COMM 294 - Final #2

COMM 294 - Final #2 - The University of British Columbia...

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Unformatted text preview: The University of British Columbia Faculty of Commerce and Business Administration COMMERCE 294, FINAL EXAMJNATION Question Booklet Time: 180 minutes . Total Marks: 160 Instructor: THIS EXAMINATION CONSISTS 0F 9 PAGES (INCLUDING THIS COVERING PAGE). CHECK To ENSURE THAT THE QUESTION BOOKLET IS COMPLETE. 1. EACH CANDIDATE SHOULD BE PREPARED TO PRODUCE, UPON REQUEST, _ HIS/HER LIBRARY/AMS CARD. 2. READ AND OB SERVE THE FOLLOWING ADDITIONAL RULES: No candidate shall be'permitted to enter the examination room afier'the expiration Osz hour, or to leave during the first V2 hour of the examination. ‘ 10 Candidates are not permitted to ask questions of the invigilators, except in cases of supposed errors or ambiguities in examination-questions. CAUTION - Candidates guilty of the following, or similar, dishonest practices Shall be immediately dismissed from the examination and shall be liable to disciplinary action a) Making use of any books, papers or memoranda, audio or visual cassette players or other memory aid devices, other than those authoriZed by the examiners. b) Speaking or communicating with other candidates. 'c) Purposely exposing written papers to the view of other candidates. The plea of ' accident or forgetfulness shall be not received. 3 . SMOKlNG IS NOT PERMITTED DURING EXAMINATIONS. 4. ANSWER ALL QUESTIONS IN THE SUPPLIED ANSWER BOOKLET. 5. Enjoy, seize your opportunities and manage your weaknesses. Also, make a difference and above all be successful at being young, as it} happens only once in your lifetime. ' Cheers (and good luck), NEXT (Jr->89 ’5 § (16 marks, sugg -«~ ted time 16 minutes) Budgeting Question 2 zen lasa s ‘ or major food chains. . . ated sales inunitsl(not S’s) Homestyle Foods produces fi'o e year 001 are as follo - for lasagnes for the first 5 months 0 January February needs onhand att- n—d of Homestyle’s A each mon . ‘ Ieeds on hand aswell as % ofthe The materials p is to have 5% of ‘ s - 4 equirement has always been met. next month’s oduction needs for all - Requi : a : g a. many lasagnes sho e produced in . .*. h? (4 marks) to sauce shoul- e pure = ed inMarch'? (8 marks) b. ‘ ow many kilos of t- . Describe two reaso . for estimatin_ ' 1a edient purchases? (4 marks) suggested time 18 minutes) Segmented Reporting ._ said Bugs Bunny, executive vice president of Cartoons Company oller. “Just look at this income statement for out East District; but, we‘ve really got to month). We don‘t need to worry at all ab . The statement to which Dafl‘y Duck was referring is shoWn below: Question 3 (18 marks; (“Cartoons”). March (a typical shake things up in West District." r l x 3‘ l i 5 Total Company East District West District Sales ($20 per unit) $500,000 $300,000 $200,000 Cost of good sold (39 per unit) ’ 225 000 135 000 90 000 Gross margin 275,000 165,000 110,000 Less operating expenses: Marketing expenses: Shipping 26,000 111,000 15,000 Warehouse" rent‘ 40,000 24,000 16,000 Sales salaries and commissions 56,000 34,000 - 22,000 District advertising 50,000 20,000 30, 000 Total marketing expenses 172,000 89,000 83,000 Administrative expeIlSes: ‘ ‘ ' ' ., District management salaries 25,000 10,000 15, 000 ‘ » Central ofice expenses" 50,000 30,000 20,000 Total admin. expenses 75,000 40,000 35,000 Total operating expenses 24 7,000 129,000 , 116,000 Operating income (loss) $28,000 $36 000' $(8,000) * ' Allocated based on sales dollars. Cartoons is a “wholesaler”- an organization that sells a video cartoons to various retailers. These retailers then sell the cartoons to consumers through their video stores. Cartoons is organized into . two districts (areas) as shown above. Each district has about the same number of retail customers. These retailers place orders with their district salesperson and the goods are shipped to them from ' the central warehouse. The salespersons work out of their own home and are responsible for their own travelling and selling expenses. Additional information on the company follows: i. The ofice and warehouse are centrally located, being about the same distance fi'om each district. ii. Each district salesperson specifics on the sales order what shipping (delivery) method 15 to be used (by truck or air). (All goods are shipped to the customer from the central warehouse.) Shipping . is a variable cost, and it is traceable to the districts; difl'erences 1n