Accounting -Outdoors Furniture, Inc. annually produces and sells 100,000 Umbrellas (units)

| January 31, 2017

Question
Question 1

Outdoors Furniture, Inc. annually produces and sells 100,000 Umbrellas (units), incurring the following results:

Sales

$59 per unit

Materials

$3.80 per unit

Labor

$2.20 per unit

Overhead

$1.50 per unit

Selling Expenses

$1.40 per unit

Administrative Expenses

$ .80 per unit

A new customer has offered to purchase an additional 10,000 Umbrellas, at $38.50 each.

If Outdoors Furniture, Inc. decided to produce the additional 10,000 units:

Additional materials at $5.50 per unit and additional labor at $2.20 per unit would be incurred
Overhead costs would increase by $5,825
Selling expenses would increase by $2,200
Administrative expenses would increase by $1,075
Plant capacity is not a concern for Outdoors Furniture, Inc. It has the excess capacity to produce the additional units. Ignore income taxes.

Should Outdoors Furniture, Inc. accept OR reject this order? Show all work.

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Question 2

Service Departments:

Costs Incurred

Human Resources

$ 83,000

40 sq. ft

3 employees

Engineering

$225,000

20 new hires

16 employees

Quality Assurance

$ 95,000

6 new hires

85 sq. ft.

Production Departments:

Cutting

$ 12,000

15 new hires

21 sq. ft.

22 employees

Drilling

$ 6,000

5 new hires

16 sq. ft

8 employees

Assembly

$ 26,000

8 new hires

42 sq. ft.

35 employees

Human Resource costs are allocated based on new hires; Engineering costs are allocated based on square footage; Quality Assurance costs are allocated based on number of employees

Rank the service departments based on the percentage of their services provided to the production departments. Use this ranking to allocate the support departments’ costs to the operating departments based on the step-down method. Show all allocations and totals to each department.

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Question 3

Building, Inc. is contemplating purchasing additional warehouse space, at a cost of $15,000.

If the purchase is made, Building, Inc. can improve its production and expects profits to increase by $15,200.

Building, Inc. has Assets of $100,000. Currently, Building, Inc. has a ROI of 25% and a Required Rate of Return of 15%.

Building, Inc. evaluates itself based on Return on Investment (ROI), and will use the ROI calculation to make a decision. Should Building, Inc. purchase the additional warehouse space? Why Or Why not? Show your work.

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Question 4

Assets $ 200,500

Liabilities 65,000

Operating Income 650,000

XYZ Manufacturer has a required rate of return of 18 percent. The Portfolio Manager of XYZ’s Investment Division has presented an investment opportunity which is expected to yield 23%. The investment will cost $22,000.

Compute the following Residual Income calculations:

(a) XYZ’s Residual Income before the new investment

(b) Residual Income from the new investment

(c) XYZ’s Residual Income after the new investment

(d) If XYZ evaluates whether to accept a proposed investment based on Residual Income, should the company accept its Portfolio Manager’s proposal to make this investment?

4a. 650,000-(18%*200,500)=613,910
b.
c.

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