Midterm Sample 2

Midterm Sample 2 - Commerce 294 Faculty of Commerce and...

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Unformatted text preview: Commerce 294 Faculty of Commerce and Business Administration University of British Columbia Mid-term Examination Name: ..................................................... .. Signature: ...................................................... .. Student number: .................................... .. Instructor: Time: 120 minutes Total Marks: 106 This examination booklet contains thirteen pages (including this page). Check to ensure this paper is complete. No programmable calculators are permitted. Please show all your calculations in an orderly format for part marks. Time management is crucial. Be sure to answer each question. No questions will be permitted during this examination. If you need to make an assumption, state it and continue. Read the questions carefully before making any assumptions. At the end of the examination hand your exam paper directly to an invigilato'r. Question 1 28 marks su ested time 30 minutes Fraser Tugs Ltd. operates a fleet of tugboats on the coast of British Columbia. Maintenance has always been a major cost to the company due to the unpredictable location of breakdowns. Repairs are either done at the company’s own dockside Repair Shop in New Westminster, or the maintenance employees use a service boat to travel to the location of the breakdown. The Controller is in the budgeting phase for Year 2 and has asked you to use the Year 1 financial information to help her predict future costs. She believes that the range of activity in these two quarters represents the activity levels that they have experienced over the years. 7 The Controller has accumulated the following monthly overhead costs for the tugboat Maintenance Department for Year 1. Month Direct Labour Cost Overhead Cost Overhead cost is incurred in three main areas: Service boat Dock Space (New Westminster) Repair Shop Direct labor hours are used to apply overhead and the direct labor rate is $35/hour. Remote dock space costs are included in Service Boat Costs and are incurred on an "as needed” basis. PART I Required ,a) The Operations Department has indicated that for Year 2 we should-expect an average of 5,500 direct labour hours of tugboat repairs. Use the provided information to predict the monthly overhead that can be expected for Year 2. (6 ' marks) ' b) The operations department has also indicated that there is the possibility that they may contract out repair sen/ices to other companies in which case direct labour hours could reach 7,800 per month. The controller has asked you to explain whether your model developed in part (a) could be used to predict this future level of activity. Thoughtfully explain your answer (4_ marks ) c) What would be a more appropriate analysis that you could perform which may provide a more accurate result? Why would this alternate analysis be better (4 marks) PART II Fraser Tugs Ltd. (continued) Further analysis of the overhead costs for July shows: Required: ' Rep‘airShop _ —— —— _ — ' — _ a) Calculate the Service Boat cost for Agril Year 1. (10 marks ) b) Calculate the fixed costs for the Repair Shop for Juiy Year 1. (4 marks) — - ' — _ — Question 2 ' (36-marks; suggested time, 40 minutes) _ Alice Rich graduated from UBC in April, Year 1 with aBachelor of Fine Arts degree. Since graduating, she has worked in the editorial department of a local fashion magazine and received a salary and benefits package of $28,000 in her first year at . work. This past year (Year 2) her “package” was $36,000 per year. Over the (Christmas) holidays, because of the lack of artistic creativity in her current position, she is considering leaving herjob and renting space at Granville island market to sell her watercolor paintings. She estimates that she can sell at least 150 paintings per year. She estimates that, producing a watercolor would cost $100 in painting supplies and other (non-labour) variable costs. She Will produce her paintings in the basement of her townhouse (inherited from her grandmother). She thinks she can sell her unframed paintings for an average price of $400. Rental of space at the market is $1,000 per month and insurance for her unsold paintings will cost her $50 per month. Additionally, to help her with her business, she will have to use the services of an accountant/tax advisor which will cost her $2,400 annually. Her tax rate will be 30% (for tax purposes, assume that her business income would be taxed in a similar manner to her employment income). PART I: a) _ What would be Alice’s yearly p're-tax income from selling the watercolor paintings. (3 marks) - D) From a quantitative perspective how many paintings would Alice need sell for her to "break-even" in this decision? (7 marks) Identify and discuss TWO qualitative factors she should consider before making her decision. (4 marks} Issue #1: ' Issue #2 PART II A friend of hers, Lorna Quigley, suggested that, in order to lure the impulse buyer who wants a ready-to-hang picture, Alice should sell framed paintings in addition to unframed paintings. Framing incurs an additional $50 cost and such paintings would sell for $500. If Alice decides to sell framed and unframed paintings, she estimates that sales w0uld increase to 200 units and that 40% of her unit sales would be framed paintings. a) Assuming she has already started her own business how many paintings of each type would she have to sell each year to “break even"? (6 marks) b) How many paintings (framed and unframed) in total would she have to sell each year to generate an after-tax income of $30,000. (3 marks) PART C: (15 marks) Assume that Alice has just completed her first year at the Granville island market and that she has realized her estimated sales and costs for selling framed and unframed paintings. Based on her success, a local gallery has offered to feature Alice’s ‘ watercolors in its store. However, the gallery wants exclusive rights to them, so she would have to give up her Granville Island market sales. The gallery only requires unframed paintings because it has its own custom—framing operation. It would sell her paintings for $500 each, and Alice would receive 50% of the sales price. The gallery would guarantee sales of 200 paintings a year. (Based on Alice's knowledge of the gallery business, she knows that galleries tend to "play it safe" and provide a guarantee of 50% of expected sales for artists that they “sign up” to exclusive contracts.) a) Assume that Alice accepted the gallery’s offer and that it sold 200 watercolors in the first year. Calculate Aiice’s after-tax income in that year? (3 marks) b) How many units would the gallery have to sell such that Alice would be “indifferent” between selling at Granville Island market or the gallery. (6 marks) c) Identify and discuss TWO other factors Alice should take into consideration before making this decision? (4 marks) Issue #1 Issue #2 Question 3 (34 marks, suggested time 40 minutes) Enpaz Ltd manufactures and sells DVD players and digital cameras. They have been in the business for several years. The following is an income statement for Year 1 as reared b the accountin clerk. — — ' , 0 ' _ " — 61200 _ — ' _ _ 245.500 340.000 Factory, lease, insurance, security 1,110,000 Totai Costs — (4,379,690) — $ 71.910 As the new management accountant you have conducted several interviews and learned the following: 1) Utilities are primarily comprised of electricity for machines. 2) The plant is operating at 72% of capacity based on space. 3) The machines are operating at 84% of capacity. Ali costs are hourly. 4) The insurance of $110,000 is for theft and fire. - 5) The security guards are hired from a security company and paid by the hour. 6) The factory lease is for ten years and the amount is $900,000 per annum. The company employs two engineers who are each responsible to ensure quality control for one of the products; the DVD engineer is paid $50,000 and the Camera engineer is paid $80,000. The firm also employs a manager for the DVD division who is paid $90,000. The Camera division is managed by the CEO who spends 25% of her time managing this product. The CEO's is paid $120,000 per annum. Activit reorts for Year 1: DVD Camera Total _ Units produced & sold 9,810 13,100 . 22,910 - 980 3.930 4.910 2.943 10.480 13.423 30% 72% Number of Orders 21 55 Production run capacity 200 units 200 units N/A Types of cleaning suplies 18 Maintenance is performed prior to each production run. Enpaz Ltd. has contracted Aficion Ltd to perform this activity since it is very technical, involving specialized parts and equipment. - The total direct labor hours for the year was 13,423. The production of one Camera uses 48 minutes of labor while the DVD player takes 18 minutes. Direct Material costs for the Camera are $60 per unit. The company uses solar powerfor lighting and heating. 10 Demand for Year 2 is expected to be similar to Year” '1. Required a) The CEO has requested that you use ABC to determine the cost of a DVD player based on Year 1 production volume? (for purposes of part “a” allocate all of the costs between DVD and Camera). Show a detailed calculation. (20 marks) Cost per DVD Direct Materials Direct labor Machining Maintenance Utilities Management Factory lease insurance, security '11 b) What is the maintenance cost associated with the production of 300 Cameras? Show catculation; (2 marks) . c) During Year 2 a movie production company has requested 380 DVD players for their set. You want the “free marketing” that this will pr0vide so you are willing to offer them 380 DVD players at a price equal to your "cost". What is the most competitive price you will offer for the 380 DVD units? (4 marks) d) During Year 2, 50 cameras were damaged during an accident in the factory and were discarded. What is the cost of