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Unformatted text preview: Name (Last, First): ___________________________Student #:________ Section: 201 (10am) 202 (12pm) Sauder School of Business University of British Columbia Commerce 294, Managerial Accounting Midterm Examination #2, March 3, 2011 TIME: 90 MINUTES MARKS: 60 This examination booklet contains 11 pages (including this page). Check to ensure that this paper is complete. No programmable calculators are permitted. Please show all your calculations in an orderly format for part marks. ALL CELL PHONES MUST BE SWITCHED OFF AND MUST BE GIVEN TO AN INVIGILATOR IF YOU NEED TO USE THE WASHROOM. No questions will be permitted during the examination. If you need to make an assumption, state it and continue. Read the questions carefully before making any assumptions. Question # 1 ________ Question # 2 _________ Total_______ 60 Question #1 (30 marks, suggested time 45 minutes) CBA Ltd manufactures and sells two products, Product A and Product B. The following information is available about CBA: 1) Activity reports for 2010: Units produced & sold Machine hours Labor hours Space used Number of Orders Production run capacity Types of cleaning supplies Prod. A 9,810 980 2,940 40% 21 200 8 Prod. B 13,100 3,930 10,480 60% 34 200 10 Total 22,910 4,910 13,420 100% 55 18 2) The following is an income statement for 2010: Revenue $4,451,600 Direct Materials $1,178,400 Direct Labor 402,690 Machining 491,100 Maintenance 612,000 Utilities 245,500 Management 340,000 Factory; lease, insurance, security 1,110,000 Total Costs (4,379,690) Net Income $71,910 3) Utilities are primarily comprised of electricity. The company uses solar power for lighting and heating. 4) The machines are operating at 84% of capacity. 5) The insurance of $110,000 is for theft and fire. 6) The security guards are hired from a security company and paid by the hour. 7) The factory lease is for ten years and the amount is $900,000 per annum. 8) Direct Material costs for Product A are $40 per unit. 9) Maintenance is performed prior to each production run. CBA Ltd. has contracted Manut Ltd to perform this activity since it is very technical, involving specialized parts and equipment The company employs two engineers who are each responsible to ensure quality control for one of the products; the Product A engineer is paid $50,000 and the Product B engineer is paid $80,000. The firm also employs a manager for the Product A division who is paid $90,000. The Product B division is managed by the CEO who spends 25% of her time managing this product. The CEO’s is paid $120,000 per annum. Demand for 2011 is expected to be similar to 2010. REQUIRED a) The CEO has requested that you use ABC to determine the cost of a unit of Product B based on 2010 production volume? (for purposes of part ”a” allocate all of the costs between Product A and Product B). Show a detailed calculation. (12 marks) Cost per Product B Direct Materials 1,178,400 – ($40 x 9,810) = 786,000 / 13,100 = $60 per unit Direct labor [ 402,690 / 13,420] = $30/DLH 10,480 DLH * $30/DLH = $ 314,470.3 $ 314,470.3 / 13.100 = $ 24 per unit Machining $491,100 / 4,910 = $100 per machine hour 3,930 MH * $100/MH = $393,000 $393,000 / 13,100 = $30.2 per unit Maintenance Batch cost: number of set‐ups = 9,810 / 200 = 50 runs = 13,100 / 200 = 66 runs Total of 116 runs $612,000 / 116 = $5,276 per batch If the batch cost is unitized for 2010 then, (66 x 5276)/ 13,100 = $26.58 per unit This is based on volume from 2010. This figure is not useful for most decision making. Utilities The best driver here is machine hours. $245,500 / 4,910 = $50 per MH 3,930 MH * $50/MH = $ 196,500 196,500 / 13,100 = $15 per unit Management If unitized then => ($80,000 + 25% of $120,000)/ (13,100) = $8.40 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. CEO: 75% of 120,000 / 22,910 = $ 3.92 per unit Factory lease insurance, security $1,110,000 / 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. $1,110,000 / 22,910 = $ 48.45 per unit TOTAL……………………………………………………………………………………………….. b) What is the maintenance cost associated with the production of 480 units of Product A? Show calculation. (3 marks) 450 cameras would require 3 set‐ups which would provide a capacity of 600 units. The cost would be 3 x $5,276 = $15,828 c) During 2011 a potential new customer has requested 480 units