Tennessee Company is geographically segmented into two divisions - East and West. The company's income statement for the last month is presented below:

Total Company % of sales west % of sales East % of sales

Sales $8,500,000 $3,825,000

Variable expenses 3,395,750 1,636,250 1,759,500

Contribution margin $5,104,250 60% $3,038,750 65% $2,065,500 54%

Total Fixed expenses 3,825,000 45% 1912500 41% 1912500 50%

Net income $1,279,250 15% $1,126,250 24% $153,000 4%

Management is concerned with the reported results, especially the East Division's net income results in relation to the net income results of the West Division. They have asked you to examine the EastDivision in relation to West Division and further to examine the East Division to determine if any of the three product lines are causing the low level of profitability in that division.

You have been provided the following additional information:

Of the total fixed expenses reported above, management has determined that 30% are traceable the East Division, 55% are traceable to the West Division. The remaining fixed expenses are common to both divisions.

The East provided the following respecting the three product lines:

Product Line

Cola Fruit Drinks Flavoured Water

Sales $1,147,500 $1,721,250 $956,250

Traceable fixed expenses

Administration 103,275 103,275 51,638

Advertising 255,606 139,421 69,711

Depreciation 123,930 154,913 30,983

Variable Expenses 351,900 615,825 791,775

The remaining fixed costs for the East Division are common to all product lines.

Required:

1.Prepare segmented income statements for:

a.total company broken down between the two divisions,

b.the East Division broken down by product line.

Show both amount and percent columns for all information.

2.What observations and recommendations would you make to management based on your analysis?Be sure to integrate your analysis.

QUESTION II - LO 7 - Cash Budget(12 Marks)

Note to students - as this is an open-book assignment (as opposed to a Final exam), students will need to develop the budgets - template is not provided.

Cummings Inc.,has been accumulating operating data in order to prepare annual budget.They have determined that a minimum cash balance of $150,000 is required.Any required borrowings take place in increments of $1,000 with annual interest of 8%.Repayment of borrowed funds is also made in increments of $1,000.Assume that borrowings are made on the first day of the month in which the cash is required, and the repayments are made on the last day of a month in which cash is available.On March 1, the cash balance will be$320,000.

Details regarding sales for the first six months of the year are as follows:

January $1,200,000

February 1,300,000

March 1,400,000

April 1,250,000

May 1,440,000

June 1,600,000

Twenty percent (20%) of the above sales are cash sales and 80% are credit sales.

Accounts receivable collection experience is 30% the month of the sale, 40% the month following and 25% the second month following the sale.The remaining receivables are deemed uncollectable for planning purposes.

Budgeted inventory purchases are as follows:

January $480,000

February 520,000

March 560,000

April 500,000

Cummings Inc. pays 50% of their inventory purchases the month of the purchase and 50% the following month.

Budgeted expenses for March and April are as follows:

March April

Advertising 72,000 60,000

Payroll 648,000 518,400

Depreciation 110,000 110,000

Insurance 120,000

Property taxes 80,000

A new truck was required to replace their aging truck.The new truck costing $40,000 was received in March and paid for in cash.They were successful in finding a buyer for their old truck in April and received $15,000 cash.

REQUIRED:

Prepare cash budget for Cummings Inc. for the months ofMarch and April.Include the calculations that you used to arrive at your entry

QUESTION III- Master budget(11 marks)

Note to students - as this is now an open-book assignment, (as opposed to a Final exam), students will need to develop the budgets - template is not provided.

U Balance Corporation manufactures balance bikes for toddlers.

Each bike requires 2 tires at a cost of $4.00 per tire, 0.5 direct labor hours and 3 machine hours. Production line works are paid $13.00 per hour. The company has estimated total manufacturing overhead of $400,000 for the year and allocates overhead on the basis of machine hours. Estimated machine hours total 80,000 for the period.The company records $5,000 in depreciation expense each month.

Production peaks in November as the company prepares for the gift giving season that occurs in December. The company has planned to produce the following units for the last four months of the year and January of the next year:

September 1,300

October 1,500

November 3,000

December 2,000

January 500

Desired ending inventory of the tires used on the balance bikes is 25% of the next month's production needs.

