,000 5,308 IRR 26% Payback, IRR and minimum cash flows Time0 Year1 Year2 Year3 (250,000) (250,000) 100000 100000 (250,000) (150,000) (50,000) Initial Investment Cash Flows Cum. CF a Payback Period 2+(50000/100000) b IRR Rate 100000 50,000 100000 150,000 21.86% c Year4 2.5 years 21.86% Time Value of Money Basics a Fv 3,246 b Pv 3,105 c Pv 39,197 d PMT 3,000 e Year1 Year2 Year3 41,667 6,944 4,051 f Pv 1 0.9090909091 1 0.8333333333 0.6944444444 0.5787037037 0.4822530864 0.401878 6,063 NPV and IRR year 0 1 0.8928571429 0.7971938776 0.7117802478 0.6355180784 0.567427 0.506631 0.452349 0.403883 year 1 (44,190) a NPV IRR Rate 9000 year 3 9000 year 4 9000 year 5 9000 year 6 9000 18.00% Ranking Investment Proposals Proposal A Proposal B Proposal C (45,000) (45,000) (45,000) Initial Investment Cash Flow Year 1 40,000 5,000 22,500 2 3 a Proposal A Payback Period Accounting Rate of return Net Present Value b 22500 22500 22500 Proposal B 2 16.67% 10,715 45000 Proposal C Best Proposal 1 A,B 0 A,B (4,821) A 2 16.67% 9,041 While the accounting rate of return explicitly considers the cost of the asset as part of annual depreciation the net present value method considers the cost of the asset as part of the initial investment. Cash Disbursements May Purchases Payroll Loan Payments June 30,000 100,000 10,000 Waycross manufacturing Schedule of cash disbursements For the month of July and August July Accounts Payable Payroll Loan Payments Total 50,000 139,000 12,000 201,000 July 48000 130000 10000 August 53,000 104,000 12,000 169,000 August 52000 140000 12000 54000 100000 12000 0.36061 0.321973 0.287476 0.256675 year 7 year 8 year 9 year 10 year 11 year 12 year 13 9000 9000 9000 9000 9000 9000 9000 9000 18.00% c year 2 3,891 b 0.826446281 0.7513148009 0.6830134554 0.620921 Answer a Appropriate transfer price opportuity costs Peanut Division Transfer price Total Variable costs CM per unit Units at normal capacity Total CM Les Fixed costs Gross Profit b Transfer pounds Sale pounds Transfer Price Sales Revenue Total Less Total costs Gross Profit c $ $ $ $ 2.00 0.87 1.13 4,000,000 pounds 4,520,000 800,000 3,720,000 1,700,000 2,300,000 1,819,000 4,600,000 6,419,000 5,080,000 1,339,000 Set transfer price at 2.00 for all transfers ROI and Residual Income Basisc Computation a Operating Assets Sales Net operating Income a ROI b Net operating Income Minimum Level Residual Income c Trucking Seafood Construction 650,000 290000 360000 1,300,000 870000 900000 101,000 52000 62000 15.538% 17.931% 17.222% Trucking Seafood Construction 101,000 52000 62000 65,000 29,000 36,000 36,000 23,000 26,000 Which division has the superior performance depends on which performance evaluation metric is used to assess performance. Income Statement Segment by teritory a Florida Sales Less Variable expenses Contribution Margin Direct Fixed expenses Product/ Territory Margin Common Fixed Expenses Net Income b Total Pen 11,000 4,400 6,600 Pencil 13000 5200 7,800 6,600 7,800 6,600 7,800 24,000 9,600 14,400 2000 12,400 6000 6,400 Albama Pen 14000 5,600 8,400 Pencil 17000 6800 10,200 8,400 10,200 8,400 10,200 Sales Varisble Costs Contribution margin Direct Fixed Expenses Product margin Allocated Common Cost Product Income Unallocated Common expenses Selling and administrative Service less allocated expenses/cost Total Net Income b 31,000 12,400 18,600 3000 15,600 3000 12,600 Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product). Income Statements Segmented by Products a Total ROI and Residual Income: Impact of a New Investment Return on Investment Operating Income Less minimum Residual income