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CHAPTER 1

MANAGERIAL ACCOUNTING AND COST CONCEPTS

ANALYTICAL THINKING
1. Plot the janitorial labor cost and units produced in a scattergraph. (Place cost on the vertical
axis and units produced on the horizontal axis).

Mapleleaf Sweepers
5000
4000
3000
Janitotial Labor Cost

2000
1000
0
0

20

40

60

80

100

120

140

No. of Units Produced

2. Plot the janitorial labor cost and number of workdays on a scattergraph. (Place cost on the
vertical axis and the number of janitorial workdays on the horizontal axis).

CHAPTER 1
MANAGERIAL ACCOUNTING AND COST CONCEPTS

Mapleleaf Sweepers
5000
4000
3000
Janitorial Labor Cost

2000
1000
0
12

14

16

18

20

22

24

Number of Janitorial Workdays

3. Which measure of activity number of units produced or janitorial workdays should be


used as the activity base for explaining janitorial labor cost?
The more appropriate activity base for explaining janitorial labor cost would be the
number of janitorial workdays because it has applies the cause-and-effect principle more
properly compared to the number of units produced. As the number of janitorial workdays
increase, the total janitorial labor cost also increases. If compared to the having the number of
units produced as an activity base, it would not be consistent because the number of units
produced has no direct relationship with the increase in janitorial labor cost.

CHAPTER 1
MANAGERIAL ACCOUNTING AND COST CONCEPTS

ETHICS CHALLENGE
1. Are Mr. Richarts actions ethical? Explain why they are or are not ethical.
Since the warehouse clerk had already ordered the cellular telephone parts but has not yet
paid for it, the division should have recorded this transaction as an expense with the
accompanying liability in accordance with the GAAP. In which case, the company did the
opposite and delayed the recognition of the transaction of the expense in order to reflect a
falsified higher amount of income which is an unethical act.
2. Do the general philosophy and accounting policies at General Electronics encourage or
discourage ethical behavior? Explain.
The general management philosophy and accounting policies at General Electronics
encourage unethical behavior. From the CEOs statement, I wont interfere with operations in
the divisions. I am available for advice, but the divisions vice presidents are free to do anything
they want so long as they hit the target profits for the year, it can be observed that the CEO is
giving the division vice presidents the freedom to do anything, whether ethical or unethical, it
takes to reach the target profits. Although the CEO expressed that she is available for advice, the
vice presidents would still tend to resort to unethical actions due to the freedom that they are
given.

CHAPTER 2
JOB-ORDER COSTING

CASE
1. Assuming the use of a plantwide overhead rate:
a. Compute the rate for the current year.
Estimated total plant
manufacturing overhead
$ 1,440,000
Total direct labor cost
900,000
Plantwide overhead rate
$
1.60
b. Determine the amount of manufacturing overhead cost that would have been applied to
the Hastings job.
Actual direct labor cost
$
21,200
Plantwide overhead rate
1.60
Total applied overhead
$
33,920
2. Suppose that instead of using a plantwide overhead rate, the company had used a separate
predetermined overhead rate in each department. Under the conditions:
a. Compute the rate for each department for the current year.

Estimated manufacturing overhead


Estimated direct labor cost
Departmental overhead rate

Cutting
$ 540,000
300,000
$
1.80

Machining
$ 800,000
200,000
$
4.00

Assembly
$ 100,000
400,000
$
0.25

b. Determine the amount of manufacturing overhead cost that would have been applied to
the Hastings job.
Actual direct labor cost
Departmental overhead
rate
Applied overhead

Cutting
$
6,500

1.80
11,700

Machining
$
1,700

Assembly
$ 13,000

4.00
6,800

0.25
3,250

Total
$
21,200
6.0
5
$
21,750

3. Explain the difference between the manufacturing overhead cost that would have been
applied to the Hastings job using the plantwide rate in question 1(b) and using the
departmental rates in question 2(b)?
The difference in the applied overhead between the two answers lies within the
differences in overhead rates that are used. The plantwide overhead rate is based on the
estimated overall manufacturing overhead that will be incurred while the departmental
overhead rate is based on the estimated manufacturing overhead rates of each department
giving each department separate rates, on the other hand, giving the plantwide rate only a

CHAPTER 2
JOB-ORDER COSTING

single rate to apply. The departmental overhead rates provide more accurate application of
the overhead rate because it reflects how the manufacturing overhead is applied and
incurred across the departments.
4. Assume that it is customary in the industry to bid jobs at 150% of total manufacturing cost.
What was the companys bid price on the Hastings job? What would be the bid price if
departmental overhead rates had been used to apply overhead cost?
PLANTWIDE OVERHEAD RATE IS USED
Total direct material cost
$
18,500
Total direct labor cost
21,200
Applied manufacturing
overhead
33,920
Total manufacturing costs
$
73,620
Mark-up
150%
Bid price
$ 110,430
DEPARTMENTAL OVERHEAD RATES ARE USED
Cutting
Machining
Total direct material cost
$
12,000 $
900
Total direct labor cost
6,500
1,700
Applied manufacturing
overhead
11,700
6,800
Total manufacturing costs
$
30,200 $
9,400
Mark-up
Bid price

Assembly
$ 5,600
13,000
3,250
$ 21,850

Total
$
18,500
21,200

$
$

21,750
61,450
150%
92,175

5. Compute for the underapplied or overapplied overhead for the year (a) assuming that a
plantwide rate is used, and (b) assuming that departmental overhead rates are used.
a
.

PLANTWIDE OVERHEAD RATE IS USED


Total actual manufacturing overhead
Less: Applied manufacturing overhead
Total actual direct labor cost
$ 870,000
Plantwide overhead rate
1.60
Underapplied manufacturing overhead

b
.

DEPARTMENTAL OVERHEAD RATES ARE USED

$ 1,482,000

$ 1,392,000
$
90,000

CHAPTER 2
JOB-ORDER COSTING

Actual manufacturing overhead


Less: Applied overhead
Total direct labor cost
Departmental overhead rates
Applied overhead
(Over) Underapplied
manufacturing overhead

Cutting
$ 560,000

Machining
$ 830,000

Assembly
$ 92,000

Total
$ 1,482,000

320,000
1.80
576,000

$
$

210,000
4.00
840,000

$ 340,000
0.25
$ 85,000

$ 1,501,000

$ (16,000)

10,000)

7,000

(19,000)

ETHICS CHALLENGE
1. Explain how shaving 5% off the estimated direct labor-hours in the base for the
predetermined overhead rate usually results in a big boost in net operating income at the
end of the fiscal year.
By shaving 5% off of the estimated direct labor-hours, it would increase the amount of
predetermined manufacturing overhead rate. In that case, the increase in the overhead rate would
then result in a large increase of applied overhead with an accompanying overapplied overhead
which would be adjusted to the cost of goods sold, decreasing it and thus, increasing the amount
of net income.
2. Should Cristin Madsen go along with the general managers request to reduce the direct
labor-hours in the predetermined overhead rate computation to 105,000 direct labor-hours?
I think not, because in reducing the direct labor-hours just to have an overapplied
overhead with would result to boost in the net income for their own benefit is unethical.