this accident? (4 marks) ' 12 e) Upon further investigation, you determine that the labor hours (2,940) included labor time spent doing set-up. This labor time was 15 labor hours per set-up. The original number of minutes per unit figure was calculated based on total labor hours divided by number of units ( ie for DVD it was 2940 hours I 9,810 = .3 of an hour or 18 minutes). How does this new information change your understanding of the various costs associated with the production of a DVD player? (2 marks for explanation, 2 marks for calculation) Question 4 ( 8 marks, suggested time 10 minutes) “As most industry watchers expected Dell Computer turned in an impressive performance in the fourth quarter, with sales rising more than 20% and profit rising 32%. These results were particularly impressive considering the shape the PC industry is in”. (Globe and Mail February 15, 2003) Using management accounting concepts explain how Dell Computers could be increasing profits when the profits of the industry are decreasing? Provide a thoughtful response. 13 SOLUTION Fraser Tugs (a)The Operations Department has indicated that for Year 2 we sh0uld expect an average of 5,500 direct labour hours of tugboat repairs. Use the provided information to predict the monthiy overhead that can be expected for Year 2. To predict the Year 2 monthly cost, first use the HighILow method to isolate the variable and fixed costs. Costs of highest level of activity less cost of lowest = $237,900 - $188,400 = $49,500 = W Highest level of activity less the lowest level (in hours) 6,800 —- 4,600 2,200 Note: $237,900 I $35 = 6,800 Fixed costs would therefore be calculated as: $ 237,900 — ( $238,000 x $22.50) = M $35Ihr or $188,400 — ( $161,000 x $22.50) = M $35.01 To predict the costs at an activity level of 5,500 hours, the isolated fixed and variable costs are, applied to the estimated activity level to provide a cost estimate. (5,500 x $22.50) + $84,900 = g 208,659 (b) The operations department has also indicated that there is the possibility that they may contract out repair services to other companies in which case direct labour hours could reach 7,800 per month. The controller has asked you to explain whether your model developed in part (a) could be used to predict this future level of activity. Thoughtfully explain your answer At an activity level of 7,800 direct labour hours per month, this model would not serve as a useful predictor of costs. The controller has indicated that the range of activity between 4,600 and 6,800 is representative for their company. 7,800 hours is well outside of their relevant range. ' The model is only appropriate for the reievant range. Activity levels bey00nd the relevant _ range could cause additional fixed costs to be required (ie more equipment) or the _ magnitude of the variable costs may change (ie overtime pay could change $35 to $40 per hour) - - r - ' 16 (c) What would be a more appropriate analysis that you 'could perform which may provide a' more accurate result? Why would this system be better The high/low method only uses the highest and lowest data points and is therefore a significant simplification of the cost behaviour. The model could be skewed by movement of just one point. A least squares regression modei would be much better choice for predicting the costs. This method will provide a statistical fit of thecost line for the data points. It is an objective method that makes use of all the data points and although more computation is required, computer applications are available. This regression will also provide statistical “feedback” or measures to draw further conclusions about the validity of the model. PART II ' ‘ '- Fraser Tugs Ltd. Required: . (a) Calculate the Service Boat cost for April Year 1. ( 10 marks ) The first step is to calculate the Service Boat costs for duty (removing the fixed portion representing the service boat leases): Service BC = § 77 900—11 800 = $66 100 A W DLH $238,000/$35 6,800 Use the July Division variable cost to predict the April variable Supplies costs: $161,000 X$ 9.72 = g gggjg $35 Total SB costs for April = $44,712 + $11,800 = M Or you could take each variable component and divide by labor hours. Parts (2950015800) (4,600) ‘ 19,918 Gasoline (11,250! 6,800) ( 4,600) 7,950 Remote dock (19,300] 6,800)(4,600) 13,064 Service beat (fixed lease . ' 11,800 Misc supp (6,050!6,800_)(4,600) . fl 56,465 17 (b) Calculate the fixed costs for the Repair shop for July Year 1. Use the high/low method to determine the Variable and fixed Repair Shop facility costs: First determine the April Repair Shop costs: Total April costs = $188,400 Less known fixed (40,000) (11,800) Less Supplies VC (44,712) Aprii Supplies From part (a) above = M ' - Use highllow method to isolate variable cost in Repair Shop: p120000—p91888 = $28112 =$_’Lzla_LDLti 6,800 — 4,600 2,200 Fixed Repair Shop Totaf Repair Shop for July ' $ 120,000 Repair Shop: Variable costs for July , (6,800 x 12.78) g ( 86,904) Repair Shop : fixed costs ' p g; 9gp 18 Alice Rich PART I: (a) (b) What is Alice’s yearly pre-tax income from selling the watercolor paintings. Revenue $60,000 DIVI (15,000) Rental (12,000) insurance (600) Accountant 2 400 $30,000 How many paintings and must she sell each year to “break-even" in her decision Fixed Costs including opportunity cost of lost wageslbenefits “package”: Lost wages/benefits package . $36,000 Rent $12,000 insurance $600 Accountinng ax services $2,400 . 