Hospital Physician Nursing Total 340,000 260000 300000 238,000 156,000 210,000 102,000 104,000 90,000 22,000 17000 11000 80,000 87,000 79,000 1,000 1000 1500 79,000 86,000 77,500 66500 65000 111,000 0.175 700,000 640,000 60,000 c 1 Return on Investment 2 Operating Income Less minimum Residual income 900,000 604,000 296,000 50,000 246,000 3,500 242,500 0.182 900,000 792,000 108,000 Company 55,000 22,000 33,000 5,000 28,000 15000 13,000 NPV and IRR: Unequal Annual Net Cash Inflows a Year 0 1 2 3 NPV b Cash Flows (42,070) 20,000 30,000 10,000 5,308 IRR 26% Payback, IRR and minimum cash flows Time0 Year1 Year2 Year3 (250,000) (250,000) 100000 100000 (250,000) (150,000) (50,000) Initial Investment Cash Flows Cum. CF a Payback Period 2+(50000/100000) b IRR Rate 100000 50,000 100000 150,000 21.86% c Year4 2.5 years 21.86% Time Value of Money Basics a Fv 3,246 b Pv 3,105 c Pv 39,197 d PMT 3,000 e Year1 Year2 Year3 41,667 6,944 4,051 f Pv 1 0.9090909091 1 0.8333333333 0.6944444444 0.5787037037 0.4822530864 0.401878 6,063 NPV and IRR year 0 1 0.8928571429 0.7971938776 0.7117802478 0.6355180784 0.567427 0.506631 0.452349 0.403883 year 1 (44,190) a NPV IRR Rate 9000 year 3 9000 year 4 9000 year 5 9000 year 6 9000 18.00% Ranking Investment Proposals Proposal A Proposal B Proposal C (45,000) (45,000) (45,000) Initial Investment Cash Flow Year 1 40,000 5,000 22,500 2 3 a Proposal A Payback Period Accounting Rate of return Net Present Value b 22500 22500 22500 Proposal B 2 16.67% 10,715 45000 Proposal C Best Proposal 1 A,B 0 A,B (4,821) A 2 16.67% 9,041 While the accounting rate of return explicitly considers the cost of the asset as part of annual depreciation the net present value method considers the cost of the asset as part of the initial investment. Cash Disbursements May Purchases Payroll Loan Payments June 30,000 100,000 10,000 Waycross manufacturing Schedule of cash disbursements For the month of July and August July Accounts Payable Payroll Loan Payments Total 50,000 139,000 12,000 201,000 July 48000 130000 10000 August 53,000 104,000 12,000 169,000 August 52000 140000 12000 54000 100000 12000 0.36061 0.321973 0.287476 0.256675 year 7 year 8 year 9 year 10 year 11 year 12 year 13 9000 9000 9000 9000 9000 9000 9000 9000 18.00% c year 2 3,891 b 0.826446281 0.7513148009 0.6830134554 0.620921 Answer a Appropriate transfer price opportuity costs Peanut Division Transfer price Total Variable costs CM per unit Units at normal capacity Total CM Les Fixed costs Gross Profit b Transfer pounds Sale pounds Transfer Price Sales Revenue Total Less Total costs Gross Profit c $ $ $ $ 2.00 0.87 1.13 4,000,000 pounds 4,520,000 800,000 3,720,000 1,700,000 2,300,000 1,819,000 4,600,000 6,419,000 4,280,000 2,139,000 Set transfer price at 2.00 for all transfers ROI and Residual Income Basisc Computation a Operating Assets Sales Net operating Income a ROI b Net operating Income Minimum Level Residual Income c Trucking Seafood Construction 650,000 290000 360000 1,300,000 870000 900000 101,000 52000 62000 15.538% 17.931% 17.222% Trucking Seafood Construction 101,000 52000 62000 65,000 29,000 36,000 36,000 23,000 26,000 Which division has the superior performance depends on which performance evaluation metric is used to assess performance. Income Statement Segment by teritory a Florida Sales Less Variable expenses Contribution Margin Direct Fixed expenses Product/ Territory Margin Common Fixed Expenses Net Income b Total Pen 11,000 4,400 6,600 Pencil 13000 5200 7,800 6,600 7,800 6,600 7,800 24,000 9,600 14,400 2000 12,400 6000 6,400 Albama Pen 14000 5,600 8,400 Pencil 17000 