amourit .above are reflective of the difi‘erent shipping methods used. iii. All salespersons are paid a base salary of $500 per month, plus a commission of 10% of sales. There are 8 saleSpersons 1n the East District and 4 1n the West District. iv. Each district sales manager must arrange his or her own district advertising program. Each district has a number of sales managers and each manager is paid the, same amount. v1. The variable costs of processing orders, which have been included in the "Central ofiice expenses" above, amount to $17,500. During March, the East District had 3,000 orders and the West District had $00 orders. The remainder of the "Central ofice expenses" are fixed and relate to general administrative assistance provided to all parts of the organization. . .< Required: » a. Porky Pig, the president, has asked Dafl‘y Duck to prepare a segmented income statement for the two districts. (12 marks) b. Based on the segmented income statement, fully discuss ANY TWO points (relating to the districts) that should be brought t6 the attention of management? (6 marks) i i i i i 1 E Question 4 (19 marks; suggested time 19 minutes) . Responsibility Accounting and Transfer Pricing Purchased parts (frOm outside suppliers) 4 $65. ' Electrical fitting (Part X23) 5,}:- Other variable costs 1 l; I Allocated fiXed overhead " gig Total cost per seat unit $99 = Although the $5 price for X23 fitting represents a substantial discount from the regular $8 price, the manager of the Seat Division believes that the price concession is necessary if his division is to get to reject his bid if it is more than $100 per seat, Thus, if the Seat Division is forced to pay the regular 38 for the X23 fitting, it will either not get the contract or it will sufi‘er'a substantial loss at a time When it is already operating at only 75% capacity. The manager of the Seat Division argues that the price concession is imperative to the well-being of both his division and the company as a whole. Waterloo Industries uses (divisional) return on investment (ROI) and (divisional) dollar profits in measuring divisional performance. Required: a.’ Assume that you are the manager of the Electrical Division Would you recommend that your division supply the X23 fitting to the Seat Division for $5 each as requested. Why or why not? Show all computations and explain your answer. (4 marks) — ' b. Would it be to the economic advantage of the company as a whole for the Electrical Division to supply the fittings to the Seat Division if the airplane seats can be sold for $100. Show all computations and explain your answer. (6 marks) c. In principle, should it be possible for the two managers to agree to a transfer price if the airplane seats can be sold for $100. If so, Within what range would that transfer price lie? (4 marks) d. Ifthe two managers do not come to an agreement, what would you advise the company's president to do in this particular situation? If your recommendation has any downside(s)/disadvantage(s) make sure and indicate it(them). (5 marks) or Question 5 (25 marks, suggested time 25 minutes) Standard Costing and Flexible Budgets Bobolina, Inc. makes a high end Italian hand bag. In December 1999, the management team collaborated on the preparation of a master budget for the year 2000. The budgeted costs were used . as the basis for updating Bobolina’s standard costing system. No further updates of standard costs took place in the year 2000. The budgeted and actual results for the year 2000 were: Master Actual Budget . Results Sales revenue $4 120 000 $4 620 375 Direct material purchases 1,200,000 1,386,482 Direct labor costs 515,200 539,181 , Machine depreciation 816,500 940,000 Supervisors’ salaries - plant 341,000 368,600 Selling and administrative salaries 425,000 430,000 r Net income a 822,300 s 956,112 Other information: ' . Unit sales 80,000 bags 83,250 bags Machine hours ' 33,600 hours 3 1,250 hours . Direct material used (sheets of leather) 4,000 sheets 4,247 sheets ' 5 Direct labor hours ' 22,400 hours . 21,567 hours > Industry volume of sales 1,200,000 bags 1,050,000 bags There were no beginning or ending inventories of raw materials, WIP or finished goods. On January 2, 2000, Bobolina received an order from Raol Loreen for a large quantity of handbags. Raol Loreen’s clients are willing to pay a premium for high quality goods. Bobolina decided to ensure the quality of their handbags, so they re-trained all of their laborers and acquired new machinery. 