Polaski Company manufactures and sells a single product called ?HTV-7?. Operating at capacity, the company can produce and sell 30,000 units of HTV-7 per year. Costs associated with this level of production and sales are given below: Per Unit_ Total_ Direct materials $15 $450,000 Direct labor 8 240,000 Variable overhead 3 90,000 Fixed overhead 9 270,000 Variable selling expense 4 120,000 Fixed selling expense 6 180,000 Total cost $45 $1,350,000 === ======== HTV-7 sells for $50 per unit. Polaski Company expects to sell 25,000 units through regular channels next year. A. A large retail chain has offered to purchase 5,000 units if Polaski is willing to accept a 16 percent discount off the regular selling price. Since there would be no sales commissions on this order, variable selling expenses would be slashed by 75 percent. However, Polaski would have to purchase a special machine in order to engrave the retail chain?s name on the 5,000 units. This machine would cost $10,000. 1. By how much would Polaski Company?s profits increase (or decrease) next year if it accepts this special order? 2. What is the minimum selling price that Polaski could charge for the special order units without decreasing the company?s overall profits? B. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 units next year through regular channels. The U.S. Army would like to make a one time only purchase of 5,000 units. The Army would pay a fixed fee of $1.80 per unit, and, in addition, it would reimburse Polaski Company for all variable costs of production associated with the special order units. Since the Army would pick up the units with its own trucks, there would be no variable selling expenses of any type associated with this order. By how much would Polaski Company?s profits increase (or decrease) next year if it accepts this special order? C. Assume the same situation as described in ?B? except that Polaski expects to sell 30,000 units through regular channels next year. By how much would Polaski Company profits increase (or decrease) next year if it accepts this special order? D. List at least two qualitative (that is, not quantitative) factors that Polaski Company should consider when making a decision as to whether to accept or reject a special order.

NAME(print)_______________________ EXAMINATION NUMBER A-______ MBA 610: ACCOUNTING INFORMATION FOR DECISION ANALYSIS Fall 2013 First Examination This examination covers Modules 13-18 of your text and is comprised of seven problems. Your total points earned on this exam will be converted to a percentage of 200 points when calculating your grade. This is a take-home examination. You are expected to comply with the University Honor Code in the taking of this examination. 1. 2. 3. You may not solicit help from anyone or discuss the examination with anyone until both of you have submitted your examination solutions. You may use your text, classnotes, and problem solutions. Failure to write and sign the HONOR CODE is a violation of the Honor Code. To receive full credit for each problem, you MUST INCLUDE AND LABEL ALL SUPPORTING CALCULATIONS . DUE DATE: NO LATER THAN MONDAY, SEPTEMBER 23rd t, at 9:00 am. METHOD OF EXAM SUBMISSION: Email your exam solution to donna.guydan@valpo.edu USE PRINT PREVIEW to check your exam solution format. If it does not print in an easily readable format, you will be asked to reformat and resubmit it. DO NOT include the examination with your solutions. PROBLEM #1 (25 points) The receiving area of BTW, Inc. has three different components of its operating costs. The first component, facility cost, is a fixed cost. The second component, supplies cost, is a variable cost. Past records reveal that, at the activity level of 40,000 operating hours, the following operating costs were incurred: Facility costs $80,000 Supplies costs 12,000 Human resources 33,000 Total $125,000 When the company operated at a 60,000-hour level, the total operating costs amounted to $135,000. REQUIRED: (TO RECEIVE FULL CREDIT YOU MUST SHOW AND LABEL ALL SUPPORTING CALCULATIONS.) A. Estimate the cost of supplies at the 60,000-hour level of operations. B. What is the cost of human resources at the 60,000-hour level of operations? C. Using the high/low method present the cost formula for estimating the cost of human resources. What type of cost behavior does the cost of human resources exhibit? D. Estimate the total operating cost at the 55,000-hour level of activity. E. Estimate the total operating cost at a level of activity of 100,000-hours. F. List at least one strength and one weakness for each of the following three methods for estimating the variable and fixed components of a mixed cost. 1. 