CHAPTER 3
ACTIVITY-BASED COSTING

ETHICS CHALLENGE
The more equitable manner of dividing the bill is to determine the cost of each individual
and divide the bill accordingly in order to avoid some of the costs to be absorbed by the other
group members, although this method is a bit time consuming as compared to dividing the bill
equally. Although equally dividing the bill is easier, it can be unfair for the other members to pay
for the cost of what others have consumed in which they should not pay for. The issue relates to
the material covered in this chapter by distributing the costs based on the activities that are
involved which is activity-based costing.
CASE
1. Using direct labor-hours as the base for assigning manufacturing overhead costs to the
products:
a. Determine the predetermined overhead rate that will be used during the year.
Estimated manufacturing overhead
cost
$ 3,000,000
Expected direct labor hours
50,000
Manufacturing overhead per DLH
$ 60.00 per DLH
b. Determine the unit product cost.
Direct materials
Direct labor
Manufacturing overhead*
Total unit product cost
*$60 0.025 hours per bag

Mona Loa
$ 4.20
0.30
1.50
$ 6.00

Malaysian
$ 3.20
0.30
1.50
$ 5.00

2. Using activity-based costing as the base for assigning manufacturing overhead costs to the
products:
a. Determine the total amount of manufacturing overhead cost assigned

CHAPTER 3
ACTIVITY-BASED COSTING

b. Compute the amount of manufacturing overhead cost per pound.


Assigned overhead
Expected sales (pounds)
Manufacturing overhead per pound

Mona Loa Malaysian


$32,900
$7,300
100,000
2,000
$0.33
$3.65

c. Determine the unit product cost.


Direct materials
Direct labor
Manufacturing overhead
Total unit product cost

Mona Loa
$ 4.20
0.30
0.33
$ 4.83

Malaysian
$ 3.20
0.30
3.65
$ 7.15

3. Write a brief memo to the president of CBI to explain the results.


To whom it may concern:
As indicated by the computations shown above, it would be much better to use
activity-based costing in allocating the cost of manufacturing overhead to the products.
Activity-based costing properly matches how the products activities reflect on the
products cost thus providing much more accurate data as compared to the traditional
costing which uses direct labor-hours.

ANALYTICAL THINKING

CHAPTER 3
ACTIVITY-BASED COSTING

1. Using activity-based costing, determine the amount of manufacturing overhead cost that
would be assigned to each standard and each specialty briefcase

Activity Cost Pool


Purchasing

Material handling
Production orders and
setups
Inspection
Frame assembly
Machine-related

Standard Briefcase
No. of
Est.
Activity
Activity
120
300
400
155
10,000
200
700
5,000

Estimated
Allocated
Overhead Cost Overhead
$ 15,000
$ 6,000
16,000
6,200

15,000
600
1,500

6,000
18,000
12,000

8,000

32,000

Total

Activity Cost Pool


Purchasing

Material handling
Production orders and
setups
Inspection
Frame assembly
Machine-related
Total

Specialty Briefcase
No. of
Est.
Activity
Activity
180
300
400
245
5,000
400
800
3,000

Estimated
Overhead Cost
$ 15,000

16,000

15,000
600
1,500

6,000
18,000
12,000

8,000

32,000

4,000
6,000
5,600
20,000
$ 44,800

Allocated
Overhead
$
9,000
9,800

2,000
12,000
6,400
12,000
54,200

2. Determine the unit product cost of each product line from the perspective of the activity
based costing system.

Direct materials
Leather
Fabric
Synthetic
Total materials
Direct labor
Manufacturing over head
Standard: ($44,80010,000)
Specialty: ($54,2002,500)
Unit product cost

Standard
Briefcase

Specialty
Briefcase

8.00
2.00
$ 10.00
6.00

12.00
1.00
7.00
20.00
4.80

4.48
$ 20.48

21.8
46.48

3. Would you recommend that the company shift its resources entirely to the production of
specialty briefcases? Explain.

CHAPTER 3
ACTIVITY-BASED COSTING

No, because as observed in the computations above, the actual cost of each specialty
briefcases is $46.48 which is more than the selling price of $42.50, giving the company losses
for each product that is sold.
4. Why do you suppose the competition hasnt been able to touch FirstLine Cases price?
It is because that the cost of specialty briefcases based on the traditional costing is low,
giving the company a high gross margin for each product sold. When in reality, the cost of each
specialty briefcases is higher than the selling price per unit, in which case of the traditional
costing, the cost is absorbed by the standard briefcases.

CHAPTER 4
PROCESS COSTING

ANALYTICAL THINKING
1. Prepare a report for the Forming Department for October.
Durall Company
Cost of Production Report Forming Department
For the Month of October
Physical
Units

Production Data
Beginning
inventory
Units started
Total units to account for

Trans. In

DM

CC

8000
97000
105000

Beginning
inventory
Units started and completed
Total units
completed
Ending inventory
Total units accounted for

8000
92000

8000
92000

8000
92000

8000
92000

100000
5000
105000

5000
105000

0
100000

2000
102000

Cost Data

Total
Costs

Trans. In
DM
$
$
$ 22,420 8,820
3,400

Cost of beginning inventory


Current period cost

205,980 81,480
27,600
$
$
$ 228,400 90,300
31,000
105000
100000
$
$
$
2.22 0.86
0.31

Total costs to account for


EUP
Cost per EUP
Cost Assignment
Units transferred
(100,000$2.22
out
)
Ending inventory
Trans. In
(5,000$0.86)
Conversion
(2000$1.05)
Total cost accounted for

$ 222,000
$ 4,300
2,100

6,400
$ 228,400

CC
$ 10,200
96,900
$ 107,100
102000
$

1.05

CHAPTER 4
PROCESS COSTING

2. Explain to the president why the unit cost appearing on the report prepared by the
accountant is so high.
The unit cost prepared by the accountant is higher compared to what is computed above
is because of (1) the accountant did not consider the number of equivalent units of production for
each cost component and treating each product as if they are completed as a singular one; (2) the
accountant did not assign any cost to the ending work in process inventory; and (3) the total cost
that was accumulated were all allocated on the number of units that are completed.
ETHICS CHALLENGE
1. If the estimate of the percentage of completion is used, what would be the cost of goods
sold for the year?