1 They also changed their suppliers to one that 'sells smaller batches of higher quality leather. Required: a. Compute the following variances:(l6 marks) i. Material price and quantity variances ii. Labor rate and efiiciency variances iii. Fixed overhead budget variance iv. Sales-price variance and sales volume variance ' v. Profit variance (static budget net income vs‘actual net income). 0} b. Management has been given limited time at the Board ofDirectors meeting to discuss ”iobolriia’s results for the year 2000. Use 3 variances to discuss the success or failure of management 5 strategy in the year 2000 (Hint, was it a good idea to change to a higher quality/higher priced product?) (9 marks) Question 6 (38 marks suggested time 38 minutes) ' Relevant Cost Analysis Tierra Lago Lodge is situated in an alpine valley. The lodge currently operates for 26 weeks each year through the spring and summer months. The lodge has been open since May 1" 1999. Revenue for the lodge is generated through the rental of its thirty (30) suites on a weekly basis. The weekly rental fee rs $1, 000 per suite. The owner is concerned about the net loss and about the fact that the occupancy rate is at 70% during the 26 weeks it is currently open. The accountant has provided the following data for the year ending April 30, 2000: Sales (31,000 x 546) ' $ 546,000 Expenses: Housekeeping ' 83,520 . Maintenance 56,380 Administration 154,600 Utilities 54,600 Property Tax 70,000 Depreciation 120,000 Advertising 55,000 Net Income (48,100) Additional Information: Housekeeping: Costs are $120 per week per suite for cleaning (based on usage) plus a manager’s salary. The manager is contracted on a weekly basis. . Maintenance: A $40,000 salary for the manager plus material costs which are traceable to usage (ie quick ”touch up" work done when the guest vacates the suite). Administration: a ; Two annual salaries of $50,000 plus a bonus of 10% of sales. Utilities: The heating and electricity are turned on when the suite is occupied. (60% heating, 40%. electricity) Depreciation: Straight-line, net book value $960,000, re-sale value is $800,000. The two administrative managers are employed yeamound. The maintenance manager is employed year-round to keep the facility in good repair. The housekeeping manager is on a weekly contract. The property tax of $70,000 is the annual tax amount. Required: . a. It is the last week of September and Tierra has eight suites available for the first week of October and is negotiating with a client who wants to book ten suites. Tierra can cancel any reservation with 48 hours notice to the client. What is the minimum price they should charge the client for all ten suites? (10 marks) ’ b. What qualitative factors should be considered when offering the “minimum price” in part (a)? (6 marks) . - c. Now assume it is one week prior to closing of the season (ie, late October) and the company has no clients booked for the last week of the season, what would they save or lose by closing for that week? (4 marks) ' d. The company is considering expansion to include the winter months. The expansion will mean ‘ that the advertising campaign will change. The company has spent $30,000 developing its promotional material in 1999. There will be an additional $8,000 required to run the advertising and awareness campaign. New equipment will be bought for $45,000 and depreciated over 5 years. Heating costs are expected to be twice as costly in the fall/winter season as the i spring/summer season. The company will now pay property tax over twelve months and not over six months. Tierra Lago will charge $600 per week in the fall/winter season and expects a 50% occupancy rate during the fall/winter 26 week period. They expect this 50% occupancy rate in winter to exist for several years. As management consultant advise the owner as to the financial wisdom of this expansion to a year-round operation. (10 marks) . e. The company is considering the installation of a geo-thermal heating system to replace the natural ‘ gas fumace. The installation fee will be $20,000 and the maintenance manager will spend 20 hours in this process. The existing fumace cost $40,000 and has a book value of $35,000. The re-sale value is $18,000. The geo-thennal system has a list price of $90,000 but your friend is willing to sell it to you for $65,000. It is estimated that the heating costs will be reduced by 70%. The company paid consultants $9,000 to determine if the geo-thermal system met environmental guidelines. Should the company switch to the geo-thermal heating system? (assume the company _ operates fiom May 1‘ to October 31" ). (8 marks) ‘ ' Mission Statement: Merwin’s mission is to become the trendsetter in the high-end “electronic” toy manufacturing industry. Gerry (design engineer): But to do that, were going to have to. make some drastic changes here involving a lot of decision making. I’ll need to decide soon if we want to hire more engineers or . inspectors. ' Les (production manager):And what about my department? I’ll need to decide whether or not to ask for new machines or to retrain the workforce.