6800 10,200 8,400 10,200 8,400 10,200 Sales Varisble Costs Contribution margin Direct Fixed Expenses Product margin Allocated Common Cost Product Income Unallocated Common expenses Selling and administrative Service less allocated expenses/cost Total net income b 31,000 12,400 18,600 3000 15,600 3000 12,600 Because costs that may be directly traceable to one segment base (i.e., territory) may not be directly traceable to another segment base (i.e., product). Income Statements Segmented by Products a Total Hospital Physician Nursing Total 340,000 260000 300000 238,000 156,000 210,000 102,000 104,000 90,000 22,000 17000 11000 80,000 87,000 79,000 1,000 1000 1500 79,000 86,000 77,500 900,000 604,000 296,000 50,000 246,000 3,500 242,500 65000 16500 161,000 ROI and Residual Income: Impact of a New Investment Return on Investment 17.500% Operating Income Less minimum Residual income 700,000 640,000 60,000 c 1 Return on Investment 18.182% 2 Operating Income Less minimum Residual income 900,000 792,000 108,000 Company 55,000 22,000 33,000 5,000 28,000 15000 13,000 NPV and IRR: Unequal Annual Net Cash Inflows a Year 0 1 2 3 NPV b Cash Flows (42,070) 20,000 30,000 10,000 5,308 IRR 22% Payback, IRR and minimum cash flows Time0 Year1 Year2 Year3 (250,000) (250,000) 100000 100000 (250,000) (150,000) (50,000) Initial Investment Cash Flows Cum. CF a Payback Period 2+(50000/100000) b IRR c Rate Year4 100000 50,000 100000 150,000 2.5 years 21.86% 22% Time Value of Money Basics a Fv 3,506 b Pv 3,105 c Pv 39,197 d PMT 3,000 e Year1 Year2 Year3 41,667 6,944 4,051 f Pv 1 0.9090909091 1 0.8333333333 0.6944444444 0.5787037037 0.4822530864 0.401878 6,063 NPV and IRR year 0 1 0.8928571429 0.7971938776 0.7117802478 0.6355180784 0.567427 0.506631 0.452349 0.403883 year 1 (44,190) a NPV IRR Rate 9000 year 3 9000 year 4 9000 year 5 9000 year 6 9000 18.00% Ranking Investment Proposals Proposal A Proposal B Proposal C (45,000) (45,000) (45,000) Initial Investment Cash Flow Year 1 40,000 5,000 22,500 2 3 a Proposal A Payback Period Accounting Rate of return Net Present Value b 22500 22500 22500 Proposal B 2 50.00% 10,715 45000 Proposal C Best Proposal 1 A,B 0 A,B (4,821) A 2 50.00% 9,041 While the accounting rate of return explicitly considers the cost of the asset as part of annual depreciation the net present value method considers the cost of the asset as part of the initial investment. Cash Disbursements May Purchases Payroll Loan Payments June 30,000 100,000 10,000 Waycross manufacturing Schedule of cash disbursements For the month of July and August July Accounts Payable Payroll Loan Payments Total Cash Budget 50,000 139,000 12,000 201,000 July 48000 130000 10000 August 53,000 104,000 12,000 169,000 August 52000 140000 12000 54000 100000 12000 0.36061 0.321973 0.287476 0.256675 year 7 year 8 year 9 year 10 year 11 year 12 year 13 9000 9000 9000 9000 9000 9000 9000 9000 18.00% c year 2 3,891 b 0.826446281 0.7513148009 0.6830134554 0.620921 a b Peoria Supply Company Schedule of Cash Collection For month of July Current Month's sales Previous month's sales Two Months Prior Sales Total cash collection Peoria Supply Company Schedule of Cash Payments for purchases For month of July Current month's purchases Beginning Accounts payable Total cash payments 24,010 17,600 1,800 43,410 Purchases Units ending inv beg inv Purchases 17,170 13,000 30,170 c Peoria Supply Company Cash Budget For month of July Cash receipts Cash Disbursements Merchandise Selling and administrative Excess receipts(disbursements) 1633 833 750 1717 Peoria Supply Company Schedule of Selling and administrative