Started and Completed


Ending Inventory
Total units accounted for

Physical
Units
250,000
20,000

270,000
Total Cost

Current period cost


EUP
Cost per EUP
No. of Units Sold
Total cost per unit
Cost of goods sold

$ 5,541,000
$ 246.30

Trans. In
250000
20,000
270,000

Conversion
250000
5,000

255,000

Trans. In
Conversion
$49,221,000 $ 6,320,000
270000
255000
$ 182.30
$ 64.00

250,00
0
246.30
$ 61,575,000

2. Does Thad Kostowski want the estimated percentage completion to be increased or


decreased?
Thad Kostowski would want the estimated percentage of completion to be increased
because it would later create a decrease in the cost of goods sold and subsequently to the net
income.

3. What percentage completion figure would result in increasing the reported net operating
income by $62,500 over the net operating income that would be reported if the 25%
figure were used?

CHAPTER 4
PROCESS COSTING

Let X = Percentage Completed


250,000{182.30+[16,320,000(250,000+20000X]
}
250,000{182.30+[16,320,000(250,000+20000X]
}
250,000
182.30+[16,320,000 (250,000+20,000X)]
16,320,000 (250,000+20,000X)
16,320,000
1,275,000X
X

= 61,575,000 62500
61,512,000
=
250,000
=
=
=
=
=

246.05
63.75
15,937,500+1,275,000X
382,500
30%

4. Do you think Carol Lee should go along with the request to alter estimates of the
percentage completion? Why or why not?
No, because it would be unethical to alter the estimate to manipulate the earnings for the
sake of getting the additional bonus.

CHAPTER 5
COST-VOLUME-PROFIT RELATIONSHIPS

CASE
1. Assuming sales of $30,000,000, construct a budgeted contribution format income
statement for the upcoming year.
a. The independent sales agents commission rate remains unchanged at 18%.
Marston Corporation
Budgeted Contribution Income Statement
Sales
Variable Expenses:
Cost of Goods Sold
Commission
Contribution Margin
Fixed Expenses:
Cost of Goods Sold
Advertising
Administrative
Net Operating Income

$ 30,000,000
$ 17,400,000
5,400,000

$ 2,800,000
800,000
3,200,000

22,800,000
$ 7,200,000

6,800,000
$ 400,000

b. The independent sales agents commission rate increases to 20%.


Marston Corporation
Budgeted Contribution Income Statement
Sales
Variable Expenses:
Cost of Goods Sold
Commission
Contribution Margin
Fixed Expenses:
Cost of Goods Sold
Advertising
Administrative
Net Operating Income

$ 30,000,000
$

c. The company employs its own sales force.

17,400,000
6,000,000

2,800,000
800,000
3,200,000

23,400,000
$ 6,600,000

6,800,000
$ (200,000)

CHAPTER 5
COST-VOLUME-PROFIT RELATIONSHIPS

Marston Corporation
Budgeted Contribution Income Statement
Sales
Variable Expenses:
Cost of Goods Sold
Commission
Contribution Margin
Fixed Expenses:
Cost of Goods Sold
Advertising
Administrative
Selling
Net Operating Income

$ 30,000,000
$ 17,400,000
3,000,000

2,800,000
1,300,000
3,200,000
1,300,000

20,400,000
$ 9,600,000

8,600,000
$ 1,000,000

2. Calculate the break-even point in sales dollars for the upcoming year.
a. The independent sales agents commission rate remains unchanged at 18%.
$ 6,800,000
BEP Sales = (7,200,00030,000,000
)
=
$ 28,333,333.33
b. The independent sales agents commission rate increases to 20%.
$ 6,800,000
BEP Sales = (6,600,00030,000,000
)
=
$ 30,909,090.91
c. The company employs its own sales force.
$ 8,600,000
BEP Sales = (9,600,00030,000,000
)
=
$ 26,875,000.00

CHAPTER 5
COST-VOLUME-PROFIT RELATIONSHIPS

3. Refer to your answer to (1) (b) above. If the company employs its own sales force, what
volume of sales would be necessary to generate the net operating income the company
would realize if sales are $ 30,000, 000 and the company continues to sell through agents
(at a 20% commission rate)?
Sales

($200,000) + 6,800,000
(9,600,00030,000,000)
=
$ 20,625,000

4. Determine the volume of sales at which net operating income would be equal regardless
of whether Marston Corporation sells through agents (at a 20% commission rate) or
employs its own sales force.
Let X = Sales
X (0.20X+0.58X) 6,800,000
X 0.78X 6,800,000
0.22X 6,800,000
8,600,000 6,800,000
1,800,000
X

=
=
=
=
=
=

X (0.10X+0.58X) 8,600,000
X 0.68X 8,600,000
0.32X 8,600,000
0.32X 0.22X
0.10X
$18,000,000

5. Prepare a graph on which you plot the profits for both of the following alternatives.
a. The independent sales agents commission rate increases to 20%.

CHAPTER 5
COST-VOLUME-PROFIT RELATIONSHIPS

b. The company employs its own sales force.

6. Write a memo to the president of Marston Corporation in which you make a


recommendation as to whether the company should continue to use independent sales
agents (at a 20% commission rate) or employ its own sales force. Fully explain the
reasons for your recommendation in the memo.

To whom it may concern:

CHAPTER 5
COST-VOLUME-PROFIT RELATIONSHIPS

I would like to recommend that the company should employ its own sales force as
it would result in a higher net operating income compared to the companys sales
commissions remaining at 18% with a lesser income and the companys sales
commission increased to 20% which would result in a net operating loss.

CHAPTER 5
COST-VOLUME-PROFIT RELATIONSHIPS

ANALYTICAL THINKING
1. What is the companys overall break-even point in total sales dollars?
Frog
Sales
Variable expenses
Contribution margin
CM Ratio

Minnow Worm
Total
$280,00 $240,00 $720,00
$200,000
0
0
0
120,000 160,000 150,000 430,000
80,000 120,000
90,000 290,000
40.00%

42.86%

37.50%

40.28%

$282,000
40.28%
= $700,137.93

BEP Sales =

2. Of the total fixed costs of $282,000, $18,000 could be avoided if the Frog lure product
were dropped, $96,000 if the Minnow lure product were dropped, and $60,000 if the
Worm lure product were dropped. The remaining fixed expenses of $108,000 consist of
common fixed costs such as administrative salaries and rent on the factory building that
could be avoided only by going out of business entirely.
a. What is the break-even point in units for each product?