2. 3. High/low Scattergraph Regression PROBLEM #2 (25 points) Jen and Berry Company produces butter pecan ice cream. The following operating data have been accumulated for 2013 to assist in making plans for 2014. The factory has a capacity of 80,000 cases annually. The company's after tax net income for 2013 is estimated to be $40,560 and the income tax rate is forty (40) percent. Year 2013 Data Per Case Selling price $50.00 Variable costs: Direct materials $24.00 Direct labor $ 3.00 Manufacturing overhead $ 8.00 Selling expenses $ 5.00 Annual fixed costs: Manufacturing overhead Selling expenses Administrative expenses Totals $375,500 $ 56,700 $ 94,200 REQUIRED: (TO RECEIVE FULL CREDIT YOU MUST SHOW AND LABEL ALL SUPPORTING CALCULATIONS.) A. For the year 2013: 1. Calculate Jen & Berry Company's break-even point in number of cases. 2. Without using numbers or making any calculations, describe (in words only) three different ways in which Jen & Berry Company could lower the break-even point. B. Management has reviewed costs and expenses for 2014 and estimates that the cost of cream will increase by $2.00 per case. Due to increased automation of the production line, the cost of direct labor will decrease by $.50 per case, but variable manufacturing overhead will increase 1.25 percent per case and fixed overhead will increase $30,000. All other costs and expenses are expected to remain at the same rates or levels as experienced in year 2013. 1. How many cases of butter pecan ice cream will Jen & Berry Company have to sell for $50.00 per case in year 2014 to earn the same after tax net income as in year 2013? 2. How much would Jen & Berry Company have to charge for one case of butter pecan ice cream to maintain the same contribution margin ratio in year 2014 as in year 2013? C. In year 2014, Jen & Berry Company wants to expand its product line by introducing a new flavor, peppermint crunch. Expected operating data for this new flavor are as follows: Selling price per case Variable costs per case: Direct materials Direct labor Manufacturing overhead Selling expenses $45.00 $20.00 $ 4.00 $ 6.00 $ 7.00 Additional manufacturing facilities would be required and could be leased for $200,000 per year. Fixed advertising costs would increase by $55,600 per year. Jen & Berry Company's marketing department has estimated that one case of peppermint crunch would be sold for every four cases of butter pecan sold. If Jen & Berry Company does introduce the new flavor in year 2014 and also experiences the cost changes associated with butter pecan (as described in Requirement B), how many cases of butter pecan (with a selling price of $50.00 per case) and how many cases of peppermint crunch must the company sell to break even in year 2014? PROBLEM #3 (25 points) Polaski Company manufactures and sells a single product called \"HTV-7\". Operating at capacity, the company can produce and sell 30,000 units of HTV-7 per year. Costs associated with this level of production and sales are given below: Per Unit_ Total_ Direct materials $15 $450,000 Direct labor 8 240,000 Variable overhead 3 90,000 Fixed overhead 9 270,000 Variable selling expense 4 120,000 Fixed selling expense 6 180,000 Total cost $45 $1,350,000 === ======== HTV-7 sells for $50 per unit. Polaski Company expects to sell 25,000 units through regular channels next year. REQUIRED: (TO RECEIVE FULL CREDUT YOU MUST SHOW AND LABEL ALL SUPPORTING CALCULATIONS.) A. A large retail chain has offered to purchase 5,000 units if Polaski is willing to accept a 16 percent discount off the regular selling price. Since there would be no sales commissions on this order, variable selling expenses would be slashed by 75 percent. However, Polaski would have to purchase a special machine in order to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. 1. By how much would Polaski Company's profits increase (or decrease) next year if it accepts this special order? 2. What is the minimum selling price that Polaski could charge for the special order units without decreasing the company's overall profits? B. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 units next year through regular channels. The U.S. Army would like to make a one time only purchase of 5,000 units. The Army would pay a fixed fee of $1.80 per unit, and, in addition, it would reimburse Polaski Company for all variable costs of production associated with the special order units. Since the Army would pick up the units with its own trucks, there would be no variable selling expenses of any type associated with this order. By how much would Polaski Company's profits increase (or decrease) next year if it accepts this special order? C. Assume the same situation as described in \"B\" except that Polaski expects to sell 30,000 units through regular channels next year. By how much would Polaski Company profits increase (or decrease) next year if it accepts this special order? D. List at least two qualitative (that is, not quantitative) factors that Polaski Company should consider when making a decision as to whether to accept or reject a special order. PROBLEM #4 (25 points) The Baker Company's old equipment for making motors is worn out. The company is considering two courses of action: (1) completely replacing the old equipment with new equipment or (2) buying the motors from an outside supplier, who has quoted a unit purchase price of $90 on a seven year contract for a minimum of 50,000 motors per year. Production was 60,000 motors in each of the past two years. Future needs for the next seven years are not expected to fluctuate beyond 50,000 to 70,000 motors per year. Cost records for the past two years reveal the following unit costs of manufacturing each motor: Direct Materials $30 Direct Labor 35 Variable Overhead 10 Fixed Overhead (including $10 depreciation, $10 for direct departmental overhead, and $5 for allocated fixed overhead) 25 $100 The new equipment will cost $18,800,000, will last seven years, and will have zero disposal value. The current disposal value of the old equipment is $3,000,000. The sales representative for the new equipment has summarized her position as follows: The increase in machine speeds will reduce direct labor costs by $30 per motor and variable overhead costs by $5 per motor. Consider last year's experience of one of your major competitors with identical equipment. They produced 100,000 motors under operating conditions very comparable to yours and showed the following unit costs: Direct Materials Direct Labor Variable Overhead Fixed Overhead (including depreciation of $24 per motor) $30 5 5 40 $80 For purposes of this problem, assume that any idle facilities and equipment cannot be put to any alternative use. Also, assume that Baker's allocated fixed overhead costs will not be affected by the company's decision. Ignore all tax implications. REQUIRED: (TO RECEIVE FULL CREDIT YOU MUST SHOW AND LABEL ALL SUPPORTING CALCULATIONS.) A. The president of Baker Company has asked you to compare alternatives under the assumption that 60,000 motors per year will be needed over the next seven years. 1. Calculate the impact on Baker's cash flow over the next seven years if the company chooses the first alternative, replace the old equipment and continue to manufacture motors. 2. Calculate the impact on Baker's cash flow over the next seven years if the company chooses the second alternative, buy the motors from the outside supplier and dispose of the old equipment. 3. Based upon your previous calculations, which alternative seems more attractive? B. At what volume level (annual number of motors) would Baker be indifferent between the two alternatives, (1) purchasing the new equipment and continuing to make the motors versus (2) disposing of the old equipment and buying the motors from the outside supplier? C. List at least three qualitative (non quantitative) factors that Baker should consider when making this decision. PROBLEM #5 (25 points) Connelly Upholstery, Inc., uses a job-order costing system to accumulate manufacturing costs. The company's work in process on December 31, 2013, consisted of one job (No. 2077), which was carried on the year end balance sheet at $156,800. The year end balance in the direct materials inventory was $80,000. There was no finished goods inventory on this date. Connelly applies manufacturing overhead to production on the basis of direct labor cost. Budgeted totals for 2014 are: Direct labor hours 50,000 Direct labor cost 