Expenses and Cash Disbursement For month of July Total Cash Fixed 7,250 Cash payment 5,583 Variable 7,881 5,921 Total expenses and cash disbursement 15,131 11,504 d July 43,410 30,170 11,504 41,674 1,736 Developing Master Budget Peyton Departmental Store (2010) Particulars Sales Revenue ($) Cost of Sales 50% Payment of Dividend Debtors $ $ $ January 80000 40000 Feb. 50000 25000 Mar. 40000 20000 Apr. 50000 25000 17000 May 60000 30000 June 70000 35000 41000 Answer (a) Purchase Budget For Apr. 2014 to June, 2010 Opening Inventory Consumption for month Desired Closing Inventory Purchases $ $ $ $ 30000 25000 36000 31000 36000 30000 42000 36000 42000 35000 54000 47000 Answer (b) Cash Receipt Schedule For Apr. 2014 to June, 2010 Collection from Debtors 50% during the mont Collection from Debtors 40% of last month Collection from Debtors 10% of 2nd last mont Total collection for month $ $ $ $ 25000 16000 5000 46000 30000 20000 4000 54000 35000 24000 5000 64000 17000 27000 1000 600 26000 71600 0 27000 1000 600 31000 59600 0 27000 1000 600 36000 64600 Answer (c) Cash Disbursment Schedule For Apr. 2010 to June, 2010 Payment of Dividend $ Wages & Salaries $ Rent $ Utilities (1000 - 400 ) $ Payment for Purchases $ Total Cash Disbursement $ Answer (d) Cash Budget For Apr. 2010 to June, 2010 Opening Cash Balance: Total Collection For month Borrowings Total Receipts (A) Total Cash Disbursement for the month Payment of Interest(for 2 months on May Borr Repayment of borrowings (for May borrowings Apr. $ $ $ $ $ $ $ 2000 46000 26000 74000 71600 0 0 May 2400 54000 6000 62400 59600 0 0 June 2800 64000 0 66800 64600 0 0 July August 90000 80000 45000 40000 17000 Total Payment (B) Desired Cash Balance $ $ Answer (e) Income Statement For Apr. 2010 to June, 2010 Sales revenue Less Cost Of Sales 50% Gross Margine (A) Operating Expenses Wages & Salaries Depreciation Insurance Utilities Rent Payment of Interest Total Operating Expenses (B) Net Margine (+)/ Loss (-) Total profits for quarter 71600 2400 64600 2200 Apr. 50000 25000 25000 May 60000 30000 30000 June 70000 35000 35000 27000 100 400 600 1000 0 29100 (4100.00) $ $ $ $ $ $ $ $ $ $ $ $ $ $ 59600 2800 27000 100 400 600 1000 0 29100 900.00 27000 100 400 600 1000 0 29100 5900.00 2700.00 Peyton Departmental Store Assets Cash Accounts Receivables Inventory Prepaid Insurance Fixtures Less: Dep. Total Assets Budgeted Balance Sheet March 31, 2010 $ Liab. And Equity 2200 Accounts Payable 41000 Dividend Payable 54000 rent Payable 800 Borrowings 25000 Stockholders equity: 300 24700 Opening 40000 Add: Net Margi 2700 Less: Dividend (17000) 122700 Total Liab. & equity $ 47000 17000 1000 32000 25700 122700 0 Developing a Master Budget for a Merchandising Organization Peyton Department Store prepares budgets quarterly. The following information is available for use in planning the second quarter budgets for 2010. PEYTON DEPARTMENT STORE Balance Sheet March 31, 2010 Assets Liabilities and Stockholders' Equity Cash $2,000 Accounts payable $26,000 Accounts receivable 25,000 Dividends payable 17,000 Inventory 30,000 Rent payable 1,000 2,000 Stockholders' equity 40,000 Total liabilities and equity $84,000 Prepaid Insurance Fixtures 25,000 Total assets $84,00 0 Actual and forecasted sales for selected months in 2010 are as follows: Month Sales Revenue January $80,000 February 50,000 March 40,000 April 50,000 May 60,000 June 70,000 July 90,000 August 80,000 Monthly operating expenses are as follows: Wages and salaries $27,000 Depreciation 100 Utilities 1,000 Rent 1,000 Cash dividends of $17,000 are declared during the third month of