Fixed expenses
Contribution margin per unit
BEP Units

Frog

Minnow

Worm

$ 18,000
0.80
22,500

$ 96,000
0.60
160,000

$ 60,000
0.30
200,000

b. If the company sells exactly the break-even quantity of each product, what will be the
overall profit of the company? Explain this result.
Frog
Sales
$ 45,000
Variable expenses
27,000
Contribution margin
$ 18,000
Traceable fixed
18,00
expenses
0
Product margin
$
Common fixed expenses
Net operating loss

Minnow

Worm

$ 224,000
128,000
$ 96,000
96,00
0
$
-

$ 160,000
100,000
$ 60,000
60,00
0
$
-

Total
$ 429,000
255,000
174,000
174,00
0
$
108,000
$(108,000)

CHAPTER 5
COST-VOLUME-PROFIT RELATIONSHIPS

The company incurred a net operating loss because if the company were able to sell each
product at break-even, it would only cover up the fixed expenses that are traceable to each
product which doesnt include the common fixed expenses that are not directly traceable to each
product.

CHAPTER 6
VARIABLE COSTING AND SEGMENT REPORTING: TOOLS FOR MANAGEMENT

ANALYTICAL THINKING
1. Prepare contribution format income statements.
Reston Company
Contribution Income Statement
For the Month Ended May 31
Total
Compan
y
Sales
Variable expenses
Contribution margin
Traceable fixed
expenses
Divisional segment
margin
Common fixed
expenses
Net operating income

$900,000
408,000
$492,000
290,00
0
$202,00
0
175,000
$ 27,000

Sales Territory
%
100.0
%
45.3%
54.7%

Central

32.2%

$400,000
208,000
$192,000
160,00
0

22.4%

$ 32,000

%
100.0
%
52.0%
48.0%

Eastern

40.0%

$500,000
200,000
$300,000
130,00
0

8.0%

$170,000

%
100.0
%
40.0%
60.0%
26.0%
34.0%

19.4%
3.0%

Segments Defined as Product Lines of the Central Sales Territory


Central
Products
Territory
%
Awls
%
Pows
$400,00
100.0
100.0
Sales
0
% $100,000
% $300,000
Variable expenses
208,000
52.0%
25,000
25.0% 183,000
Contribution margin
$192,000 48.0% $ 75,000 75.0% $117,000
Traceable fixed
114,00
60,00
54,00
expenses
0
28.5%
0
60.0%
0
Product margin
$ 78,000 19.5% $ 15,000 15.0% $ 63,000
Common fixed
expenses
46,000
11.5%
Divisional segment
margin
$ 32,000
8.0%

%
100.0
%
61.0%
39.0%
18.0%
21.0%

2. Look at the statement you have prepared showing the total company segmented sales by
territory. What points revealed by this statement should be brought to managements
attention?

CHAPTER 6
VARIABLE COSTING AND SEGMENT REPORTING: TOOLS FOR MANAGEMENT

As it can be observed in the statement, although the amount of sales in the central sales
territory is less than the sales in the eastern sales territory, its fixed and variable expenses
combined are greater compared to the eastern sales territory.
3. Look at the statement you have prepared showing the Central Territory segmented by
product lines. What points revealed by this statement should be brought to managements
attention?
Although the amount of sales in for the awls product is less than the sales of pows
product, the amount of traceable fixed expenses for awls is greater than pows.
ETHICS CHALLENGE
1. Assume that the division is using variable costing. How many units should be scheduled
for production during the last quarter of the year?
Expected Sales + Desired ending inventory Beginning
inventory
= 18,000 + 1, 500 12,000
= 7,500 units

Required Production =

No, because in a variable costing environment, the number of scheduled number of units
to be produced does not affect the net income for the year because under variable costing, units
produced do not affect the income.
2. Assume that the division is using absorption costing and that the divisional manager is
given an annual bonus based on the divisions net operating income. If Mr. Constantinos
wants to maximize his divisions net operating income for the year, how many units
should be scheduled for production during the last quarter? Explain.
Expected Sales + Desired ending inventory Beginning
inventory
= 22,000 + 1, 500 12,000
= 11,500 units

Required Production =

If the company is using variable costing, the company should have more number of units
produced than the number of units sold in order to stock the cost of inventory in the ending
inventory, decreasing cost of goods sold and thus, increasing net income.
3. Identify the ethical issues involved in the decision of Mr. Constantinos must make about
the level of production for the last quarter of the year.
The ethical issues in the decision of Mr. Constantinos would involve questioning about
the integrity and objectivity of his decisions. If he is given an annual bonus based on the

CHAPTER 6
VARIABLE COSTING AND SEGMENT REPORTING: TOOLS FOR MANAGEMENT

divisions net operating income, he may become reluctant as to whether do ethical or unethical
actions to earn the said bonus.
CASE
1. Prepare a contribution format segmented income statement for the American Association
of Acupuncturists for last year.
PRODUCTS
TOTAL
COMPANY
Sales
Variable expenses
Contribution margin
Traceable fixed expenses
Product segment margin
Common fixed cost
Net operating income

$970,000
$374,250
$595,750
410,000
$185,750
178,750
$7,000

MEMBERSHI
P SERVICE

JOURNAL

BOOKS &
REPORTS

$433,750
210,000
$223,750
220,000
$3,750

$236,250
71,250
$165,000
70,000
$95,000

$70,000
33,000
$37,000
50,000
-$13,000

CONTINUIN
G
EDUCATION
$230,000
60,000
$170,000
70,000
$100,000

2. Give arguments for and against allocating all costs of the association to the four
programs.
There are no allocated costs of printing and mailing in the membership service program
although it may be possible that there are printing and mailing activities in the said program.

CHAPTER 7
PROFIT PLANNING

ANALYTICAL THINKING
1. Identify the problems that exist in Ferguson & Son manufacturing Companys budgetary
control system and explain how the problems are likely to reduce the effectiveness of the
system.
The main problem that can be observed from the statements is that there is too much
reinforcement in of the budgets that are prepared by the higher management. The higher
management only considers on the overall goal of the company in preparing the budgets without
giving consideration from the lower levels of management. Since the budgets imposed are too
tight for the managers to handle, the costs of products might have been reduced on the other
hand, the quality of the products are the ones suffering.
2. Explain how Ferguson & Son Manufacturing Companys budgetary control system could
be revised to improve its effectiveness.
One way to improve the effectiveness of the budgets is to have the higher and lower
levels of management be involved in a participative budget in which they will organize
altogether. That way, the budgets that will be imposed will be more accurate due to the lower
managers knowledge of the day-to-day operations of their departments and will recognize their
value to the company where they may strive harder to meet those budgets.
CASE
Prepare a master budget for the three-month period ending June 30.
1. a. A sales budget by month and in total.
Cravat Sales Company
Sales Budget
For the Quarter Ended June 30

Budgeted sales in units


Selling price per unit
Total sales

Month
May
45,0
00
$8

April
June
Quarter
35,0
60,0
140,00
00
00
0
$8
$8
$8
$280,00
0 $360,000 $480,000 $1,120,000

b. A schedule of expected cash collections from sales, by month and in total.

