Faculty of Commerce
Department of Accounting
Advanced Managerial Accounting.
Summer Term Final Exam (2014/2015).
Master for Accounting and Finance
Master of Business Administration.
Please read the following instructions before answering the questions:
(a) Time Allowed for this exam: Three hours.
(b) Answer Eight Questions only.
(c) For each Question 6.25 Mark.
(d) Use the provided answer book.
(e) Insert your name and student No. below.
Student Name……………………………………………………
Student No………………………………………………………
Prof. Salem Abdalla Helles
25 Aug., 2015
Question No. (1)
A summary of the budgeted income statement of Port Gaza Gift Shop follows:
Net revenue / $ 800,000Less Expenses, including $ 400,000 of fixed expenses / 880,000
Net loss / $ (80,000)
The manger believes that an additional outlay of $200,000 for advertising will increase sales substantially.
1. At what sales volume in dollars will the shop break even after spending $200,000 on advertising?
2. What sales volume in dollars will result in a net profit after tax of $40,000 after spending the $200,000 on advertising? While tax rate 20%.
Question No. (2)
A recent directive of ME Manufacturing, had instructed each department to cut its costs by 10%. The traditional functional budget for the shipping and receiving department was as follows:
Salaries, 4 employees @ $42,000 / $168,000Benefits @20% / 33,600
Depreciation, straight- line basis / 76,000
Supplies / 43.400
Overhead@35% of direct costs / 112,350
Total / $433,350
Therefore, the shipping and receiving department needed to find $43,335 to cut. Jamal Saed, a recent MBA graduate, was asked to pare $43,335 from the shipping and receiving department's budget. As a first step, he recast the traditional budget into an activity – based budget.
Receiving, 620,000 pounds / $93,000Shipping, 404,000 boxes / 202,000
Handing 11,200 moves / 112,000
Record Keeping 65,000 transactions / 26,350
Total / $433,350
1. What action might Saed suggest to attain a $43,335 budget cut? Why would these be the best action to pursue?
2. Which budget helped you most in answering number 1? Explain .
Question No. (3)
Blue Sea Co. is a large integrated Arabian Company with shipping, metals and mining operations throughout Asia. The general manger of the Mining Division plans to submit a proposed capital budget for 2016 for inclusion in the companywide budget.
The division manger has for consideration the following projects, all of which require an outlay of capital. All projects have equal risk.
Project / Investment Required / Return1 / $4,800,000 / $1,200,000
2 / 1,900,000 / 627,000
3 / 1,400,000 / 182,000
4 / 950,000 / 152,000
5 / 650,000 / 136,500
6 / 300,000 / 90,000
The division manger must decide which of the projects to take. The company has a cost of capital of 15%. An amount of $12 million is available to the division for investment purposes.
1. What will be the total investment, total return, return on investment, and economic profit (Residual Income) of the rational division manger if:
a. The company has a rule that mangers should accept all projects promising a return on investment of at least 20%.
b. The company evaluates division mangers on their ability to maximize the return on capital invested (assume that this is a new division with no invested capital).
c. The division manager is expected to maximize Residual income as computed by using the 15% cost of capital.
2. Which of the three approaches will induce the most effective investment policy for the company as a whole? Explain.
Question No. (4)
A) Coca-Cola was one of the first companies to use Residual Income (RI). The company's net income in 2013 was $4,872 million, up slightly from $4,847 million in 2014. Coca – Cola reported the following results for 2013 and 2014 (in millions):
2013 / 2014Pre-tax operating income / $5,698 / 6,085
Taxes / 1,676 / 1,500
Coca- Cola's average adjusted invested capital was $20,308 million in 2013 and $19,591 million in 2014, and its cost of capital increased from 9% in 2013, to 10% in 2014.
Required:
1. Compute Coca- Cola's RI for 2013 and 2014.
2. Compare the company's performance in creating value for its shareholders in 2014 with that in 2013.
B) What is meant by the terms Balance scorecard and Dual transfer pricing ?