of Product B. You are willing to offer them 480 units of B at a price equal to your “cost”. What is the most competitive price you will offer for the 480 units of Product B? (5 marks) The minimum price would be the out‐of‐ pocket cost (the cost to make these 480 units). Current demand of 13,100 + 480 would be 13,580. The incremental number of batches would be 1. (68 versus 66). DM DL Machining Utilities 60 x 480 24 x 480 30.2 x 480 15 x 480 28,800 11,520 14,496 7,200 129.2 x 480 = $62,016 Maintenance 2 x $5,276 = $ 10,552 Total = $ 72,568 or for this order $72,568 / 480 = $151.18 per unit d) During 2011, 100 units of Product A were damaged during an accident in the factory and were discarded. What is the cost of this accident? (4 marks) 9810 units + 100 = 9910 < 1000 related t0 50 runs already defined. No additional batch is required since there is excess capacity in the batch. DM ($40)(100) = $4,000 or 40 DL {[(402,690/13,420) x 2,940]/9810} x ( 100) = 900 9 Machining {[(491,100/4,910) x 980]/9810} x ( 100) = 1000 10 Utilities {[(245,500/4,910) x 980]/9810} x ( 100) = 500 5 6,400 64 per unit Clearly, this would trigger no facility 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 to understanding your cost behavior in conjunction with utilization of ABC. 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 Product A it was 2940 hours / 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 Product A? (2 marks for explanation, 3 marks for calculation) 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 Product A is decreased by a corresponding amount. For example Product A’s 2,940 – (15 x 50) = 2,190 Thus per unit the labor is actually 2,190 / 9,810 = 22.3% => .223 x 60 = 13.4 minutes. This new information would increase the cost of orders that triggered multiple batches. CBA Ltd. could make the units for less cost (per unit). For example, the accident damaging 100 units is actually less costly than previously calculated. Batch cost climb by $450 per batch Unit costs drop by the labor decrease: OLD 18 minutes NEW 13.4 minutes @ $30 / hour $6.67 Cost Difference: 380 (9‐6.67) $877.80 Batch 1 ($450) $450 Decrease $427.80 in impact This is because we are making more than a full batch Question #2 (30 marks, suggested time 50 minutes) Happy Ending Events (HEE) is a comprehensive event production management and marketing company. HEE offers full support to host events for up to 1,000 guests. PART ONE – Current Structure For the previous years, HEE was charging a fee per guest that includes meals, beverages, entertainment (DJ service), event planner, and free Parking/Valet Services. HEE costs related to the services provided are the following: ‐ ‐ ‐ ‐ ‐ ‐ Meals Beverages Entertainment (DJ service) Location Parking/Valet services Waiters less than 300 guests from 301 to 500 guests from 501 to 700 guests from 701 to 1000 guests $25/guest $15/guest $900/event $3,500/event $900/event $350/event $500/event $600/event $650/event ‐ ‐ ‐ ‐ Event planner Security for the Parking area Cooking staff Administrative staff $90,000/year $36,000/year $51,600/year $84,000/year Income tax rate is 40% REQUIRED: a. Assuming the average number of guests per event is 450, calculate the number of events required per year to break‐even if HEE charges $65 per guest? (6 marks) Revenue: 450 x 65 $29,250 Variable costs: Meals: 25 x 450 = $11,250 Beverages: 15 X 450= $ 6,750 Entertainment $ 900 Location $ 3,500 Valet services $ 900 Waiters $ 500 Total $23,800 Fixed Costs: Event planner $90,000 Cooking staff $51,600 Security for the Parking area $36,000 Administrative staff $84,000 Total $261,600 B/E point in units = . 261,600 . = 48 events 29,250 – 23,800 b. If HEE holds 51 events during a year with an average of 550 guests per event at $65 per guest, what is the margin of safety in %? (3 marks) Even though the number of guests increased compared to the expected amount, you could have used the information from part “a” as the B/E point, i.e. 450 guests x $65 / guest x 48 events = $1,404,000. Actual sales: 51 x 65 x 550 = $1,823,250 B/E sales: 48 x 65 x 450 = $1,404,000 Margin of safety: = $ 419,250 % = $ 419,250 / 1,823,250 = 23% PART TWO – New structure Realizing the high costs associated with hosting an event, a customer suggested the following option: HAA would be paid $58/guest to provide services related to meals, beverages, entertainment, location