CHAPTER 7
PROFIT PLANNING

Schedule of Expected Cash Collections


Month
April
May
June
Accounts receivable, beginning balance:
February sales
$ 48,000
March sales
112,000
$ 56,000
April sales
70000
140000
70000
May sales
90000
180000
June sales
120000
Total
$230,000
$286,000 $370,000

Quarter
$ 48,000
168,000
280,000
270,000
120,000
$ 886,000

c. A merchandise purchases budget in units and in dollars.


Cravat Sales Company
Merchandise Purchases Budget
For the Quarter Ended June 30

Budgeted sales
Add desired ending
inventory
Total needs
Less beginning
inventory
Required purchases
Cost per tie
Cost of purchases

April
35000

Month
May
45000

June
60000

Quarter
140000

40500
75500

54000
99000

36000
96000

36000
176000

31500
40500
54000
31500
44000
58500
42000 144500
$5
$5
$5
$5
$220,00 $292,50 $210,00 $722,50
0
0
0
0

d. A schedule of expected cash disbursements for merchandise purchases.


Schedule of Expected Cash Disbursements for Purchases
Month
April
May
June
Beginning accounts payable:
$ 85,750
April purchases
110,000
$ 110,000
May purchases
146250 $ 146,250
June purchases
105,000
Total
$ 195,750
$ 256,250
$ 251,250

Quarter
$ 85,750
220,000
292,500
105,000
$ 703,250

CHAPTER 7
PROFIT PLANNING

2. A cash budget
Cravat Sales Company
Cash Budget
For the Quarter Ended June 30

Cash balance, beginning


Add receipts:
Collections from customers
Total cash available
Less disbursements:
Purchases
Selling and administrative
Land purchase
Dividends
Total disbursements
Excess (deficiency) of cash available over
disbursements
Financing:
Borrowings
Repayments
Interest
Total financing
Cash balance, ending

April
$ 14,000

Month
May
$ 10,250

June
$ 10,000

Quarter
$ 34,250

230,000
$244,000

286,000
$296,250

370,000
$380,000

886,000
$920,250

$195,750
74000
0
12000
$281,750
$(37,750
)

$256,250
84000
25000
0
$365,250
$(69,000)

$251,250 703,250
99000 257,000
0
25,000
0
12,000
$350,250 $997,250
$(7
$ 29,750
7,000)

$48000

$79000

48000
$ 10,250

79000
$ 10,000

$16000
3020
19020
$ 10,730

3. A budgeted income statement.


Cravat Sales Company
Budgeted Income Statement
For the Quarter Ended June 30
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income
4. A budgeted balance sheet.

$1,120,000
700,000
$420,000
265,100
$154,900
3,020
$151,880

$127,000
16,000
3,020
146,020
$ 30,980

CHAPTER 7
PROFIT PLANNING

Cravat Sales Company


Budgeted Balance Sheet
For the Quarter Ended June 30
Assets
Cash
Accounts Receivable
Inventory
Prepaid insurance
Fixed assets, net of depreciation
Land
Total assets

10,730
450,000
180,000
10,800
168,200
25,000
844,730

LIABILITIES and Stockholder's Equity


Accounts payable
$
105,000
Dividends payable
12,000
Loans payable
111,000
Common stock
300,000
Retained earnings
316,730
Total liabilities and stockholders' equity $
844,730
ETHICS CHALLENGE
1. Is Granger Stokes using budgets as a planning and control too?
No, he is not using budgets as a planning and control tool, because if he intends to use
budgets as a planning and control tool, he would consider not only the increase in the sales
volume but also the increase in costs related to the increase of sales. Hes only using those
budgets to impose what he wants to achieve in the company.
2. What are the behavioral consequences of the way budgets are being used at PrimeDrive?
The employees of PrimeDrive would tend to quit their jobs because they may feel
invaluable to company due to the current management. Stokes does not listen to whatever the
employees may suggest even though that the employees are the ones with knowledge of the dayto-day operations. If it keeps up, the company would go bankrupt in no time.
3. What, if anything do you think Keri Kalani should do?

CHAPTER 7
PROFIT PLANNING

Kalani should stand up against Stokes and make him realize that what he is doing isnt
beneficial to the company. She may need the help of the other employees to support her. In doing
so, she should still comply with professional ethics in order that she would not be in harm in
standing up against him.

CHAPTER 8
FLEXIBLE BUDGETS, STANDARD COSTS, AND VARIANCE ANALYSIS

ETHICS CHALLENGE
Prating should include the additional $16,000 unfavorable variance and he needs to not
only look at the aggregate amount of variances included in the report. He should perform a
variance analysis by observing the components of each item. First, he should separate the total
direct labor variance into labor rate variance and labor efficiency variance. And, he should also
separate the overhead components into variable and fixed overhead. The total variable overhead
variance should be separated into variable overhead rate and variable overhead efficiency
variances while the fixed overhead should be separated into budget variance and volume
variances. In doing so, it can be discovered who should be held responsible for the unfavorable
variances depending on which department does the variance belong to.
ANALYTICAL THINKING
1. What was the total standard cost of the materials used during August?
Total standard cost per kit
Number of kits produced
Total standard cost
Standard direct labor cost
Standard VOH
Standard material cost

$ 42
500
$21,000
(1,600)
(8,000)
$11,400

2. How many yards of material are required at standard per kit?


Standard material cost
Number of kits produced
Stardard material cost per kit
Standard price of material
Standard quantity of material

$11,400
500
$ 22.80

6
3.80 yards

3. What was the materials price variance for August if there were no beginning or ending
inventories of materials?
AQ x AP
$ 10,000

AQ x SP
$12,000
$2,000 F
Material Price
Variance

SQ x SP
$ 11,400
$600 U
Material Quantity
Variance

CHAPTER 8
FLEXIBLE BUDGETS, STANDARD COSTS, AND VARIANCE ANALYSIS

4. What is the standard direct labor rate per hour?


Standard VOH cost
Number of kits produced
Standard VOH cost per kit
Standard VOH rate
Standard hours

$1,600

Standard cost per kit


Standard material cost per kit
Standard VOH cost per kit
Standard direct labor cost per kit
Standard hours
Standard direct labor rate