4,200,000 Manufacturing overhead cost 5,460,000 Actual results for 2014 are: Direct labor hours 60,000 Cost of direct materials purchased 5,800,000 Cost of direct materials used 5,600,000 Direct labor cost 4,350,000 Indirect material cost 65,000 Indirect labor cost 2,860,000 Factory depreciation expense 1,740,000 Factory insurance expense 59,000 Factory utilities expense 830,000 Selling and administrative expenses 2,160,000 Job No. 2077 was completed in January 2014. There was no work in process at year end. All jobs produced during 2014 were sold with the exception of Job No. 2143, which contained direct material costs of $156,000 and direct labor charges of $85,000 for the 650 direct labor hours worked on this job. REQUIRED: (TO RECEIVE FULL CREDIT YOU MUST SHOW AND LABEL ALL SUPPORTING CALCULATIONS,) A. Determine the company's predetermined (aka budgeted) overhead application rate. B. Compute the amount that Connelly would disclose on its December 31, 2014, balance sheet for 1. Direct materials inventory 2. Work in process inventory 3. Finished goods inventory C. Compute the amount of over or under applied overhead at year end. D. Calculate the unadjusted Cost of Goods Sold. E. Calculate adjusted cost of goods sold for 2014 assuming the amount of under or over applied overhead computed in Part C is immaterial (insignificant). PROBLEM #6 (20 points) Recently, Walters Company expanded its market by becoming an original equipment supplier to Jeep Wrangler. Walters produces factory upgraded speakers specifically for Jeep. The Kicker components and speaker cabinets are outsourced with assembly remaining in-house. Walters assembles the product by placing the speakers and other components in cabinets that define an audio package upgrade and that can be placed into any Jeep, producing the desired factory-installed appearance. Speaker cabinets and associated Kicker components are added at the beginning of the assembly process. Assume that Walters uses the weighted average method to cost out the audio package. The following are cost and production data for the assembly process for April: Production Units in process, 4/1, 60% complete Units completed and transferred out Units in process, 4/30, 20% complete Costs: Work-in-process, 4/1: Cabinets Kicker components Conversion costs Costs added during April: Cabinets Kicker components Conversion costs 60,000 30,000 150,000 $ 1,200,000 12,600,000 5,400,000 $ 2,400,000 25,200,000 8,640,000 REQUIRED: (TO RECEIVE FULL CREDIT YOU MUST SHOW AND LABEL ALL SUPPORTING CALCULATIONS.) Prepare a Cost of Production Report for April. PROBLEM #7 (25 points) Suppose that Stillwater Designs has two classes of customers just-in-time (JIT) customers and non-justin-time (nonJIT) customers. The JIT customers place small, frequent orders, and the nonJIT customers tend to place larger, less frequent orders. Both types of customers are buying the same type of product. Stillwater Designs provides the following information about customer-related activities and cost for the most recent quarter: Customers ________________ JIT_____ nonJIT_____ Sales orders 700 70 Sales calls 70 70 Service calls 350 175 Average order size 750 7,500 Manufacturing cost per unit $125 $125 Selling price per unit $150 $150 Customer Costs $ 3,080,000 1,120,000 1,050,000 $ 5,250,000 ========= REQUIRED: (TO RECEIVE FULL CREDIT SHOW AND LABEL ALL SUPPORTING CALUCLATIONS.) Processing sales orders Making sales calls Servicing goods Total A. Calculate the total revenues per customer category , and assign the customer costs to each type of customer (JIT and nonJIT) by using revenues as the allocation base for assigning the customer costs. B. Calculate the customer cost for each type of customer using activity-based cost assignments. C. Discuss the merits of offering the nonJIT customers a $2 per unit price decrease (assuming that they are agitating for a price concession). Use calculations to support your response. D. Assume that the JIT customers are simply imposing the frequent orders on Stillwater Designs. No formal discussions have taken place between the JIT customers and Stillwater Designs regarding the supply of goods on a just-in-time basis. The sales pattern has simply evolved over time. As an independent consultant, what suggestions would you make to Stillwater Designs' management when having these discussions with the JIT customers and why