March 2010 China EMBA - Shanghai
Short Cases
Day 2 - Afternoon
Question Cost of Goods Manufactured Computation
Short Case Cost of Goods Manufactured – Suzhou Manufacturing
Suzhou Manufacturing had the following data for the period just ended (in thousands of ¥):
Required:
A. Calculate Panama's cost of goods manufactured.
B. Calculate Panama's cost of goods sold.
Day 2 – Afternoon
Question Job-Costing Computations, Overhead Application
Short Case Job-Costing – Guangdong Trading Company
Guangdong Trading Company, which uses a job-costing system, is a labor-intensive firm, with many skilled craftspeople on the payroll. Job no. 789 was the only job in process on January 1, having costs of ¥22,500 as of that date. Direct materials used and direct labor incurred during January were:
Job No. / Direct Materials / Direct Labor789 / ¥ 2,000 / ¥ 6,000
790 / 9,000 / 10,000
791 / 14,000 / 8,000
Job no. 791 was the only job in production as of January 31.
Required:
A. Should Guangdong Trading use direct labor or machine hours as a cost driver. Why?
B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of direct labor and manufacturing overhead are anticipated to be ¥200,000 and ¥300,000, respectively, what is the firm's predetermined overhead rate?
C. Compute the cost of work-in-process inventory as of January 31.
D. Compute the cost of jobs completed during January.
E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much would the firm report as sales revenue?
Day 3 – Morning
Question
Short Case Activity Based Costing – Langfang Company
Langfang Company manufactures two products, Product K-7 and Product L-15. Product L-15 is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product K-7. Product L-15 is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct labor time for Product K-7. Product L-15 is produced on an automated production line.
Overhead currently is applied to the products on the basis of direct labor hours. The company estimated it would incur ¥510,000 in manufacturing overhead costs and produce 10,000 units of Product L-15 and 40,000 units of Product K- 7 during the current year.
Unit costs for materials and labor are:
Product K-7 / Product L-15Direct material / ¥11 / ¥24
Direct labor / 6 / 12
Required:
a. Compute the predetermined overhead rate under the current method, and determine the unit product cost of each product for the current year.
b. The company is considering the use of activity-based costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below:
Estimated / Expected ActivityOverhead / Product / Product
Activity Cost Pool / Costs / K-7 / L-15 / Total
Machine setups required / ¥204,000 / 800 / 1,600 / 2,400
Purchase orders issued / 43,500 / 500 / 100 / 600
Machine-hours required / 105,000 / 7,000 / 10,500 / 17,500
Maintenance requests issued / 157,500 / 650 / 850 / 1,500
¥510,000
Using the data above, determine the unit product cost of each product for the current year.
c. What items of overhead cost make Product L-15 so costly to produce according to the activity-based costing system? What influence might the activity-based costing data have on management's opinions regarding the profitability of Product L-15?
Day 3 – Afternoon
Question
Short Case Cost vs. Profit Centers – Jinhong Telecommunications, Inc.
Jinhong Telecommunications, Inc. provides a variety of telecommunications services to residential and commercial customers from its massive campus-like headquarters in suburban Beijing. For a number of years the firm's maintenance group has been organized as a cost center, rendering services free of charge to the company's user departments (sales, billing, accounting, marketing, research, and so forth).
Requests for maintenance have grown considerably, and demand is approaching the point where quality and timeliness of services provided is becoming an issue. As a result, management is studying whether the maintenance operation should be converted from a cost center to a profit center, with users to be billed for services performed.
Required:
A. Differentiate between a cost center and a profit center. How is each of these centers evaluated?
B. What will likely happen to the number of user service requests if the company makes the switch to a profit-center form of organization? Why?
C. Assume that a user department has requested a particular service, one that is time consuming and costly to perform. The maintenance group's actual cost incurred in providing this service is ¥17,800, and the user has agreed to pay ¥20,800 if the switch to a profit center is made. If this case is fairly typical within the firm, which of the two forms of organization (cost center or profit center) will result in a more responsive, service-oriented maintenance group for Jinhong Telecommunications? Why?
Day 3 - Afternoon
Short Case Segmented Income Statement Relationships – Yichun Designs
Segmented Income Statement Relationships, Cost Allocation, Responsibility Accounting
Yichun Designs is an upscale boutique that operates various stores throughout China. The company, which has three divisions (Guangzou, Shanghai, and Beijing), reported the following information for the year just ended (in thousands):
Guangzou / Shanghai / BeijingSales revenue / ¥1,500 / ¥5,000 / ¥3,500
Divisional contribution margin / 1,050 / 3,200 / 1,800
Profit margin controllable by division manager / 320 / 440 / 480
Divisional profit margin / 120 / 330 / 410
Yichun Designs also reported ¥450 of common fixed expenses that top management wants to allocate to the divisions on the basis of sales revenue. As the company's chief executive office notes, "Each division helped to incur a portion of these costs and, as a result, should absorb its fair share." The firm has adopted various responsibility accounting procedures to evaluate division personnel.