1.Create direct materials budget for the last quarter of the year for tires used on the balance bikes. At the bottom of the budget, indicate the total cost to purchase the tires.

2.Create direct labor budget for the last quarter of the year.

3.Calculate the predetermined overhead rate for manufacturing overhead.

4.Prepare manufacturing overhead budget for the last quarter of the year.

QUESTION IV - Variance Analysis(8 Marks)

The Litton Company has established standards as follows:

Direct materials: 3 kg @ $4/kg = $12 per unit

Direct labour: 2 hours @ $8 per hour = $16 per unit

Variable mfg overhead: 2 hours @ $5 per hour = $10 per unit

Actual production figures for the past year are given below.The company records the materials price variance when materials are purchased.

Units produced 600

Direct material used 2,000

Direct material purchased (3,000 kg) $11,400

Direct labour cost (1,100 hrs) $9,240

Variable MOH cost incurrecc $5,720

The company applies variable manufacturing overhead to products on the basis of direct labour hours.

REQUIRED:

1.Compute and name the relevant variances for direct material, direct labour, and variable manufacturing overhead.

2.Which two variances (be specific) would you bring to the attention of management? Explain the impact on profitability.What could have possibly caused these variances?

QUESTION V(5 Marks)

Tony Hawk Inc. (Hawk) is a wholesale distributor supplying moderately priced sporting equipment to large chain stores.Hawk manufacturers and sells 20,000 tackle boxes annually, making full use of its direct labour capacity at available workstations.Following are the selling price and costs associated with Hawk's tackle boxes:

Selling price per box $86.00

Costs per box:

Direct material $17.00

Direct labour 18.75

Fixed manufacturing overhead:

Depreciation on equipment ($65,000 / 20,000) 3.25

Production supervisor's salary ($185,000 / 20,000) 9.25

Selling and administrative costs 17.00 65.25

Profit per box $20.75

The company has looked into the possibility of outsourcing the tackle boxes.A supplier of high quality products has approached Hawk and would be able to provide up to 20,000 tackle boxes per year at a price of $54 per box delivered to Hawk's facility.

The selling and administrative costs include $120,000 fixed cost for distribution of the product.Every unit of product that Hawk sells, whether outsourced or manufactured is allocated $6 of this fixed distribution cost.The remainder of the selling and administrative cost would be saved if the tackle boxes were outsourced.

REQUIRED:

Determine whether Tony Hawk Inc. should accept the supplier's offer to provide 20,000 tackle boxes at $54 per box.

QUESTION VI(7 Marks)

Holt Company makes three products in a single facility. Data concerning these products follow:

Products

A B C

Selling price per unit $67.90 $57.70 $43.90

Direct materials 12.10 10.30 8.60

Direct labour 14.10 8.00 6.80

Variable manufacturing overhead 2.60 2.20 1.80

Variable selling cost per unit 2.50 2.20 2.50

Mixing minutes per unit 2.70 3.30 4.70

Monthly demand in units 1,000 3,000 3,000

The mixing machines are potentially the constraint in the production facility. A total of 25,800 minutes are available per month on these machines.Direct labour is a variable cost in this company.

Required:

1.How many minutes of mixing machine time would be required to satisfy demand for all four products?

2.How much of each product should be produced to maximize net operating income? (Round off to the nearest whole unit.)

QUESTION VII(4 Marks)

Jimbob Co. is considering replacing its existing fleet of trucks with new trucks. Estimates for the next three years are as follows:

Old trucks New trucks

Average annual sales $500,000 $520,000

Annual operating costs 100,000 75,000

Original costs of old trucks 100,000 --

Remaining book value of old trucks 10,000 --

List price of new trucks -- 120,000

Remaining life 3 years --

Expected life -- 3 years

Disposal value now $10,000 ---

Disposal value in 3 years $ nil $ nil

Required:

Based strictly on the financial information presented above, should the

company replace the old trucks now? (Ignore time value of money).