51 000 Contribution Margin per painting = $400 - $100 = $300 Break-even point = $51 ,000 1 $300 per painting = 170 paintings if $15,000; 300 = 50 paintings => 5/7 (c) identify and discuss'two qualitative factors she consider before making up her mind. - increased job satisfaction due to more creative work; at the same time, will the business take up so much of her time that she will not be able to take vacations, etc., that she can currently take with herjob (increased stress, repercussions on her health and quaiity of life...) ' - chances of promotion or increase in salary/benefits package at currentjob o the uncertainty related to her estimates of sales and costs a increase in her townhouse insurance rates due to unfinished/unsold paintings in her basement . ‘ o the extra risk involved in starting .up a business and the “security” she is giving up by going into business; however, one must also consider the extra profits (“the sky is the limit”) that could materialize if her business is successful - the upside of the “watercolour” business- she may attract widespread ' attention which would reain give her “artistic” career a boost 19 PART ii: (a) Assuming she has already started her own business, how many paintings of each type would she have to sell each year to "break even"? CM per unit (unframed) = 400 - 100 = $300 CM per unit (framed) = 500 — (100 + 50) = $350 Average CM per unit = 300 (.6) + 350 (.4) = 180 + 140 = $320 Fixed costs = $15,000 (she has already decided to start the business so the $36,000 is now not an oppostunity cost) ' Break-even point = $15,000/ $320 = 46.87 "units" Unframed paintings = 46.87 (.6) = 28.12 or 29 Framed paintings = 46.87 (.4) = 18.74 or 19 (b) How many paintings (framed and unframed) in total would she have to s'eileach year to generate an after-taxincome of $30,000. I Before~tax incOme = After-tax income I (1 -— tax rate) = 30,000 / (1-.30) = $42,857 Thus, (42, 857 + 12,000 + 600 + 2,400) = 57,857! 320 = 18‘] paintings PART III: (a) Assume that Alice accepted the gallery’s-offer and that it sold 200 watercolors in the first year. What was Alice’s after-tax income in that year? AliCe will receive: 500 X .5 = 250 per painting CM per unit = 250 — 100 = 150 per painting After-tax income = [200 (150) -— 2,400 (accounting/tax)] X .7 = $19,320 Revenue $50,000 V.C 7 (20,000) Accountant (2,400) $ 27,600 Tax ( 8,280) After tax income $ 19,320 20 (b) How many units would the gallery have to sell such that Alice would be “indifferent” between selling at Granville Island market or the gallery. Currently, at Granville Island, she is selling 80 framed and 120 unframed paintings (see note that states that she has realized her estimated sales). Thus, her before-tax income is: 80 (350) + 120 (300) —.12,000 — 600 — 2,400 = $49,000 To be indifferent: 250x — 100X — 2,400 : 49,000 X = 311 paintings Identify and discuss TWO factors Alice should take into consideration before making this decision? - if she accepts the gallery’s offer, she can focus exclusively on her “creative pursuits” (she doesn’t need to worry about the business aspect of things) a the gallery’s efforts at marketing her paintings may lead to greater “artistic recognition" which may lead to increased creative and/or monetary opportunities .- if she accepts the gallery‘s offer, wilt she still retain control over the "artistic process” or will the gallery “dictate” the nature/type of paintings she must produce a the length of the contract with the gallery (a longer contract would be preferred, all other things being equal) ' - based on her knowledge of the gallery business, it is quite likely that the gallery will be able to sell more than 311 paintings - if she accepts the gallery’s offer, will she have enough time produce the extra paintings; alternatively, willacceptingthe contract with the gallery free up some of her time 21 'Enpaz Ltd. 1) The CEO has requested that you use ABC to determine the cost of a DVD player based on Year 1 production volume? (for purposes of part "a" allocate all of the costs between DVD and Camera). Show a detailed calculation. Cost per DVD Direct Materials 1,178,400 — ($60 x13,100)= 392,400 I 9,810 - = $40 per unit Direct labor {18 f 60] x [402,690] 13,420] = $9 per unit Machining $491,100 14,910 = $100 per machine hour 98019810 = 10% of one machine hour = (.10) ($100 ) = $10 per unit Maintenance Batch cost: number of set-ups = 9,8101200 = 50 runs = 13,1001200 = 66 runs Total of 116 runs $612,000/116 = $5,276 per batch If- the batch cost is unitized for Year 1 then, (50 x 5276)! 