Which of the following is an example of the planning function of a budget?

A budget demands integrated input from different business units and functions.

Employees are motivated to achieve the goals set by the budget.

Budget figures are used to evaluate the performance of managers.

The budget outlines a specific course of action for the coming period.

Opportunity cost(s):

of a resource with excess capacity is zero

should be maximized by organizations

are recorded as an expense in the accounting records

are most important to financial accountants

Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from a supplier. Which of the following is relevant to this decision?

the potential uses of the facilities that are currently used to manufacture the component

the insurance on the manufacturing facility which will continue regardless of the decision

allocated corporate fixed costs which would have to be allocated to other products if the component is no longer manufactured

the cost of the equipment that is currently being used to manufacture the component

Which of following statements is true of short-term decision making?

Fixed costs and variable costs must be analyzed separately.

All costs behave in the same way.

Unit manufacturing costs are variable costs.

All costs involved in a decision are considered relevant.

A company is analyzing its month-end results by comparing it to both static and flexible budgets. During the previous month, the actual selling price was higher than the expected price as per the static budget. This difference results in a(n):

favorable flexible budget variance for sales revenues.

favorable sales volume variance for sales revenues.

unfavorable flexible budget variance for sales revenues.

unfavorable sales volume variance for sales revenues.

When replacing an old asset with a new one, the original purchase price of the old asset represents:

relevant cost.

differential costs.

opportunity cost.

sunk cost.

Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $300. Polynesia produces and sells 5,500 of them per year. Cost data are as follows:

Variable manufacturing	$100	per unit
Variable marketing	$15	per unit
Fixed manufacturing	$280,000	per year
Fixed marketing & admin	$150,000	per year

The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats. He proposes a sale of 40 units at a special price of $150 per unit. He says it will not cannibalize the company's regular sales and is a one-time transaction. It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way. The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,500 to operating income. Based on the president's criteria, what will Polynesia decide to do? (show the calculation to support this decision)

Doro Fill Company fabricates inexpensive automobiles for sale to 3rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows:

Volume 800 units per month

Variable cost per unit $7 per unit

Fixed costs $15,000 per month

A factory in Indonesia has offered to supply Dora Fill with ready-made units for a price of $10 each. Assume that Doro Fill's fixed costs are unavoidable, but the company could use the vacated production facilities to earn an additional $5,000 of profit per month. Calculate the total relevant costs for both the in-house and outsourcing options.

In your words, describe a Flexible Operating Budget and a Static Budget and the major differences between them.

Kapital Inc. has prepared the operating budget for the first quarter of 2015. They forecast sales of $50,000 in January, $60,000 in February, and $70,000 in March. Variable and fixed expenses are as follows:

Variable: Power cost (40% of Sales)

Miscellaneous expenses: (5% of Sales)

Fixed: Salary expense: $8,000 per month

Rent expense: $5,000 per month

Depreciation expense: $1,200 per month

Power cost/fixed portion: $800 per month

Miscellaneous expenses/fixed portion: $1,000 per month

Calculate total selling and administrative expenses for the month of January & February.

McPherson Company is facing a $6 increase in the variable cost of producing one of its products for the upcoming year. Because of this situation, the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time. The price increase will lower sales volume, but the other changes may help the company maintain its profit margins. McPherson has provided the following information regarding the current year results and the proposal made by the sales manager:

	Current Year	Proposal
Unit sales	27,000	18,000
Sales price per unit	$48	$58
Variable cost per unit	$30	$36
Fixed cost	$76,000	$96,000

Relative to the current year, the sales manager's proposal will do what to Operating Income? (show calculations to support this)

Evans Company has estimated the following amounts for its next fiscal year:

Total fixed expenses	$832,500
Sale price per unit	40
Variable expenses per unit	25

If the company spends an additional $30,000 on advertising, sales volume would increase by 2,500 units. What effect will this decision have on the operating income of Evans? (show calculations)

Moylan Company has provided the following information:

Sales	$777,000
Variable expenses	504,000
Fixed expenses	212,000

What will be the change in variable expenses if the sales volume increases by 10%?

