Final exam review problems for ACC 212
Problem No. 1
Hits Video is considering installing tanning beds in its video rental stores. The beds cost $235,000 and have an estimated six-year useful life. Ignore income taxes. The following pro forma income statement is provided:
Tanning bed revenue$100,000
Less expenses:
Bulbs, supplies, etc.$20,000
Insurance 10,000
Depreciation 24,000
Maintenance 6,000
60,000
Net income$40,000
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Required.
(1.) Hits Video's cost of capital is 16%. Compute the unadjusted rate of return on initial investment. Would you recommend that the beds be purchased? Why or why not?
(2.) Compute the internal rate of return (using trial and error, with net present value). Is this a good project, from that perspective?
Problem No. 2
Zelda Company is considering a project that requires an initial investment of $500,000. Its incremental cash flows are expected to be $153,000 per year for five years. The project would be depreciated on a straight-line basis over 5 years with a $20,000 expected salvage value. The company has a stated policy that all projects must return their required investment dollars within the first 75% of the project's life. The cost of capital is 10%.
Required.
(1.) Compute the project's net present value:
(2.) Compute the project's payback period.
(4.) Should the project be accepted? Why or why not?
Problem No. 3
Contribution margin income statements for two local landscapers are provided below:
Action Lawn Southern Lawn
Revenue $100,000 $100,000
Less variable costs 40,000 60,000
Contribution margin$ 60,000 $ 40,000
Less fixed costs 30,000 10,000
Operating income$ 30,000 $ 30,000
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Required.
(1.) Compute each company's operating leverage at the $100,000 sales level.
(3.) Using the operating leverage measures computed in requirement 1, determine the increase in each company's net income (percentage and amount) if each company experiences a 10 percent increase in sales.
(3.) Assume that sales are expected to continue to increase for the foreseeable future, which company probably has the better cost structure? Why?
Problem No. 4
Harrell Company produces and sells an electric saw. Its current sales are 9000 units which generate total revenues of $225,000. The company's accountant provided the following cost information:
Manufacturing costs:$50,000 + 30% of sales
Selling costs:$12,000 + 10% of sales
Administrative costs:$19,000 + 6% of sales
Required.
(1.) Compute the company's current net income.
(2.) Compute the product's break-even point.
(3.) Compute the amount of revenue necessary to earn $121,500 in profit.
(4.) Compute the company's current margin of safety ratio.
(5.) Should the company accept a proposal that increases sales by 20% and total fixed costs by 35%.
Problem No. 5
Kipper Company manufactures and sells two kinds of ceramic fixtures. The same production equipment is used for both fixtures. The company's most recent financial statements are shown below:
Standard DivisionCustom Division
Unit sales 10,0002,000
Sales$800,000 $200,000
Less: cost of goods sold:
Unit-level production costs 350,000 120,000
Depreciation production equipment 150,000 50,000
Gross margin $300,000$ 30,000
Less: operating expenses:
Unit-level selling and administrative 80,000 20,000
Corporate-level facility costs (fixed) 25,000 15,000
Net income (loss)$195,000($ 5,000)
Required. Compute the impact on profit if the Custom Division is eliminated.
Problem No. 6
Stringer Audio Systems sells and installs car stereo systems. Ken Stringer needs to prepare a purchases budget for the first quarter of 2008. The company's sales budget for the first quarter is provided below:
JanuaryFebruaryMarch
Budgeted Sales$90,000$98,000$104,000
Based on past experience, Ken expects the company's cost of goods sold to equal 80% of sales. Furthermore, he believes that the ideal ending inventory balance each month should be $4,000 plus 20% of the current period's cost of goods sold. There was a $20,000 inventory balance on December 31, 2000. The company makes all purchases on account and pays 60% of accounts payable in the month of purchase and the remaining 40% in the next month. Accounts payable stood at $18,000 at December 31, 2000.
Required.
(1.) Prepare an inventory purchases budget for January, February, and March of 2008.
(2.) Prepare a schedule of cash payments for inventory for January, February, and March of 2008.
