HW

| March 14, 2016

1. (TCO 7) Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the Serving Pieces line of products takes up approximately 50% of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering Serving Pieces focus only on Snail Extraction Tool Sales. If the Serving Pieces are dropped, salaries and other direct fixed costs can be avoided and Snail Extraction Tool Sales would increase by 13%. Allocated fixed costs are assigned based on relative sales.

Snail Extraction Serving
Tools Pieces Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold 700,000 500,000 1,200,000
Contribution margin 500,000 300,000 800,000
Less direct fixed costs:
Salaries 175,000 175,000 350,000
Other 60,000 60,000 120,000
Less allocated fixed costs:
Rent 14,118 9,882 24,000
Insurance 3,529 2,471 6,000
Cleaning 4,117 2,883 7,000
Executive salary 76,470 53,530 130,000
Other 7,058 4,942 12,000
Total costs 340,292 308,708 649,000
Net income ($159,708) ($8,708) $151,000

Prepare an incremental analysis in good form to determine the incremental effect on profit of discontinuing the Serving Pieces line. (Points : 6)

Question 2.2. (TCO 4) Paschal’s Parasailing Enterprises has estimated that fixed costs per month are $110,500 and variable cost per dollar of sales is $0.45 (6 points).

What is the break-even point per month in sales?

What level of sales is needed for a monthly profit of $80,000?

For the month of August, Paschal’s anticipates sales of $450,000. What is the expected level of profit? (Points : 6)

Question 3.3. (TCO 6) Princess Cruise Lines has the following service departments: concierge, valet, and maintenance. Expenses for these departments are allocated to Mediterranean and transatlantic cruises. Expenses for the departments are totaled (both variable and fixed components are combined) and as follows.

Concierge $1,500,000

Valet $2,750,000

Maintenance $2,250,000

The sea miles logged are 6,000,000 for the Mediterranean and 18,000,000 for the transatlantic voyages.

Based upon the sea miles logged, allocate the service department costs (6 points). (Points : 6)

Question 4.4. (TCO 9) Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center in his lot. The building and equipment are estimated to cost $1,100,000, and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munster’s required rate of return for this project is 12%. Net income related to each year of the investment is as follows.

Revenue $450,000
Less:
Material Cost $60,000
Labor 100,000
Depreciation 110,000
Other 10,000 280,000
Income before taxes 170,000
Taxes at 40% 68,000
Net Income $102,000

(A) Determine the net present value of the investment in the service center. Should Munster invest in the service center?

(B) Calculate the internal rate of return of the investment to the nearest 0.5%.

(C) Calculate the payback period of the investment.

(D) Calculate the accounting rate of return. (Points : 8)

Question 5.5. (TCO 5) The following information relates to Vice Versa Ventures for calendar year 20XX, the company’s first year of operations.

Units produced 20,000
Units sold 17,000
Selling price per unit $30
Direct material per unit $5
Direct labor per unit $5
Variable manufacturing overhead per unit $2
Variable selling cost per unit $3
Annual fixed manufacturing overhead $160,000
Annual fixed selling and administrative expense $80,000

(a) Prepare an income statement using full costing.

(b) Prepare an income statement using variable costing. (Points : 8)

Question 6.6. (TCO 8) Leekee Shipyards has a new barnacle-removing product for ocean-going vessels. The company invests $1,000,000 in operating assets and plans to produce and sell 300,000 units per year. Leekee wants to make a return on investment of 20% each year. Leekee needs to know what price to charge for this product.

Use the absorption costing approach to determine the markup necessary to make the desired return on investment based on the following information.
Per Unit Total
Direct Materials $2.00
Direct Labor $1.50
Variable Manufacturing Overhead
$1.00
Fixed Manufacturing Overhead $100,000
Variable Selling and Administrative Expense $0.10
Fixed Selling and Administrative Expense $100,000
(Points : 6)

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