Week 7 Homework 22-23 Multiple choice (5 pts each) (highlight or clearly mark your answer) 1) Which a. b. c. d. of the following is an example of the planning function of a budget? A budget demands integrated input from different business units and functions. Employees are motivated to achieve the goals set by the budget. Budget figures are used to evaluate the performance of managers. The budget outlines a specific course of action for the coming period. 2) Opportunity cost(s): a. of a resource with excess capacity is zero b. should be maximized by organizations c. are recorded as an expense in the accounting records d. are most important to financial accountants 3) Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from a supplier. Which of the following is relevant to this decision? a. the potential uses of the facilities that are currently used to manufacture the component b. the insurance on the manufacturing facility which will continue regardless of the decision c. allocated corporate fixed costs which would have to be allocated to other products if the component is no longer manufactured d. the cost of the equipment that is currently being used to manufacture the component 4) Which a. b. c. d. of following statements is true of short-term decision making? Fixed costs and variable costs must be analyzed separately. All costs behave in the same way. Unit manufacturing costs are variable costs. All costs involved in a decision are considered relevant. 5) A company is analyzing its month-end results by comparing it to both static and flexible budgets. During the previous month, the actual selling price was higher than the expected price as per the static budget. This difference results in a(n): a. favorable flexible budget variance for sales revenues. b. favorable sales volume variance for sales revenues. c. unfavorable flexible budget variance for sales revenues. d. unfavorable sales volume variance for sales revenues. 6) When replacing an old asset with a new one, the original purchase price of the old asset represents: a. relevant cost. b. differential costs. c. opportunity cost. d. sunk cost. Problems (10 pts each) (please show your work for partial credit) 1) Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $300. Polynesia produces and sells 5,500 of them per year. Cost data are as follows: Variable manufacturing Variable marketing Fixed manufacturing Fixed marketing & admin $100 $15 $280,000 $150,000 per per per per unit unit year year The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats. He proposes a sale of 40 units at a special price of $150 per unit. He says it will not cannibalize the company's regular sales and is a one-time transaction. It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way. The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,500 to operating income. Based on the president's criteria, what will Polynesia decide to do? (show the calculation to support this decision) 2) Doro Fill Company fabricates inexpensive automobiles for sale to 3rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: Volume 800 units per month Variable cost per unit $7 per unit Fixed costs$15,000 per month A factory in Indonesia has offered to supply Dora Fill with ready-made units for a price of $10 each. Assume that Doro Fill's fixed costs are unavoidable, but the company could use the vacated production facilities to earn an additional $5,000 of profit per month. Calculate the total relevant costs for both the in-house and outsourcing options. 3) In your words, describe a Flexible Operating Budget and a Static Budget and the major differences between them. 4) Kapital Inc. has prepared the operating budget for the first quarter of 2015. They forecast sales of $50,000 in January, $60,000 in February, and $70,000 in March. Variable and fixed expenses are as follows: Variable: Power cost (40% of Sales) Miscellaneous expenses: (5% of Sales) Fixed: Salary expense: $8,000 per month Rent expense: $5,000 per month Depreciation expense: $1,200 per month Power cost/fixed portion: $800 per month Miscellaneous expenses/fixed portion: $1,000 per month Calculate total selling and administrative expenses for the month of January & February. 