$ 3.20
2
1.6 hours

$ 42.00
22.80
3.20
$ 16.00
1.6
$ 10.00

5. What was the labor efficiency variance for August? The direct labor rate variance?
Standard cost per kit
Total unfavorable variance
Actual cost per kit
Number of kits produced
Total manufacturing costs

$ 42.00
0.14
$ 42.14
500
$21,070
(10,000
)
(1,620)
$ 9,450

Actual materials cost


Actual VOH cost
Actual direct labor cost
AH x AR
$ 9,450

Actual direct labor hours


Standard direct labor rate
Standard direct labor cost for actual labor
hours

AH x SR
$9,000
$450 U
Labor Rate
Variance

900
$ 10
$9,000

SH x SR
$ 8,000

$1000 U
Labor Efficiency
Variance

6. What was the variable overhead efficiency variance for August? The variable overhead
rate variance?
Actual
$1,620

AH x VOH Rate
SH x VOH Rate
$ 1,800
$ 1,600
$180 F
$200 U
VOH Rate
Variance
VOH Efficiency Variance

7. Complete the standard cost card for one kit shown at the beginning of the problem.

CHAPTER 8
FLEXIBLE BUDGETS, STANDARD COSTS, AND VARIANCE ANALYSIS

Direct materials..
Direct labor
Variable manufacturing overhead..

Standard Quantity
or Hours
3.8 yards
1.6 hours
1.6 hours

Standard Price
or Rate
$6 per yard
$10 per direct
labor-hour
$2 per direct
labor-hour

Standard
Cost
$22.80

Total standard cost per kit

16.00
3.20
$42.00

CASE
1. Prepare a flexible budget for The Munchkin Theater based on the actual activity of the
year.
The Munchkin Theater
Flexible Budget
For the Year Ended December 31
Budgeted numbers of productions
Budgeted numbers of performances
Actors' and directors' wages
Stagehands' wages
Ticket booth personnel and ushers' wages
Scenery, costumes, and props
Theater hall rent
Printed programs
Publicity
Administrative expenses
Total

4
64
$153,600
28,800
11,520
34,400
48,000
11,200
10,400
42,192
$340,112

2. Prepare a report that summarizes the spending variances for all expense items.

CHAPTER 8
FLEXIBLE BUDGETS, STANDARD COSTS, AND VARIANCE ANALYSIS

The Munchkin Theater


Spending Variances
For the Year Ended December 31
Flexible
4
64

Actual

Budgeted numbers of productions


Budgeted numbers of performances
Actors' and directors' wages
Stagehands' wages
Ticket booth personnel and ushers' wages
Scenery, costumes, and props
Theater hall rent
Printed programs
Publicity
Administrative expenses
Total

$153,600
28,800
11,520
34,400
48,000
11,200
10,400
42,192
$340,112

$148,000
28,600
12,300
39,300
49,600
10,950
12,000
41,650
$342,400

Variances

4
64
$5,600 F
200 F
780 U
4,900 U
1,600 U
250 F
1,600 U
542 F
$2, 288 U

3. If you were on the board of directors of the theater, would you be pleased with how well
costs were controlled during the year? Why or why not?
With regards to the expenses, I would not be satisfied with it because most of the
variances are unfavorable which means that the crew were not able to control its costs. But with
regards to the number of performance and productions, I would be satisfied because the number
of productions were less than planned and the number of performances were more than planned
which may indicate that less amount of work was to be done about the production and the
number of performances would indicate an increase in demand.

CHAPTER 9
PERFORMANCE MEASUREMENT IN DECENTRALIZED ORGANIZATIONS

CASE
1. Construct the balanced scorecard.

+
Total
profit

Total
sales revenue

Write-off of accounts
receivable

+
+

Customer Survey:
Satisfaction with
Accuracy of Charge
Account Bills

Sales per square foot of


floor space

Inventory
unsold

+
Percentage of employees
who attended the citys
annual diversity
workshop

Percentage of charge
account bills containing
errors

+
Percentage of suppliers
making
just-in-time deliveries

+
Percentage of salesclerks
trained to correctly enter
data on charge account
slips

CHAPTER 9
PERFORMANCE MEASUREMENT IN DECENTRALIZED ORGANIZATIONS

2. Assume that the company adopts your balanced scorecard. After operating for a year,
there are improvements in some parts but not in the others. What should management do
next?
I suggest that the company may adopt a new balanced scorecard and determine the
performance measures that are potential to eliminate or reduce the problem to a tolerable level.
With that, the company would be able to improve the internal aspects as well as the external
aspects that are crucial to the entitys survival.
3. a. Suppose that customers express greater satisfaction with the accuracy of their charge
account bills, but the performance measures for the average age of accounts receivable
and for bad debts do not improve. Explain why might this happen.
Although that the customers are satisfied with the accuracy of the charges in their
accounts, the allowance for bad debts have not improve because the companys products are too
expensive for the customers to afford. Even having the products on accounts but still it has high
prices, the customers might find it difficult to pay off their balances to the company.
b. Suppose that the performance measure for the average age of accounts receivable, bad
debts, and unsold inventory improve, but total profits do not. Explain why might this
happen. Assume in your answer that the explanation lies within the company.
Since the company decreases the number of unsold inventory, the selling and
administrative expenses may be a high resulting in a little or minimal increase. And also, since
there are also improvements in the average age of receivables, the company may have hired
employees who may be highly paid and trained to cause a minimal amount of errors in charging
the customers accounts.

CHAPTER 10
DIFFERENTIAL ANALYSIS: THE KEY TO DECISION MAKING

CASE
1. Given the margins of the two products as indicated in the reports submitted by the
accounting department, does it make any sense to even consider producing the mountain
bike frames? Explain.
As the company having limited amount of available resources, which is the welding
hours, giving consideration to manufacture the mountain bike frames depends on if the
manufacture would increase the amount of income without affecting the companys operations
and the availability of the resources.
2. Compute the contribution margin per unit for
a. Purchased XSX drums.
Selling price per drum
Variable cost per drum:
Purchase price
Selling and administrative
expense
Contribution margin per drum
b. Manufactured XSX drums.
Selling price per drum
Variable cost per drum:
Direct materials
Manufacturing overhead
Selling and administrative expense
Contribution margin per drum
c. Manufactured mountain bike frames.
Selling price per frame
Variable cost per frame:
Direct materials
Manufacturing overhead
Selling and administrative expense
Contribution margin per frame

$154.00
$120.0
0
0.85

120.85
$ 33.15

$154.00
$44.50
1.05
0.85

46.40
$107.60

$ 65.00
$17.50
0.60
0.40

18.50
$ 46.50

3. Determine the number of XSX drums (if any) that should be purchased and the number
of XSX drums and/or mountain bike frames (if any) that should be manufactured. What is
the improvement in net income that would result from this plan over current operations?

