Quiz - Chapter 9 - Solutions

1. Royco, Inc. contracted, for the current year, to purchase $425,000 worth of light
fixtures from a retailer for $5 per unit. Royco keeps 12 1/2 percent of its annual
purchases (in dollars) on hand at the end of each calendar year to avoid stockouts
in early January, a period when most retailers are out of fixtures. If Royco
purchased $725,000 worth of inventory last year at $7.50 per unit, what are the
unit sales for the current year? Royco uses a FIFO inventory system.
A 128,542
B 97,083
C 86,458
D 84,583

ANSWER: C

(725,000/7.50) .125 + 425,000/5.00 - x = (425,000/5.00) .125

2. The Axel Company's contribution margin ratio is 25% and its total fixed costs are
$80,000. Certain changes are planned that will increase total fixed costs by 10%
but decrease variable expenses by 20% per unit. What sales volume will achieve
a pre-tax income of $16,000? (Round your answer to the nearest $1,000.)
A $149,000
B $173,000
C $260,000
D $347,000

ANSWER: C

fixed costs = 80,000 (1.10) = 88,000

.25 = (Sales – VC/Sales) VC = .75 sales
if VC decrease by 20%, then VA = .60 sales
sales - .60 sales - 88,000 = 16000
.40 sales = 88,000 + 16,000 = 104,000
Sales = 104,000/.4 = 260,000
3. The Sledge Hammer Company manufactures a line of high quality tools. The
company sold 1,000,000 hammers at a price of $4 per unit in 1993. The company
estimates that this volume represents a 20% share of the current hammers
market. The market is expected to increase by 5%. Marketing specialists have
determined that, as a result of a new advertising campaign and packaging, the
company will increase its share of this larger market to 24%. Due to changes in
prices, the new price for the hammer will be $4.30 per unit. This new price is
expected to be in line with the competition and have no effect on the volume
estimates. What are the estimated sales revenues in 1994?
A $5,040,000
B $5,160,000
C $5,418,000
D $5,689,000

ANSWER: C

1993 sales = 1,000,000 ($4) = $4,000,000

1993 market size = 1,000,000/.20 = 5,000,000
1994 sales volume = 5,000,000 (1.05) (.24) = 1,260,000
1994 sales = 1,260,000 (4.30) = $5,418,000

For the following question(s) refer to the information below.

Each column is a separate situation).

1 2 3 4

Sales 100,000 units 40,000 units $2,000,000 ?

Production 110,000 units ? 1,950,000 $55,000

Beg. Finished Goods 20,000 units 5,000 units ? 7,000

Ending Finished Goods ? 7,500 units 10,000 9,500

4. What is the ending finished goods inventory (in units) column 1?

A 10,000
B 27,000
C 30,000
D 100,000

ANSWER: C

X = 20,000 + 110,000 - 100,000 = 30,000

5. What is the production volume (in units) for column 2?
A 50,000
B 42,500
C 35,000
D 12,500

ANSWER: B

5,000 + x - 40,000 = 7,500

X = 7,500 + 40,000 – 5,000 = 42,500

6. What is the beginning finished goods in column 3?

A $40,000
B $50,000
C $60,000
D $90,000

ANSWER: C

x + 1,950,000 - 2,000,000 = 10,000

x= 2,000,000 – 1,950,000 = 10,000 = 60,000

7. What are the sales in column 4?

A $62,000
B $55,000
C $52,500
D $16,500

ANSWER: C

7,000 + 55,000 - x = 9,500

7,000 + 55,000 -9,500 = x
52,500 = x
For the following question(s) refer to the information below.

T. Jackson Retail seeks your assistance to develop cash and other budget information
for May, June, and July. At April 30, the company had cash of $5,500, accounts
receivable of $437,000, inventories of $309,400, and accounts payable of $133,055.
The budget is to be based on the following assumptions:

SALES:
Each month's sales are billed on the last day of the month. Customers are allowed a 3%
discount if payment is made within 10 days after the billing date. Receivables are
recorded in the accounts at their gross amounts (not net of discounts). 55% of the
billings are collected within the discount period; 30% are collected by the end of the
month; 9% are collected by the end of the second month; and 6% turn out to be
uncollectible.

PURCHASES:
60% of all purchases of merchandise and selling, general, and administrative expenses
are paid in the month purchased and the remainder in the following month. The number
of units in each month's ending inventory is equal to 125% of the next month's units of
sales. The cost of each unit of inventory is $30. Selling, general, and administrative
expenses, of which $3,000 is depreciation, are equal to 15% of the current month's
sales.

Actual and projected sales are as shown below:

Dollars Units
March..................... 472,000 11,800
April..................... 484,000 12,100
May....................... 476,000 11,900
June...................... 456,000 11,400
July...................... 480,000 12,000
August.................... 480,000 12,200
8. What are the budgeted merchandise purchases (in dollars) for May?
A $338,250
B $355,500
C $357,000
D $375,750

ANSWER: A

1.25 (11,900) + x - 11,900 = 1.25 (11,400)

X = 11,275
purchases = 11,275 (30) = $338,250

9. What are the budgeted merchandise purchases (in dollars) for June?
A $319,500
B $342,000
C $364,500
D $375,000

ANSWER: C

1.25 (11,400) + x - 11,400 = 1.25 (12,000)

x = 12,150
purchases = 12,150(30) = $364,500

10. What are the budgeted cash disbursements during the month of June?
A $407,520
B $420,600
C $421,950
D $434,280

ANSWER: B

merchandise purchases = .60 (364,500) + .40 (338,250)

= $354,000
Expenses = .60 [(.15)(456,000) - $3,000] + .40[(.15) 476,000 - 3000]
= 66,600
Cash Disbursements = 354,000 + 66,600 = 420,600
11. What are the budgeted cash collections during the month of May?
A $445,894
B $453,880
C $472,114
D $474,934

ANSWER: A

From April: 484,000 (.55) (97) + 484,000 (.30) = $403,414

From March: 472,000 (.09) = $42,480
Total Cash Collections = 403,414 + 42,480 = 445,894

12. What are the budgeted number of inventory units that need to be purchased in
July?
A 15,250
B 15,000
C 12,250
D 12,000

ANSWER: C

Beg Bal + purchases –sales = ending balance

1.25 (12,000) + x - 12,000 = 1.25 (12,200)
15,000 + x -12,000 = 15,250
3,000 + x = 15,250
X = 12,250