Question No. (5)
Big Burgers (BB) is considering a proposal to invest in a speaker system that would allow its employees to service drive- through customers. The cost of the system (including installation of special windows and driveway modifications) is $40,000 Jamel Sagr, manager of BB's expects the drive- through operations to increase annual sales by $25,000, with a 40% contribution margin ratio. Assume that the system has an economic life of six years, at which time it will have no disposal value. The required rate of return is 12%.
1. Compute the payback period. Is this a good measure of profitability?
2. Compute the NPV. Should Sagr accept the proposal? Why or why not.
3. Using the ARR model, compute the rate of return on the initial investment.
Question No. (6)
Dawood Jamel is a cost accountant and business analyst for DDC, which manufactures expensive brass doorknobs. DDC uses two direct cost categories: direct materials and direct manufacturing labor. Jamel feels that manufacturing overhead is most closely related to material usage. Therefore, DDC allocates manufacturing over- head to production based upon pounds of materials used.
At the beginning of 2014, DDC budgeted annual production of 400,000 doorknobs and adopted the following standards for each doorknob:
Input / Cost/DoorknobDirect materials (brass) / 0.3 lb. @ $10/lb. / $ 3.00
Direct manufacturing labor / 1.2 hours @ $20/hour / 24.00
Manufacturing overhead:
Variable / $6/lb. * 0.3 lb. Fixed / 1.80
Fixed / $15/lb. * 0.3 lb. / 4.50
Standard cost per doorknob / $33.30
Actual results for April 2014 were as follows:
Production / 35,000 doorknobsDirect materials purchased / 12,000 lb. at $11/lb.
Direct materials used / 10,450 lb.
Direct manufacturing labor / 38,500 hours for$808,500
Variable manufacturing overhead / $64,150
Fixed manufacturing overhead / $152,000
1. For the month of April, compute the following variances, indicating whether each is favorable (F) or unfavorable (U):
a. Direct materials variances
b. Direct manufacturing labor variances
c. Variable manufacturing overhead variances
d. Fixed manufacturing overhead variances
Can Jamel use any of the variances to help explain any of the other variances? Give examples.
Question No. (7)
A) ) Outline the steps in preparing an operating budget in case of manufacturing companies compare to merchandising companies?
B) Three years ago the CCC bought a frozen yogurt machine for $8,000. A salesman has just suggested to the CCC manager that he replace the machine with a new, $12,500 machine. The manager has gathered the following data.
Old Machine / New MachineOriginal cost / $8,000 / $12,500
Useful life in years / 8 / 5
Current age in years / 3 / 0
Useful life remaining in years / 5 / 5
Accumulated depreciation / $3,000 / Not acquired yet
Book value / $5,000 / Not acquired yet
Disposal value (in cash) now / $2,000 / Not acquired yet
Disposal value in 5 years / 0 / 0
Annual cash operating cost / $4,500 / $ 2,000
Compute the difference in total costs over the next five years under both alternatives, that is, keeping the original machine or replacing it with the new machine. Ignore taxes.
Question No. (8)
A) What is the difference, if any, between the cost indifference point and the price indifference point?