CHAPTER 10
DIFFERENTIAL ANALYSIS: THE KEY TO DECISION MAKING

Contribution margin
Welding hours per unit
Contribution margin per welding hour

Manufactured
XSX
$107.60
0.80
$ 134.50

Mountain
Purchased
Bike Frames
XSX
$ 46.50
$ 33.15
0.20
$ 232.50

After obtaining the computations above, the company should use 700 welding hours to
produce 3,500 bike frames to obtain a contribution margin of $162,750, the remaining 1,300
hours to manufacture 1,625 XSX drums to obtain a contribution margin of $174,850 and
purchase 1,375 drums to obtain a contribution margin of $45,581.25. With that, the company
would earn a total $383,184.25 contribution margin. With fixed expenses of $43.75 unit totaling
$153,125 and fixed expenses per unit $21.15 totaling $34,368.75 for manufactured mountain
bike frames and XSX drums respectively, the company would earn a net income of $195,690.50.
4. Redo requirements (2) and (3) above, making the opposite assumption about direct labor
from the one you originally made.
(2)

PURCHASED XSX DRUMS


Selling price per drum
Variable cost per drum:
Purchase price
Selling and administrative
expense
Contribution margin per drum
MANUFACTURED XSX DRUMS
Selling price per drum
Variable cost per drum:
Direct materials
Direct labor
Manufacturing overhead
Selling and administrative expense
Contribution margin per drum

$154.00
$120.0
0
0.85

120.85
$ 33.15
$154.00

$44.50
4.50
1.05
0.85

MANUFACTURED MOUNTAIN BIKE FRAMES


Selling price per frame
Variable cost per frame:
Direct materials
$17.50
Direct labor
22.50
Manufacturing overhead
0.60
Selling and administrative expense
0.40

50.90
$103.10

$ 65.00

41.00

CHAPTER 10
DIFFERENTIAL ANALYSIS: THE KEY TO DECISION MAKING

Contribution margin per frame

$ 24.00

(3)

Contribution margin
Welding hours per unit
Contribution margin per welding hour

Manufactured
XSX
$ 103.10
0.80
$ 128.88

Mountain
Purchased
Bike Frames
XSX
$ 24.00 $ 33.15
0.20
$ 120.00

After obtaining the contribution margin per constrained resource, Storage Systems should
use all of its available 2,000 welding hours to manufacture all 2,500 drums to obtain a
contribution margin of $257,750 and purchase 500 drums to obtain a contribution margin of
$16,575 for a total contribution margin of $274,325. With fixed expenses of $16.65 per
manufactured XSX drum totaling $41,625, the net income of the company would be $232,700.
5. What do you think is the correct way to treat direct labor in this situation? Explain.
I think that the direct labor should be treated as a fixed cost because according to the
companys policy, the employees are paid for full 40-hour workweeks and the employees are
only laid off during major recessions which mean that the employees are still paid full and the
cost will only disappear in major recessions.
ETHICS CHALLENGE
1. Should the Ashton processing center be shut down and its work redistributed to the other
processing centers in the region?
Revenues
Operating expenses:
Additional rent
Local administrative expense
Total operating expenses
Net operating income (loss)

Continue
$ 5,000,000

Discontinue
$
-

Difference
$ (5,000,000)

120,000
$ 120,000
$ 4,880,000

400,000
60,000
$ 460,000
$ (460,000)

(400,000)
60,000
$ (340,000)
$ (5,340,000)

No, the Ashton processing center should not be discontinued because the amount of
revenues that would be lost is greater than the amount of costs that can be avoided and the
additional costs if the operations are shifted combined.

CHAPTER 10
DIFFERENTIAL ANALYSIS: THE KEY TO DECISION MAKING

2. Do you think Marvin Brauns decision to shut down the Ashton facility is ethical?
Explain.
In my opinion, his decision to shut down the operations is unethical because he is making
a decision from a view of his own perspective and not for the company as a whole. He intends to
discontinue the operations just to avoid having to report a negative result of operations without
knowing first the effect to the company if the operations have been shut down.
3. What influence should the depreciation on the facilities at Ashton have on prices charged
by Ashton for its services?
ANALYTICAL THINKING
1. Do you agree with the sales manager that the company should discontinue milling flour
and use the entire milling capacity to mill cracked wheat if the price of flour remains at
$625 per ton? Support your answer with computations and explanations.

Selling price
Cost to manufacture:
Raw materials:
Enrichment materials
Cracked wheat
Wheat grain
Total raw materials
Contribution margin

Continue
Manufacturing
Flour
$ 625

Discontinue
and Produce
Cracked Wheat
$490

80
470
550
$75

390
390
$100

Difference
$ (135)

80
470
(390)
160
$ 25

I think I might agree and would consider to discontinue the operations because even
though that the revenue to be generated from cracked wheat per ton is $135 less than the revenue
per ton of flour, the raw materials cost less which can compensate for the decrease in the
revenue.

2. What is the lowest price that the company should accept for a ton of flour?

CHAPTER 10
DIFFERENTIAL ANALYSIS: THE KEY TO DECISION MAKING

Selling price (squeezed)


Variable expenses:
Direct materials
$ 550
Direct labor
20
Contribution margin
Fixed expense
Manufacturing profit

630

570
$60
60
$0

It is still tolerable for a company if the realized neither a profit nor loss, in other words,
the company can accept a lowest selling price which is equal to the total expenses.

CHAPTER 11
CAPITAL BUDGETING DECISIONS

ETHICS CHALLENGE
1. What should Amy do?
Amy should act with integrity and credibility. She should not act in the way that the
committee might be leading her into and she should communicate her report fairly and
objectively. And also, since she is having an ethical dilemma against the committee, she should
discuss the matter with the management above the committee.
2. Do you have any suggestions for revising the way in which postaudits are conducted at
Hi-Q?
A way to improve the postaudits is that the higher management should accept the
opinions of others and have the truth be reported. It can be clearly observed from the statements
that the committee only looks from their perspective and does not want the results of the
postaudits to be away from their expectations. The committee should learn that not all things will
go the way we want.
ANALYTICAL THINKING
1. Using the net present value approach, determine whether Wyndham Stores should lease
or buy the new store. Assume that you will be making your presentation before the
companys executive committee.
Cash
12%
PV of Cash
Buy
Year
Flows
Factor
Flow
(6,000,000
Down payment
Now
)
1.000 $ (6,000,000)
(2,000,000
Installments
1-4
)
3.037
(6,074,000)
Operating expenses
1 - 20
(200,000)
7.469
(1,493,800)
Residual value
20 5,000,000
0.104
520,000
Net Present Value
$ (13,047,800)

