ACC 601 Managerial Accounting Group Case 3 (160 points)

Instructions:

1. As a group, complete the following activities in good form. Use excel or word only. Provide all supporting calculations to show how you arrived at your numbers

2. Add only the names of group members who participated in the completion of this assignment.

3. Submit only one copy of your completed work via Moodle. Do not send it to me by email.

4. Due: No later than the last day of Module 7. Please note that your professor has the right to change the due date of this assignment.

Part A: Capital Budgeting Decisions Chee Company has gathered the following data on a proposed investment project:

Investment required in equipment …………. $240,000

Annual cash inflows ……………………………. $50,000

Salvage value …………………………………….. $0

Life of the investment …………………………. 8 years

Required rate of return ………………………… 10%

Assets will be depreciated using straight

line depreciation method

Required:

Using the net present value and the internal rate of return methods, is this a good investment?

Part B: Master Budget

You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below. The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings):

January (actual) 20,000 June (budget) 50,000 February (actual) 26,000 July (budget) 30,000 March (actual) 40,000 August (budget) 28,000 April (budget) 65,000 September (budget) 25,000 May (budget) 100,000

The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. Monthly operating expenses for the company are given below:

Variable: Sales commissions 4 % of sales

Fixed: Advertising $ 200,000 Rent $ 18,000 Salaries $ 106,000 Utilities $ 7,000 Insurance $ 3,000 Depreciation $ 14,000

Insurance is paid on an annual basis, in November of each year. The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter. The company’s balance sheet as of March 31 is given below:

Assets Cash $ 74,000 Accounts receivable ($26,000 February sales; $320,000 March sales) 346,000 Inventory 104,000 Prepaid insurance 21,000 Property and equipment (net) 950,000

Total assets $ 1,495,000

Liabilities and Stockholders’ Equity Accounts payable $ 100,000 Dividends payable 15,000 Common stock 800,000 Retained earnings 580,000

Total liabilities and stockholders’ equity $ 1,495,000

The company maintains a minimum cash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash. Required: Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:

1. a. A sales budget, by month and in total. b. A schedule of expected cash collections, by month and in total. c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total. d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.

2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.

3. A budgeted income statement for the three-month period ending June 30. Use the

contribution approach. 4. A budgeted balance sheet as of June 30.

Part C: Variance Analysis for Decision Making

Bronfenbrenner Co. uses a standard cost system for its single product in which variable overhead is

applied on the basis of direct labor hours. The following information is given:

Standard costs per unit:

Raw materials (1.5 grams at $16 per gram) ………………………. $24.00

Direct labor (0.75 hours at $8 per hour) ……………………………. $6.00

Variable overhead (0.75 hours at $3 per hour) …………………… $2.25

Actual experience for current year:

Units produced ……………………………………………………………… 22,400 units

Purchases of raw materials (21,000 grams at $17 per gram) .. $357,000

Raw materials used ………………………………………………………… 33,400 grams

Direct labor (16,750 hours at $8 per hour) ………………………… $134,000

Variable overhead cost incurred ………………………………………. $48,575

Required:

Compute the following variances for raw materials, direct labor, and variable overhead,

assuming that the price variance for materials is recognized at point of purchase:

a. Direct materials price variance. b. Direct materials quantity variance. c. Direct labor rate variance. d. Direct labor efficiency variance. e. Variable overhead spending variance. f. Variable overhead efficiency variance. g. As a manager, why is variance analysis important?

Part D: Evaluation of Decentralized Organizations

The Clipper Corporation had net operating income of $380,000 and average operating assets of

$2,000,000. The corporation requires a return on investment of 18%.

Required:

a. Calculate the company's return on investment (ROI) and residual income (RI). b. Clipper Corporation is considering an investment of $70,000 in a project that will generate

annual net operating income of $12,950. Would it be in the best interests of the company to make this investment?

c. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?

d. Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment?

Part E: Preparing Statement of Cash Flows

Boscia Corporation's balance sheet appears below:

Comparative Balance Sheet

Ending

Balance

Beginning

Balance

Assets:

Cash and cash equivalents ……………………. $ 44 $ 38

Accounts receivable ……………………………. 82 69

Inventory …………………………………………… 71 69

Plant and equipment ……………………………. 537 500

Accumulated depreciation ……………………. ( 240) ( 201)

Total assets ………………………………………… $494 $475

Liabilities and stockholders’ equity:

Accounts payable ……………………………….. $ 70 $ 60

Wages payable ……………………………………. 24 21

Taxes payable …………………………………….. 19 22

Bonds payable ……………………………………. 226 300

Deferred taxes …………………………………….. 19 18

Common stock ……………………………………. 22 20

Retained earnings ……………………………….. 114 34

Total liabilities and stockholders’ equity .. $494 $475

The net income for the year was $108. Cash dividends were $28.

Required:

Prepare a statement of cash flows in good form using the indirect method.