5) McPherson Company is facing a $6 increase in the variable cost of producing one of its products for the upcoming year. Because of this situation, the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time. The price increase will lower sales volume, but the other changes may help the company maintain its profit margins. McPherson has provided the following information regarding the current year results and the proposal made by the sales manager: Unit sales Sales price per unit Variable cost per unit Fixed cost Current Year 27,000 $48 $30 $76,000 Proposal 18,000 $58 $36 $96,000 Relative to the current year, the sales manager's proposal will do what to Operating Income? (show calculations to support this) 6) Evans Company has estimated the following amounts for its next fiscal year: Total fixed expenses Sale price per unit Variable expenses per unit $832,500 40 25 If the company spends an additional $30,000 on advertising, sales volume would increase by 2,500 units. What effect will this decision have on the operating income of Evans? (show calculations) 7) Moylan Company has provided the following information: Sales Variable expenses Fixed expenses $777,000 504,000 212,000 What will be the change in variable expenses if the sales volume increases by 10%? Multiple choice (5 pts. each) (highlight or clearly mark your answer) 1) Which of the following is an example of the planning function of a budget? a. A budget demands integrated input from different business units and functions. b. Employees are motivated to achieve the goals set by the budget. c. Budget figures are used to evaluate the performance of managers. d. The budget outlines a specific course of action for the coming period 2) Opportunity cost(s): a. of a resource with excess capacity is zero b. should be maximized by organizations c. are recorded as an expense in the accounting records d. are most important to financial accountants 3) Gnome Company is trying to decide whether to continue to manufacture a particular component or to buy the component from a supplier. Which of the following is relevant to this decision? a. the potential uses of the facilities that are currently used to manufacture the component b. the insurance on the manufacturing facility which will continue regardless of the decision c. allocated corporate fixed costs which would have to be allocated to other products if the component is no longer manufactured d. the cost of the equipment that is currently being used to manufacture the component 4) Which of following statements is true of short-term decision making? a. Fixed costs and variable costs must be analyzed separately. b. All costs behave in the same way. c. Unit manufacturing costs are variable costs. d. All costs involved in a decision are considered relevant 5) A company is analyzing its month-end results by comparing it to both static and flexible budgets. During the previous month, the actual selling price was higher than the expected price as per the static budget. This difference results in a (n): a. favorable flexible budget variance for sales revenues. b. favorable sales volume variance for sales revenues. c. unfavorable flexible budget variance for sales revenues. d. unfavorable sales volume variance for sales revenues. 6) When replacing an old asset with a new one, the original purchase price of the old asset represents: a. relevant cost. b. differential costs. c. opportunity cost. d. sunk cost. Problems (10 pts each) (please show your work for partial credit) 1) Polynesia Company manufactures sonars for fishing boats. Model 70 sells for $300. Polynesia produces and sells 5,500 of them per year. Cost data are as follows: Variable manufacturing $100 Variable marketing per unit $15 Fixed manufacturing $280,000 Fixed marketing & admin per unit per year $150,000 per year The sales manager says he has an opportunity to pitch a special sale to a new Canadian fishing company that is outfitting new boats. He proposes a sale of 40 units at a special price of $150 per unit. He says it will not cannibalize the company's regular sales and is a one-time transaction. It will require the normal amount of variable costs, both marketing and manufacturing, but will not impact fixed costs in any way. The president of the company has some reservations, but finally agrees to make the deal if and only if it adds a minimum of $1,500 to operating income. Based on the president's criteria, what will Polynesia decide to do? (show the calculation to support this decision) Answer: Total Variable cost : Variable manufacturing Variable marketing Total $100 per unit 15 per unit $115 per unit Contribution for special sale = Selling price per unit - variable cost = $150 - $115 =$35 per unit Contribution = unit of sales * contribution per unit = 40 * 35 =$1400 Since the President of the company made a deal that if it contributes a minimum of $1500 to operating income, the Polynesia will have to drop the idea. 2) Doro Fill Company fabricates inexpensive automobiles for sale to 3rd world countries. Each auto includes one wiring harness, which is currently made in-house. Details of the harness fabrication are as follows: Volume 800 units per month Variable cost per unit $7 per unit Fixed costs per month $15,000 A factory in Indonesia has offered to supply Dora Fill with ready-made units for a price of $10 each. Assume that Doro Fill's fixed costs are unavoidable, but the company could use the vacated production facilities to earn an additional $5,000 of profit per month. Calculate the total relevant costs for both the in-house and outsourcing options. Relevant