each quarter and are paid during the first month of the following quarter. Operating expenses, except insurance, rent, and depreciation are paid as incurred. Rent is paid during the following month. The prepaid insurance is for five more months. Cost of goods sold is equal to 50 percent of sales. Ending inventories are sufficient for 120 percent of the next month's sales. Purchases during any given month are paid in full during the following month. All sales are on account, with 50 percent collected during the month of sale, 40 percent during the next month, and 10 percent during the month thereafter. Money can be borrowed and repaid in multiples of $1,000 at an interest rate of 12 percent per year. The company desires a minimum cash balance of $2,000 on the first of each month. At the time the principal is repaid, interest is paid on the portion of principal that is repaid. All borrowing is at the beginning of the month, and all repayment is at the end of the month. Money is never repaid at the end of the month it is borrowed. (a) Prepare a purchases budget for each month of the second quarter ending June 30, 2010. Peyton Department Store Monthly Purchase Budget Quarter Ending June 30, 2010 April May $Answer June $Answer 31000 Total $Answer 36000 $Answer 47000 114000 Budgeted purchases (b) Prepare a cash receipts schedule for each month of the second quarter ending June 30, 2010. Do not include borrowings. Peyton Department Store Schedule of Monthly Cash Receipts Quarter Ending June 30, 2010 April May $Answer June $Answer 46000 Total $Answer 54000 $Answer 64000 164000 Total cash receipts (c) Prepare a cash disbursements schedule for each month of the second quarter ending June 30, 2010. Do not include repayments of borrowings. Peyton Department Store Schedule of Monthly Cash Disbursements Quarter Ending June 30, 2010 April May $Answer June $Answer 72000 Total $Answer 60000 $Answer 65000 197000 Total cash disbursements (d) Prepare a cash budget for each month of the second quarter ending June 30, 2010. Include budgeted borrowings and repayments. Only use negative signs, if needed, for: excess receipts over disbursements, balance before borrowings and cash balances (beginning and ending). Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April May June $Answer $Answer $Answer 2000 2000 Total 2000 $Answer 2000 Cash balance, beginning Answer Answer Answer 54000 46000 Answer 64000 164000 Receipts Disbursements Answer Answer 72000 Answer 60000 Answer 65000 197000 Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April May Answer June Answer -26000 Total Answer -6000 Answer -1000 -33000 Excess receipts over disb. Answer Answer -24000 Answer -4000 Answer 1000 -31000 Balance before borrowings Answer Answer Answer 6000 26000 1000 Answer 33000 Borrowings Answer Answer 0 Answer 0 Answer 0 0 Loan repayments Cash balance, ending $Answer $Answer 2000 $Answer 2000 $Answer 2000 2000 Peyton Department Store Monthly Cash Budget Quarter Ending June 30, 2010 April May June Total (e) Prepare an income statement for each month of the second quarter ending June 30, 2010. Only use negative signs to show net losses in income. Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April May $Answer June $Answer 50000 Total $Answer 60000 $Answer 70000 180000 Sales Answer Answer 25000 Answer 30000 Answer 35000 90000 Cost of sales Answer Answer 25000 Gross profit Operating expenses: Answer 30000 Answer 35000 90000 Peyton Department Store Budgeted Monthly Income Statements Quarter Ending June 30, 2010 April Answer May Answer 27000 June Answer 27000 Total Answer 27000 81