Problem 1. (15 marks)

Drang and Lluvia are two divisions in Nature Corporation.Both managers are independent decision makers and are compensated based on net income.Bonuses are a substantial part of total compensation and are determined based on net income. Drang produces storms and Lluvia produces rain.It requires 20 units of rain to produce 1 storm.Contribution format income statements and capacity information for the two divisions from last month follow:

DrangLluvia

Capacity5020,000

Units produced and sold5016,000

Sales$75,000$307,200

VC39,000177,600

CM$36,000$129,600

FC20,00085,000

NI$16,00044,600

At the current time, the two divisions acquire all resources from third parties.The manager of Drang believes that it might be a good idea to consider purchasing her rain from Lluvia.Both managers have considered the idea.The manager of Drang has determined that she will save $10 per storm due to superior ability to plan and coordination information.The manager of Lluvia has determined that she will save $2 per unit in variable selling costs.

1.What is the range for a transfer price that will benefit both divisions as well as Nature Corporation?

2.Prepare contribution format income statements that show the effect of a transfer price of $15 on each division.You may assume that last month's results are typical.

Problem 1.(continued)

1. What transfer price do you believe the manager of Lluvia would prefer?Explain why.

Problem 2.(14 marks)

Sunshine Company produces gold medals that are awarded to winners of writing competitions all over the world.The sales budget for the second quarter of the year follows:

AprilMayJuneTotal

Unit Sales15,00036,00042,00093,000

Price$9$9$9$9

Sales$135,000$324,000$378,000$837,000

Actual sales for February were 10,400 units and for March sales in units were 11,900.Predicted sales for July and August are 40,000 and 45,000 units respectively.

All sales are on account.The firm collects 10% of accounts receivable in the month of the sale.65% is collected the following month and 20% is collected in the second month after the sale.

Sunshine requires a minimum cash balance of $15,000.Inventory amounting to 15% of the following month's sales must be on hand at all times.On March 30, the actual cash balance was $7,400.Inventory on that date was 3,400 units at a cost of $2 each.

1.Produce a properly formatted purchases budget for the appropriate budget period.

Problem 2.(continued)

2.What is the purpose of the purchases budget?

Problem 3.(13 marks)

Gray Company refinishes antique furniture.Most customers bring in an item that they have inherited or purchased.Gray then completely repairs and refinishes each item with loving care.

The firm prepares a budget at the beginning of each month.Number of units refinished is very difficult to predict.However, labor and materials have been found to vary closely with number of units completed.There is only 1 employee, who has worked for the firm for 20 years.Materials consist of chemicals to clean the furniture and wood finishes.Utilities and depreciation are fixed costs.A static budget analysis for the month of April follows:

ItemBudgetActual Variance

Units45053080 F

Revenue$405,000$445,200$40,200 F

Labor83,250 94,90011,650 U

Materials33,75050,35016,600 U

Utilities31,05030,819231 F

Depreciation75,43075,430--

1. Prepare a flexible budget analysis for the firm for the month of April.

Problem 3.(continued)

1. Explain the change, if any, in the variance for labor under the static budget compared to the flexible budget.

Problem 4.(17 marks)

Lucky Company produces silver medallions that are awarded to people around the world who commit random acts of kindness.The firms uses a standard costing system.The standard cost card for the medallions follows:

DM.11 ounces of silver @ $49.16 per ounce$5.41

DL.25 hours @ $25.43 per hour6.38

VOH.34 MH @ $8.60 per MH2.92

FOH.34 MH @ $15.64 per MH5.32

Unit Cost$20.03

Silver is purchased from a mining operation in Argentina, La Tierrra.1 pound of grade B silver costs $50 and 1 pound of grade A silver costs $75.Purchases of 100 pounds or more are subject to a 10% discount.In addition, cash purchases (made in Argentia's currency) receive an additional 5% discount.La Tierra pays for all shipping at a rate of $5 per pound.Duties to import silver into Canada are about 15% of the declared value of each shipment. Lucky has decided to use grade B silver and to take advantage of both of the offered discounts.

Each finished medallion must weigh one tenth of a pound.First, any impurities in the silver must be removed.On average this results in the loss of about 5% of the weight of the silver.After that, the medallions are formed by melting the silver and pouring it into round forms.Spillage during this process amounts to about 3% of the molten silver.Finally the design must be stamped onto the face of the medallion.During this process, an average of 2% of the medallions break and must be discarded.

During the month of April, Lucky purchased 6,000 pounds of silver at a total cost of $295,300.3,900 pounds were used to produce 30,000 medallions.A total of 6,680 DL hours were worked on silver medallions.The associated cost was $191,240.Overhead is applied on the basis of machine hours.

1.Compute the DMPV.

2.Compute the DMQV.