costs for in house and outsourcing options In- house Variable cost 800 *7 = $5,600 outsourcing options Cost 800*10 = $8000 Additional profit = 5000 Total relevant cost $5600 total relevant cost = $3000 3) In your words, describe a Flexible Operating Budget and a Static Budget and the major differences between them Flexible Budget as the name suggests is a budget which is flexible to changes in the volume of activity and thus accordingly makes changes in its expenses. Static budget is the budget which does not change with the volume of activity. The other name for it is Master Budget. Difference 1) The main difference between the two budgets is that Static budget remains same, it is set at the start of the year and is then compare to actual results. Flexible budget on the other hand is not rigid; it changes according to the actual results Thus static budget does not change with the actual volume of the output achieved whereas a flexible budget changes with the level of activity. 2) Static budget cannot ascertain costs correctly in case of any change in circumstances. Flexible budget can easily ascertain costs at different level of activities. 3) Static budget are generally prepared assuming that conditions will not change whereas flexible budget considers changes in operational aspect of business. 4) Static budget has limited application and is ineffective as a tool for cost control whereas flexible budget has a wide application as effective tool for cost control. 5) Static budget is prepared without classifying the costs according to their valuable nature. Flexible budget is prepared by classifying the costs according to their variable nature. 4) Kapital Inc. has prepared the operating budget for the first quarter of 2015. They forecast sales of $50,000 in January, $60,000 in February, and $70,000 in March. Variable and fixed expenses are as follows: Variable: Power cost (40% of Sales) Miscellaneous expenses: (5% of Sales) Fixed: Salary expense: $8,000 per month Rent expense: $5,000 per month Depreciation expense: $1,200 per month Power cost/fixed portion: $800 per month Miscellaneous expenses/fixed portion: $1,000 per month Calculate total selling and administrative expenses for the month of January & February. Calculation of selling and administrative expenses for the month of January and February Items Sales Jan $50,000 Feb $60,000 Variable: power cost (40% of sales) Misc. exp (5% of sales) $20,000 $24,000 2,500 3,000 Fixed: Salary exp 8,000 8,000 Power cost 800 800 Misc. exp 1000 1000 Depreciation 1200 1200 Rent expense 5000 5000 Total $38,500 $43,000 5) McPherson Company is facing a $6 increase in the variable cost of producing one of its products for the upcoming year. Because of this situation, the sales manager has made a proposal to increase the selling price of the product while increasing the advertising budget at the same time. The price increase will lower sales volume, but the other changes may help the company maintain its profit margins. McPherson has provided the following information regarding the current year results and the proposal made by the sales manager: Current Year Unit sales Proposal 27,000 18,000 Sales price per unit $48 $58 Variable cost per unit $30 $36 Fixed cost $76,000 $96,000 Relative to the current year, the sales manager's proposal will do what to Operating Income? (Show calculations to support this) Operating income for current year Unit sales Sales per unit Sales Less: variable cost Fixed cost Operating income 27,000 48 $1,296,000 810,000 76,000 $410,000 Proposal operating income Unit sales Sales price per unit 18,000 58 Sales $1044, 000 Less: Variable @36 648,000 Fixed cost 96,000 Operating income $300,000 Effect of proposal, it will decrease operating income by $110,000 ($410,000 - $300,000) 6) Evans Company has estimated the following amounts for its next fiscal year: Total fixed expenses $832,500 Sale price per unit 40 Variable expenses per unit 25 If the company spends an additional $30,000 on advertising, sales volume would increase by 2,500 units. What effect will this decision have on the operating income of Evans? (Show calculations) Contribution from increase in units = (SP - variable cost)* 2500 units = ($40 - $25) 2500 = $37,500 For additional sale it needs to spend $30,000 on advertising, thus effect on operating income = $37,500 - $30,000 =$7,500 increase in income 7) Moylan Company has provided the following information: Sales $777,000 Variable expenses 504,000 Fixed expenses 212,000 What will be the change in variable expenses if the sales volume increases by 10%? Since variable cost is directly proportional to sales, an increase of 10% sales will also increase the variable expense by 10% Variable exp are $504,000/777,000 *100 =64.86486 of sales Now when sales increase by 10% it will be 777,000*110 %=854,700 Variable cost will be $854,700 * 64.86486% =$554,400 Or $504,000 @110% = $554,400