Required:
A. Compute the company's total sales revenue.
B. Calculate the amount of variable operating expense incurred by the Shanghai Division.
C. Calculate the fixed costs controllable by Guangzou's management.
D. Calculate the fixed costs traceable to the Beijing Division but controllable by others.
E. Yichun Designs desires to promote a division manager to the corporate office to oversee selected operations. In determining which individual to promote, should Yichun Design's! top management focus on the profit margin controllable by the division manager or the overall divisional profit margin? Briefly explain.
F. If the company follows the desires of top management, how much of the common fixed expenses would be allocated to the Beijing Division?
G. Do cost allocations such as those in part "F" typically appear on a segmented income statement?
Day 3 – Afternoon
Short Case ROI and Residual Income, Investment Evaluation – Ningbo Construction
Ningbo Construction is organized in three separate divisions. The three divisional managers are evaluated at year-end, and bonuses are awarded based on ROI. Last year, the overall company produced a 12% return on its investment.
Managers of Ningbo's Suzhou Division recently studied an investment opportunity that would assist in the division's future growth. Relevant data follow.
Suzhou Division / Investment OpportunityIncome / ¥12,800,000 / ¥ 4,200,000
Invested capital / 80,000,000 / 30,000,000
Required:
A. Compute the current ROI of the Suzhou Division and the division's ROI if the investment opportunity is pursued.
B. What is the likely reaction of divisional management toward the acquisition? Why?
C. What is the likely reaction of Ningbo's corporate management toward the investment? Why?
D. Assume that Ningbo uses residual income to evaluate performance and desires an 11% minimum return on invested capital. Compute the current residual income of the Suzhou Division and the division's residual income if the investment is made. Will divisional management likely change its attitude toward the acquisition? Why?
Day 4 – Afternoon
Short Case Capital Investment Analysis – Ma Meng Hospital
The Board of Trustees of Ma Meng Hospital is considering the addition of a comprehensive medical testing laboratory. In the past, the hospital has sent all blood and tissue specimens to Diagnostic Testing Services (DTS), an independent testing service. The hospital's current contract with the testing service is due to expire, and DTS has offered a new 10-year contract under which Ma Meng would pay ¥140,000 annually, plus ¥10 per specimen tested.
The proposed new lab, which is expected to have a 10-year service life, would not require any new construction, because it would occupy space currently used for storage. However, the hospital would be forced to rent storage space in a nearby medical building at a cost of ¥15,000 per year. Lab equipment would cost ¥300,000 initially; additional equipment costing ¥150,000 would be purchased after four years. Because of rapid technological change, all equipment would have negligible salvage value. Staffing the lab would require two supervisors and four technicians at ¥20,000 each and ¥15,000 each, respectively. Additional fixed operating costs in the lab would be ¥25,000 per year, and variable costs would amount to ¥5 per medical test.
Ma Meng Hospital requires 10,000 tests per year, and the capacity of the lab would be 12,500 tests per year. The hospital's administrator believes that physicians in private practice would utilize the lab's excess capacity by sending their own tests to Ma Meng. She has projected a price of ¥10 per test for these tests. Ma Meng Hospital's hurdle rate is 6%.
Required:
Prepare a net-present-value analysis to determine whether Ma Meng should continue with DTS or build the proposed testing laboratory.
Day 4 – Afternoon
Question
Short Case Capital Investment Analysis – Hai Dian Clinic
Hai Dian Clinic is considering three capital expenditure projects.
Relevant data for the projects are as follows:
Project / Investment / Annual Income / Life of Project22A / ¥240,000 / ¥14,000 / 6 years
23A / ¥270,000 / ¥24,400 / 9 years
24A / ¥280,000 / ¥ 19,000 / 7 years
Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Hai Dian Clinic uses the straight-line method of depreciation.
Required:
- Determine the internal rate of return for each project.
- If Hai Dian Clinic’s minimum required rate of return is 11%, which projects are acceptable.
Day 4 – Afternoon
Question
Short Case Capital Investment Analysis – Renmin Clinic
Renmin Clinic is considering investing in new heart monitoring equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of cash flows:
Option A / Option BInitial cost / ¥170,000 / ¥227,000
Annual cash inflows / ¥ 75,000 / ¥ 80,000
Annual cash outflows / ¥ 34,400 / ¥ 30,000
Cost to rebuild (end of year 4) / ¥ 50,000 / ¥ 0
Salvage value / ¥ 0 / ¥ 10,000
Estimated useful life / 8 years / 8 years
The company’s cost of capital is 11%.
Required:
- For each option, compute
- The net present value
- The profitability index
- The internal rate of return
- Which option should be accepted? (Hint: To solve for internal rate of return, experiment with alternative discount rates to arrive at a net present value of zero.)