Problem No. 7
Ceramics R' Us produces a number of products, including an insulating device for computer power supplies. The firm, which began operations at the beginning of the current year, uses a standard cost system. The standard costs for an insulating device produced for personal computers are provided below:
Direct material (0.5 lb. @ $1.00) $ 0.50
Direct labor (1 hr. @ $10.00) 10.00
Variable overhead (1 hr. @ $1.00) 1.00
Fixed overhead (1 hr. @ $0.50) .50
$12.00
The $0.50 fixed overhead rate is based on total budgeted fixed overhead costs of $17,000. There were no changes in any inventory account during the period. The company produced and sold 35,000 units at the following costs:
Direct materials (18,000 lbs.)$ 17,280
Direct labor (36,000 hrs.) 374,400
Variable factory overhead 34,500
Fixed factory overhead 15,000
Required.
(1.)Compute and label as Favorable (F) or Unfavorable (UF) the following flexible budget variances:
(a.) Direct materials price variance (b.) Direct materials quantity variance
(c.) Direct labor rate variance (d.) Direct labor efficiency variance
(e.) Total variable overhead (spending) variance
(f.) Fixed overhead spending variance
(g.) Fixed overhead volume variance
(2.) Comment on the firm's performance.
Problem No. 8
Mexicalli Company custom produces specialty souvenir products with a Mexican theme. During 2001, the current period, the company completed the following transactions. Post to the job sheets.
1. Record in general journal form:
(a.) Purchased $10,000 of raw materials paying cash.
(b.) Applied direct material to production as follows:
Job NumberDirect Material
Job 1$5,000
Job 2 2,500
Job 3 1,000
Total$8,500
.
(c.) Paid direct labor costs as follows:
Job NumberDirect Labor
Job 1$ 5,000
Job 2 4,000
Job 3 3,000
Total$12,000
(d.) Paid cash for various actual factory overhead costs, $20,000.
(e.) Applied factory overhead to production using a predetermined overhead rate
of $1.50 per direct labor dollar.
(f.) Completed Job 1.
(g.) Job 1, consisting of 2,000 units was sold for $25,000.
(h.) Paid $500 for selling and administrative expenses.
(i) Closed out over or under-applied overhead
Job 1 / Direct Materials / Direct labor / OverheadTotal
Job 2 / Direct Materials / Direct labor / Overhead
Total
Job 3 / Direct Materials / Direct labor / Overhead
Total
(2.) Prepare a schedule of cost of goods manufactured and sold assuming there were no beginning inventories.
(3.) Compute the amount of gross profit earned on Job 1.
Problem No. 9
Crown Company has two departments, assembly and finishing. Consider the following data for the Assembly Department:
Units / Percent complete / Direct material / Direct labor / Overhead / TotalBeginning work in process / 1,000 / 90% / $2,475
Started during the month / 9,000
Completed during the month / 7,500
Ending work in process / 2,500 / 60%
Costs added this month / $11,700 / $6,750 / $4,050 / $22,500
Required.
(1.) Compute the number of equivalent units for the Assembly Department.
(2.) Calculate the cost per equivalent unit.
(3.) Compute the amount of costs that should be transferred to the Finishing Department.
(4.) Compute the amount of costs that should be assigned to the 2,500 units in ending inventory.
Problem No. 10
- From the ratio information given below, fill in the missing items on the chart below. Label each ratio as P (profitability), L (liquidity),
S (solvency) and SM (stock market). Also, under Company trend, indicate if the trend is improving (I) or worsening (W) from last year to this year. Then under Industry Comparison, indicate whether this company’s situation in the current year is better than (B) or worse than (W) the average company in the industry.
- Make a general statement about the company’s profitability, liquidity, solvency and stock market results. Is this a good company to buy stock in or to lend money to:
a.
No. / Name of ratio / Last year / This year / IndustryAverage
This year / Type P,L,S SM / Com-pany Trend / Industry Com-
Parison
1 / Inventory turnover / 5X / 6X / 4X
2 / Debt Ratio / 45% / 55% / 50%
3 / Dividend yield / 8% / 5% / 6%
4 / Net Margin / 10% / 6% / 8%
5 / Current Ratio / 2.5 to 1 / 1.8 to 1 / 1.7 to 1
6 / Return on Asset / 9% / 11% / 10%
7 / # of times interest earned / 7X / 7X / 6X
8 / Return on Equity / 15% / 14% / 13%
9 / Accounts Rec. Turnover / 12X / 9X / 14X
10 / Quick Ratio / 1 to 1 / .5 to 1 / .9 to 1
11 / Price-Earnings ratio / 16X / 10X / 16X
12 / Earnings per share / 1.20 / .80 / 1.10