9,810 -—f $26.90 per unit This is based on volume from Year 1. This figure is not useful for most decision making. Utilities The best driver here is machine hours. $245,500 I 4,910 = $50 per MH Therefore, (.10) ( $50) = $5 per unit H Management If unitized then => ($50,000 + $90,000):' (9,810) = $14.27 per unit CEO could be split, however this position is a facility level cost and becomes problematic when unitized, as the resultant number is rendered useless if volume changes even by one unit of activity. Factory lease insurance, seburity $1,110,000 I 22,910 'As a facility cost, the unitizing of this figure renders a completely useless number. The aggregate number of $1,110,000 is the useful one as it is a cost that does not have a unit based driver and therefore ABC, which links cause and effect would treat this as a facility cost for 99.99% of all management decisions. 22 l l E 2) What is the maintenance cost associated with the production of 300 Cameras? Show calculation. 300 cameras would require 2 set-ups which would provide a capacity of 400 units. The cost would be 2 x $5,276 = $10,552 3) During 2003 a movie production company has requested 380 DVD players for their set. You want the ‘_‘free marketing” that this will provide so you are willing to offer them 380 DVD players at a price equal to your “cost”. What is the most competitive price you will offer for the 380 DVD units? The minimum price would be the out~of~ pocket cost (the cost to make these 380 units). Current demand of 9,810 + 380 would be 10,190. The incremental number of batches would be 1. (51 versus 50). DM 40 x 380 15,200 DL 9 x 380 3,420 Machining 10 x 380 3,800 Utilities 5 x 380 1,900 ' 64 x 380 = $24,320 Maintenance 1 x $5,276 = $ 5,276 $ 29,596 or for this order $25,956 I 380 = $77.88 4) During 2003, 50 cameras were damaged during an accident in the factory and were discarded. What is the cost of this accident? No additional batch is required since there is excess capacity in the batch. DlVl ($60)(50) = $3,000 or 60 DL (48/60) ($30)(50) = 1,200. ' 24 Machining (3,930113,100)($100) (50) = 1,500 30 Utilities ($50)(3,930/13,100) (50) ‘ = 750 15 6,450 ‘ 129 Clearly, this would trigger no faciiity level costs as there is excess capacity. This highlights the serious flaw in unitizing a facility level cost. This will cause the firm to make ludicrous decisions and demonstrates why it is imperative tounderstanding your cost behavior in conjunction with utilization of ABC. 23 5) Upon further investigation, you determine that the labor hours (2,940) included labor time spent doing set—up. This labor time was 15 labor hours per set-up. The "original number of minutes per unit figure was calculated based on total labor ' hours divided by number of units ( ie for DVD itwas 2940 hours I 9,810 = .3 of an hour or 18 minutes). How does this new information change your understanding of the various costs associated with the production of a DVD player? Clearly the set-up cost calculation is now bigger than previously determined. DL will increase the set-up cost by $30 x 15 = $450 per set—up. Conversely the time it takes (and thus the cost) to actually produce each DVD is decreased by a corresponding amount. - = For example DVD’s 2,940 ~— (15 x 50) = 2,190 Thus per unit the labor is actually 2,190! 9,810 = 23% => .23 x 60 = 13.5 minutes. ‘ ‘ This new information would increase the cost of orders that triggered multiple batches. Enpaz Ltd. could make the units for iess cost (per unit). For example, the accident damaging 50 units is actually less costly than previously calculated. Dell Computer "As most industry watchers expected Dell Computer turned in an impressive performance in the‘fourth quarter, with sales rising more than 20% and profit rising 32%. These results were particularly impressive considering the shape the PC industry is in". (Globe and Mail February 15, 2003) Using management accounting concepts explain how Dell Computers could be increasing profits when the profits of the industry are decreasing? Provide a thoughtful response. 'JlT Decrease insurance for inventory Eliminate cost of obsolescence Non-value added costs Warehousing Cost of capital More competitive on the cost. Can therefore price more aggressively. Faster turnaround Custom products, increase popularity and loyalty. Significant reduction of inventory levels... eliminated finished goods inventory Increase flexibility,, thus more responsive to customers demands/preferences TQM 24 ...
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This note was uploaded on 01/03/2011 for the course COMM 290 taught by Professor Brian during the Winter '09 term at UBC.

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Midterm Sample 2 - Commerce 294 Faculty of Commerce and...

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