Question 1 (25 marks)

After graduating from Yorkville University, you begin working as a senior manager for a major office cleaning company. Your boss has hired you at a salary of $127,000 per year because of your honesty and the ethical behaviour you demonstrated while you were studying at Yorkville. Your boss knows that you have strong skills in Managerial Accounting as you attended every class and never plagiarized or cheated on any of the Exams or Learning Activities.

Below is your companys static budget and actual results for the month of August. Your company has one experienced employee and two less experienced workers. It normally takes an employee two hours to clean an office. The company pays $35 per office to the experienced employee and $25 per office to the other less experienced employees. Wages are increased at the rate of inflation and are only awarded in December.

Office Cleaning Inc.

August 2020

Budget

Actual

Office Cleaned

240

260

Revenue

50,400

65,000

Variable Costs

Costs of Supplies

1,230

1,330

Labour

6,900

7,500

Total Variable Costs

8,130

8,830

Contribution Margin

42,270

56,170

Fixed Costs

5,000

5,000

Operating Income

37,270

51,170

Your boss has asked you to analyse the results and answer the following Four (4) questions.

1. How many offices, on average, did Office Cleaning Inc. budget for each employee? How many offices did each employee clean?

2. Prepare a Flexible Budget for August 2020

3. Compute the sales price variance and labour efficiency variance for both the experienced and less experienced employee.

4. What other information would you want Office Cleaning Inc. to gather if you wanted to improve operational efficiency?

QUESTION 2 (25 Marks)

After graduating from Yorkville University with a BBA, you are offered a job at Bombardeer Inc. which makes engines. You were hired directly out of school as you have a very good reputation as an honest and ethical student. You never plagiarize or cheat on exams and set a good example for other students with your strong work ethic.

Currently, Bombardeer manufactures all parts used in these engines (including starter assemblies). Your friend Sukhdeep, who also went to Yorkville University, (he did not graduate as he rarely attended classes, and had been written up for academic misconduct on several occasions), works as a sales representative at Trident Inc. and has proposed to sell your company starter assemblies that are used in Bombardeers engines.

The starter assemblies are currently manufactured in Plant 7 of Bombardeer Inc. The costs relating to the starter assemblies were as follows:

Direct materials700,000

Variable direct manufacturing labour 600,000

Manufacturing overhead900,000

Total2,200,000

Plant 7 manufactured 176,000 starter assemblies. The average cost for each starter assembly is $12.50.

You conduct further analysis and discover that 38% of manufacturing overhead is variable. Of the fixed portion, $300,000 is an allocation of general overhead that will remain unchanged for the company as a whole if production of the starter assemblies is discontinued. A further $250,000 of the fixed overhead is avoidable if production of the starter assemblies is discontinued. The balance of the current fixed overhead, $100,000, is the division managers salary. If Bombardeer discontinues production of the starter assemblies, the manager of Plant 7 will be transferred to Plant 2 at the same salary. This move will allow the company to save the $70,000 salary that would otherwise be paid to attract an outsider to this position.

You just found out that your friend Sukhdeep had been fired from his current job at Trident Inc. as he had continued to behave in an inappropriate manner. He would not show up to work and often mislead his customers (as he did his teachers at Yorkville). This conduct was not tolerated at Trident Inc., as this is a very reputable company

Required

1. Trident Inc, a reliable supplier, has offered to supply starter-assembly units at $10 per unit. Because this price is less than the current average cost of $12.50 per unit, the vice president of manufacturing is eager to accept this offer. On the basis of financial considerations alone, should Bombardeer accept the outside offer? Show your calculations.

2. How, if at all, would your response to requirement 1 change if the company could use the vacated plant space for storage and, in so doing, avoid $150,000 of outside storage charges currently incurred? Why is this information relevant or irrelevant?

QUESTION 3 (25 marks)

After being fired from Trident Inc. your friend Sukhdeep was having a difficult time finding employment. He wished he had been a better student by attending all his classes and not cheating on his exams and learning activities.

He knows that you have a strong work ethic and are a good business person as you obtained your BBA from Yorkville University and always behaved ethically throughout your studies.

He wants to go into partnership with you by opening a franchise and asked you for help in performing an analysis.

The opportunity involves a coffee shop franchise. Which will require a $650,000 buy in. Typical annual operating costs will be $200,000 (cash) and that the forecasted revenues will be $310,000 per year. The Franchisor demands a payment of 12% of Revenues for trademark and business model. You would like to earn at least 8% on this investment and will need to borrow the entire buy-in amount at an interest rate cost of 4%. You plan to conduct your analysis over a 15 year period and will not consider taxes at this time.

Required

1. Find the NPV and IRR of this investment, given the information above.

2. You are skeptical of Sukhdeeps revenue forecast of $310,000 per year. He did take Math in school and achieved a grade of 95%, however he never attended any classes and was only able to achieve this remarkable grade by plagiarizing from a classmate. You believe that a more realistic revenue forecast will be lower. Conduct a sensitivity analysis by finding the NPV and IRR (similar to Part 1 above) of this investment using $280,000 and $260,000 as the revenue forecast.

3. You believe that you can negotiate a lower payment to the franchisor and also think that if revenues are lower than $310,000 costs will decrease by $20,000. Repeat the same analysis as you did in Part 2 above (using $280,000 and $260,000 forecasted revenue) with annual operating costs of $180,000 and Franchise fee of 9% of revenues

4. Discuss how the sensitivity analysis will affect your decision to buy the franchise. Why dont you have to recalculate the IRR if you change the desired (discount) interest rate?

QUESTION 4 (25 marks)

You have decided not to go into a business partnership with your friend Sukhdeep as you are certain that he can not be trusted as he continues to behave in an unethical manner. Sukhdeep was a deceitful student often attempting to mislead his teachers at Yorkville. He has continued with this unethical behavior in his working life, and you are convinced he will not be successful.

On the other hand, your reputation as a strong Managerial Accountant as well as an honest and ethical individual has been recognized by other organizations and you have now been offered a position as senior director of a fashion company now earning $194,000 per year plus a 35% annual bonus.

Your new company Fashionista Inc. has two divisions Clothing and Make-up. Below are the financial figures for each division, and the company uses a weighted average cost of capital of 15%.

Clothing

Make-up

Assets

$2,300,000

5,700,000

Operating Income after tax

600,000

1,425,000

Your new boss has asked you to do the following

Required

1. Calculate the ROI and residual income for each division of Fashionista Inc, and briefly explain which division is performing better. What are the advantages and disadvantages of each measure?

2. The CEO of Fashionista has recently heard of another measure similar to residual income called EVA. The CEO has asked you to calculate EVA adjusted incomes of clothing and make-up and finds that the adjusted after-tax operating incomes are $548,000 and $1,047,200, respectively. Also, the clothing division has $320,000 of current liabilities, while the make-up division has only $230,000 of current liabilities. Using the preceding information, calculate EVA and discuss which division is performing better.

3. What nonfinancial measures could Fashionista use to evaluate divisional performance