fee and waiters, but not Parking/Valet Services. In other words, HEE could charge directly guests for Parking/Valet services (a fixed cost for the period of the event). The idea being that with this second source of revenue (Parking/Valet Services), HEE would be able to provide services related to event production management at lower rate. In this sense, guests would share the costs of the event by paying the Parking/Valet Services. HEE liked the idea and is currently considering applying it to all customers. After some research, HEE found out that 1) for all events, it is expected 1 car for each 3 guests; 2) with the new structure, costs related to Parking/Valet services would become: a. Costs related to Parking/Valet services increased to $1,200/event b. Costs of Security for the Parking area would be eliminated, i.e. $0/year. 3) all other costs would remain the same; 4) the average number of guests per event would still be 450; Income tax rate is 40% REQUIRED: a. Calculate the minimum Parking/Valet Services fee (flat rate) that HEE should charge in order to maintain 48 events as the break‐even point in units in a year (5 marks). B/E point in units = . 261,600 ‐ 36,000___ . = 48 events 26,100 – 22,900 + 150Y – 1,200 where Y is the fee for the Parking/Valet Services. 225,600 = 26,100 – 22,900 + 150Y – 1,200 48 Y = $ 18 b. Assuming that besides the $58/guest for the event, HEE decides to charge $ 20/car as Parking fee, calculate the sales dollars needed per year if HEE wants to earn an after tax net income of $ 83,640 and the dollar amount coming from Parking/Valet Services. (6 marks) Before tax net income = 74,640 =139,400 (1‐0.4) B/E point in units = . 225,600 + 139,400 . = 73 events 26,100 – 22,900 + 3,000 – 1,200 450 guests * $58/guest * 73 events = $ 1,905,300 For 450 guests, 150 cars are expected per event. The revenue per event is 150 cars x $20/car = $ 3,000 * 73 events = $219,000 from Parking/Valet Serv. Total sales needed per year: $ 1,905,300 + $219,000 = $ 2,124,300 c. Assuming the average number of guests per event is still 450, at what number of events in a year would HEE be indifferent between the structure defined in “PART ONE – Current Structure” and the one suggested by a customer presented in “PART TWO (B) – New Structure” with Parking fee = $20/car besides changes in costs? (5 marks) PART ONE ‐ Current Structure: Profit = 29,250Q – 23,800Q – 261,600 PART TWO (B) – New Structure Profit = RevenueTickets – VCTickets + RevenueParking – VCParking ‐ FC Profit = 26,100Q – 22,900Q + 3000Q – 1200Q – 225,600 Comparison: 29,250Q – 23,800Q – 261,600 = 26,100Q – 22,900Q + 3000Q – 1200Q – 225,600 450Q = 36,000 Q = 80 events per year PART THREE A group of UBC students has contracted HEE for assistance with a big event to celebrate their graduation. Given the importance of the event, the manager of HEE agreed to not charge any costs related to Event planner, Cooking staff, and Administrative staff. REQUIRED: The students offered to pay $50 per person with free Parking/Valet Services. The manager of HEE agreed with the price per person as long as a minimum number of guests confirm to participate. Compute the minimum number of guests HEE should require in order to not accumulate losses in the event (consider only this event). [HINT: Start by computing the break‐even point in units (number of guests) for each range of number of guests (i.e. B/E in units if number of guests is between 1 and 300, and so on)] (5 marks) Sales Price 50/guest Variable costs: Meals 25/guest Beverages 15/guest Total 40/guest Contribution Margin per guest 10/guest Fixed costs: Entertainment Location Parking/Valet services Waiters ‐ less than 300 guests Total B/E in units: from 301 to 500 guests Total B/E in units: from 501 to 700 guests Total B/E in units: from 701 to 1000 guests Total B/E in units: Minimum number of guests: 590 $900/event $3,500/event $900/event $350/event $ 5,650 5650/10 = 565 guests – outside the range $500/event $ 5,800 5800/10 = 580 guests – outside the range $600/event $ 5,900 5900/10 = 590 guests – inside the range $650/event $ 5,950 5950/10 = 595 guests – outside the range ...
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This note was uploaded on 09/01/2011 for the course COMM 294 taught by Professor Aziz during the Spring '09 term at UBC.

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