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Comprehensive Review Assignment 3 Question 1 (Correspondence to Chapter of Flexible Budget) Milano Pizza is a small neighborhood pizzeria that has a small area for in-store dining as well as offering take-out and free home delivery services. The pizzeria's owner has determined that the shop has two major cost driversthe number of pizzas sold and the number of deliveries made. Data concerning the pizzeria's costs appear below: Fixed Cost per Month Cost per Pizza Cost per Delivery $3.80 $5,220 $630 $0.05 Pizza ingredients Kitchen staff Utilities Delivery person Delivery vehicle Equipment depreciation Rent .. Miscellaneous $3.50 $1.50 $540 $275 $1,830 $820 $0.15 In November, the pizzeria budgeted for 1,200 pizzas at an average selling price of $13.50 per pizza and for 180 deliveries. Data concerning the pizzeria's operations in November appear below: Actual Results Pizzas Deliveries Revenue Pizza ingredients Kitchen staff Utilities Delivery person Delivery vehicle Equipment depreciation Rent Miscellaneous 1,240 174 $17,420 $4,985 $5,281 $984 $609 $655 $275 $1,830 $954 Required: 1. Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for the pizzeria for November. 2. Explain the activity variances. Question 2 (Correspondence to Chapter of Performance Measurement in Decentralised Operation) The contribution format income statement for Huerra Company for last year is given below: Total Unit Sales Variable expenses Contribution margin Fixed expenses Net operating income Income taxes @ 30% Net operating income $4,000,000 2,800,000 1,200,000 840,000 360,000 108,000 $ 252,000 $80.00 56.00 24.00 16.80 7.20 2.16 $ 5.04 The company had average operating assets of $2,000,000 during the year. Required: 1. Compute the company's return on investment (ROI) for the period using the ROI formula stated in terms of margin and turnover. For each of the following questions, indicate whether the margin and turnover will increase, decrease, or remain unchanged as a result of the events described, and then compute the new ROI figure. Consider each question separately, starting in each case from the data used to compute the original ROI in (1) above. 2. Using Lean Production, the company is able to reduce the average level of inventory by $400,000. (The released funds are used to pay off short-term creditors.) 3. The company achieves a cost savings of $32,000 per year by using less costly materials. The company issues bonds and uses the proceeds to purchase $500,000 in machinery and equipment at the beginning of the period. Interest on the bonds is $60,000 per year. Sales remain unchanged. The new, more efficient equipment reduces production costs by $20,000 per year. 5. As a result of a more intense effort by salespeople, sales are increased by 20%; operating assets remain unchanged. Obsolete inventory carried on the books at a cost of $40,000 is scrapped and written off as a loss. 7. The company uses $200,000 of cash (received on accounts receivable) to repurchase and retire some of its common stock. 4. 6. Question 3 (Correspondence to Chapter of Incremental Analysis/Differential Analysis) Total Home Nursing $260,000 120,000 $900,000 490,000 410,000 Meals On House- Wheels keeping $400,000 $240,000 210,000 160,000 190,000 80,000 140,000 Revenues Variable expenses Contribution margin Fixed expenses: Depreciation Liability insurance Program administrators' salaries General administrative overhead* 68,000 42,000 115,000 180,000 405,000 $ 5,000 8,000 20,000 40,000 52,000 40,000 20,000 7,000 15,000 38,000 37,000 80,000 48,000 165,000 120,000 $ 25,000 $ (40,000) Total fixed expenses 120,000 $ 20,000 Net operating income (loss) *Allocated on the basis of program revenues. The head administrator of Jackson County Senior Services, Judith Miyama, is concerned about the organization's finances and considers the net operating income of $5,000 last year to be razor-thin. (Last year's results were very similar to the results for previous years and are represen- tative of what would be expected in the future. She feels that the organization should be building its financial reserves at a more rapid rate in order to prepare for the next inevitable recession. After seeing the above report, Ms. Miyama asked for more information about the financial advisability of perhaps discontinuing the housekeeping program. The depreciation in housekeeping is for a small van that is used to carry the housekeepers and their equipment from job to job. If the program were discontinued, the van would be donated to a charitable organization. None of the general administrative overhead would be avoided if the housekeeping program were dropped, but the liability insurance and the salary of the program administrator would be avoided. Required: Should the Housekeeping program be discontinued? Explain. Show computations to support your answer. Recast the above data in a format that would be more useful to management in assessing the long-run financial viability of the various services. 1. 2. Question 4 (Correspondence to Chapter of Incremental Analysis/Differential Analysis) Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Variable selling expense Fixed selling expense Total cost $15 8 3 9 4 6 $ 450,000 240,000 90,000 270,000 120,000 180,000 $1,350,000 $45 2. The Rets normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Polaski Company has no assurance that the retail chain will purchase addi- tional units in the future. Determine the impact on profits next year if this special order is accepted. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.80 per Ret, and it would reim- burse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no vari- able selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year? 3. Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 5,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 5,000 Rets were sold through regular channels