Lease

Year

Advance lease payment

Now

Annual lease payment


Security deposit
Repairs and maintenance
Refund of security deposit

1 -19
Now
1 - 20
20

Cash
Flows
(1,000,000
)
(1,000,000
)
(400,000)
(50,000)
400,000

12%
Factor

PV of Cash
Flow

1.000

$ (1,000,000)

7.366
1.000
7.469
0.104

(7,366,000)
(400,000)
(373,450)
41,600

CHAPTER 11
CAPITAL BUDGETING DECISIONS

Net Present Value

$ (9,097,850)

Net Present Value in favor of Leasing

$ (3,949,950)

2. How will you reply in the meeting if Harry Wilson brings up the issue of the buildings
future sales value?
The future value of the building is $5,000,000, but if we consider the time value of
money at an appropriate discount rate, its value at the end of 20 years is only $520,000. Although
the discounted residual value to be recovered at the end of year 20 is greater than the discounted
refund of the security deposit, it would only be realized only if the company buys the building
but it would be accompanied with much greater costs compared to if the company just leased the
building.
CASE
1. Which alternative should the company choose?
Alternative 1
Cost of new model 2600
Market Value of Replacement
Cost of new machine
Production Cost
Production Cost
Production Cost
Production Cost
Repair and Maintenance

Amount
(180,000)
100,000
(200,000)
(18,000)
(27,000)
(36,000)
(40,500)
(6,000)

Years
Now
10
6
1
2
3

18%
PV Factor
1.000
0.191
0.37
0.847
0.718
0.609
2.32
4.494

Net present value

(412,380)

Alternative 2
Cost of new model 5200
Production Cost
Production Cost
Production Cost
Production Cost
Repair and Maintenance
Net present value

Present Value
of Cash Flows
(180,000)
19,100
(74,000)
(15,246)
(19,386)
(21,924)
(93,960)
(26,964)

Amount
(250,000)
(14,000)
(21,000)
(28,000)
(31,500)
(4,600)

Years
Now
1
2
3

18%
PV Factor
1.000
0.847
0.718
0.609
2.32
4.494

Present Value
of Cash Flows
(250,000)
(11,858)
(15,078)
(17,052)
(73,080)
(20,672)
(387,740)

2. Suppose that the cost of direct materials increases by 50%. Would this make the model
5200 machine more or less desirable? Explain

CHAPTER 11
CAPITAL BUDGETING DECISIONS

The 50% increase in direct materials would make the model 5200 less desirable because
its material would then cost $0.60 per unit compared to the model 2600 having $0.54 of direct
materials per unit.
3. Suppose that the cost of direct labor increases by 25%. Would this make the model 5200
machine more or less desirable? Explain.
A 25% increase in direct labor would cost $0.625 and $0.275 for model 2600 and model
5200 respectively, making model 5200 more desirable because it costs less than the other.

CHAPTER 13
FINANCIAL STATEMENT ANALYSIS

ETHICS CHALLENGE
1. Would the company qualify for the loan?

Current Ratio
Quick Ratio
Times Interest Earned

Requirement Performance
> 2.0
1.77
> 1.0
0.73
4
2.50

Criteria met?
No
No
No

Based on the companys current performance, the company doesnt have the
qualifications to avail the loan.
2. What advice would you give to Jurgen concerning the machine?
Classifying the equipment as inventory would increase the companys current ratio
meeting one of the requirements of the loan. Although that the bank does not require audited
financial statements, reclassifying the equipment as inventory even though that the company
would still use it in their operations, would be unethical because it would misappropriate the
assets which constitutes fraud. If the equipment is sold, it would also meet both current and quick
ratio requirements. On the other hand, there would be no means to smooth the operations
whenever there is a bottleneck. Whether the equipment is classified as inventory or the company
sells it, the financial statements would still not meet the times interest earned criteria, so the
company would still not avail the loan.
ANALYTICAL THINKING
Compute for the missing amount on the companys financial statements.
Let CA = Current Assets
CA
2.40 =
$250,000
CA = $600,000
Let QA = Quick Assets
QA
1.12 =
$250,000
QA = $280,000

CHAPTER 13
FINANCIAL STATEMENT ANALYSIS

Let I = Inventory
$280,000 + I = $600,000
I = $600,000 280,000
I = $320,000
Let EAR = Ending Accounts Receivable
$2,700,000
15.0 =
($160,000 + EAR) 2
$2,700,000
15.0 =
$80,000 + EAR/2
$1,200,000 + 7.5EAR = $2,700,000
7.5EAR = $2,700,000 1,200,000
7.5EAR = $1,500,000
EAR = $200,000
Let C = Cash
C + $200,000 + $320,000 = $600,000
C = $600,000 - $200,000 - $320,000
C = $80,000
Let CGS = Cost of Goods Sold
=
CGS
6.0
($280,000 + $320,000) 2
=
CGS
6.0
$300,000
CGS = $1,800,000
Let GM = Gross Margin
GM = $2,700,000 - $1,800,000
GM = $900,000
Let B = Bonds Payable
B 10% = $45,000
B = $450,000
Let E = Total Equity
($250,000 + $450,000)
0.875 =
E
0.875E = $700,000
E = $800,000

CHAPTER 13
FINANCIAL STATEMENT ANALYSIS

Let A = Total Assets


A = $700,000 + $800,000
A = $1,500,000
Let PPE = Plant and Equipment, net
$1,500,000 = $600,000 + PPE
$1,500,000 - = PPE
$600,000
PPE = $900,000
Let NI = Net Income
NI + ($45,000 60%)
14% = ($1,200,000 + $1,500,000)
2
NI + $27,000
14% =
$1,350,000
$189,0
= NI + $27,000
00
NI = $162,000
Let NIBT = Net Income Before Taxes
NIBT (NIBT 40%) = $162,000
NIBT 0.4NIBT = $162,000
0.6NIBT = $162,000
NIBT = $270,000
Let IT = Income Taxes
I = $270,000 40%
T
I = $108,000
T
Let NOI = Net Operating Income
NOI - $45,000 = $270,000
NOI = $270,000 + $45,000
NOI = $315,000
Let SAE = Selling and Administrative Expense
$900,000 - SAE = $315,000
-SAE = $315,000 - $900,000
SAE = $585,000
Let NSO = Number of Shares Outstanding

CHAPTER 13
FINANCIAL STATEMENT ANALYSIS

$162,000
NSO
$4.05NSO = $162,000
NSO = 40,000
$4.05 =

Let CS = Common Stock


CS = 40,000 $2.50
CS = $100,000
Let RE = Retained Earnings
$100,000 + RE = $800,000
RE = $800,000 - $100,000
RE = $700,000

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