B) Metro Supermarkets has decided to increase the size of its Memphis store. It wants information about the profitability of individual product lines: soft drinks, fresh produce, and packaged food. Metro provides the following data for 2014 for each product line:
Soft Drinks / Fresh Produce / Packaged FoodRevenues / $317,400 / $840,240 / $483,960
Cost of goods sold / $240,000 / $600,000 / $360,000
Cost of bottles returned / $ 4,800 / $ 0 / $ 0
Number of Purchase orders placed / 144 / 336 / 144
Number of deliveries received / 120 / 876 / 264
Hours of shelf-stocking time / 216 / 2,160 / 1,080
Item sold / 50,400 / 441,600 / 122,400
Metro also provides the following information for 2014:
Activity(1) / Description of Activity
(2) / Total Support Costs (3) / Cost-Allocation Base
(4)
1. / Bottle returns / Returning of empty bottles to store / $ 4,800 / Direct tracing to soft-drink line
2. / Ordering / Placing of orders for purchases / $ 62,400 / 624 purchase orders
3. / Delivery / Physical delivery and receipt of merchandise / $ 100,000 / 1,260 deliveries
4. / Shelf-stoking / Stocking of merchandise on store shelves and ongoing restocking / $ 69,120 / 3,456 hours of shelf-stocking time
5. / Customer support / Assistance provided to customers, including checkout and bagging / $122,880 / 614,400 items sold
Total / $360,000
Required:
1. Metro currently allocates store support costs (all costs other than cost of goods sold) to product lines on the basis of costs of goods sold of each product line. Calculate the operating income for each product line.
2. If Metro allocates store support costs (all costs other than cost of goods sold) to product lines using an ABC system, calculate the operating income for each product line.
Question No. (9)
A) The administrator of Alwafa Hospital would like a cost formula linking the administrative costs involved in admitting patients to the number of patients admitted during a month. The admitting department's costs and the number of patients admitted during the immediately preceding eight months are given in the following table:
Month / Number of Patients Admitted / Admitting Department CostMay / 1,800 / $14,700
June / 1,900 / $15,200
July / 1,700 / $13,700
August / 1,600 / $14,000
September / 1,500 / $14,300
October / 1,300 / $13,100
November / 1,100 / $12,800
December / 1,500 / $14,600
Required:
1. Use the high-low method to establish the fixed and variable components of admitting costs.
2. Compute admitting department cost if number of patient is 1200.
B) What is the difference, if any, between CVP analysis and Break even analysis?
Question No. (10)
Bob’s Textile Company sells shirts for men and boys. The average selling price and variable cost for each product are as follows:
Men’s Boy's
Selling Price $28.80 Selling Price $24.00
Variable Cost $20.40 Variable Cost $16.80
Fixed costs are $38,400.
Required:
A. What is the breakeven point in units for each type of shirt, assuming the sales mix is 2:1 in favor of men's shirts?
B. What is the operating income, assuming the sales mix is 2:1 in favor of men's shirts, and sales total 9,000 shirts?
C. Compute the company's degree of operating leverage and margin of safety as a percentage?
D. How many units for each type of shirt would be sold if the company desired an after- tax net income of $24,000, facing a tax rate of 20%?
Question No. (11)
A) Gaza Athletic Supply (GAS) makes game t- shirts for athletic teams. The Al-shejaea Union Club has offered to buy 100 t- shirts for the teams in its league for $15 per t- shirt. The team price for such t- shirts normally is $18, an 80% markup over GAS's purchase price of $10 per t- shirt. GAS adds a name and number to each t- shirt at a variable cost of $2 per t- shirt . The annual fixed cost of equipment used in the printing process is $6,000, and other fixed costs allocated to t- shirts are $2,000. GAS makes about 2000 t- shirts per year, so the fixed cost is $4 per t- shirt . The equipment is used only for printing t- shirts and stands idle 75% of the usable time.
The manager of GAS turned down the offer, saying, " If we sell at $15 and our cost is $16, we lose money on each t- shirt we sell. We would like to help your league, but we can't afford to lose money on the sale"
Required:
1) Compute the amount by which the operating income of GAS would change if it accepted Al-shejaea Union Club's offer.
2) Suppose you were the manager of GAS. Would you accept the offer?
B) LK Products is investigating the purchase of a piece of automated equipment that will save $400,000 each year in direct labor and inventory carrying costs. This equipment costs $2,500,000 and is expected to have a 15-year useful life with no salvage value. The company's required rate of return is 20% on all equipment purchases. Management anticipates that this equipment will provide intangible benefits such as greater flexibility and higher quality output.
Required:
What dollar value per year would these intangible benefits have to make the equipment an acceptable investment?
Good Luck
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