- Suiki: Luckily; I’ve taken Commerce 294 and know a few “tools” for decision making, such as Target Costing, Total Quality Management, Bud getingsand CVP analysis. We’re going to need all the help we can get, because you can bet we’re going to get evaluated based on the results of our decisions. ‘ Required: _ - a. Fully describe three of the four “tools”(Target Costing, Total Quality Management, Budgeting and CVP analysis) that the Merwin management can use to help make decisions (refer to Merwin’s mission statement) (12 marks) c. Management accounting (294) and financial accounting (C293) are both accounting courses, but difi‘er in content and focus. Explain why these two accounting have difl‘en'ng perspectives and why each is appropriate for its intended purpose. (6 marks) " The University Of British Columbia Faculty of Commerce and Business AdministratiOn ' -. COMIMERCE 294, FINAL EXAMINATION , Solution Question 1 (18 marks: suggested time 18 minutes) Required: a. ' Assume that the company continues to use direct labour-hours as the base for applying overhead cost to products. Compute the X200 unit product cost. (4 marks) ' - When direct labour-hours are used to apply overhead cost to products, the company’s predetermined overhead rate would be: \ Manufacturing overhead cost, $18,000,000## = SSO/DLH Direct labour-hours, 360,000 ' ##z $3,600,000 + 1,800,000 + 12,600,000 = $18,000,000. Note theadvertise and president’s salary are not allocated under either the traditional or ABC methods. ‘ ’ » ‘ X200 Direct materials ................ -. . . .- ................ S 72 Direct labour: $10 x 1.8 hours ......................... 18 Manufacturing overhead: $50 x 1.8 hours ................ 29 Total unit product cost ............................ 8180 b. Assume that the company decides to use activity-based costing to apply manufacturing Overhead , cost to products. Compute the X 200 unit product cost. (8 marks) \ Predetermined overhead rates for the activity cost pools: (1) ~ . Estimated (2) (l) + (2) Activity Cost . Overhead Expected Activity Predetermined Pool Cost Overhead Rate Machine setups . . . .. ...... S 3,600,000 1,500 setups $2,400/setup Special processing ........ 1,800,000 120,000 processing order SIS/order Rent ..... _ ............. 12,600,000 360,000 square foot $35/sq. foot .1 wéfTWf/E‘IS i Question 2 (16 marks, suggested time 16 minutes) Required: ‘ a. How many lasagnes should be produced in March? (4 marks) March production = 400,000 lasagnes x 80% = 320,000 450,000 lasagnes x 20% = 90,000 410,000 b. How many kilos of tomato sauce should be purchased in March? (8 marks) 1 Tomato sauce requirement: For production in March 410,000 lasagnes x V2 kg = , 205,000 kgs Less: Amount purchased in February (30%) (61,500) 143,500 For production in April: 450,000 x .80 360,000 200,000(May sales) x .2 40,000 April lasagne production 400,000 x V; x .30 = 60,000 . March tomato sauce purchased ' ' ' 203 500 5E2; c. Describe two reasons for estimating ingredient purchases? (4 marks) Reasons for wanting to estimate ingredient purchases are as follows: - to negotiate purchase price with suppliers - to plan the timing of the purchases, receipt of the goods, storage --to make sure cash is on hand to pay for the purchase - for calculating unit values for COGS and ending inventory valuations - pricing the lasagne ' , - as a benchmark to evaluate performance of employees. ' .-. Question 3 (18 marks; suggested time 18 minutes) Required: 11. Porky Pig, the president, has asked Dafl‘y Duck to prepare a segmented income statement for the two districts. (12 marks) Total Company" Last District figs; District Sales ($20 per unit) $500,000 (100%) $300,000 (100%) $200,000 (100%) Less we W Cost of good Sold ($9 per unit) _ 225,000 (45%) 135,000, (45%) 90,000 (45%) Shipping . 26,000 (5.2%) 11,000 (3.7%) 15,000 (7.5%) Sales commissions 50,000 (10%) 30,000 (10%) 20,000 (10%) Order processing (1). 17,500 (3.5%) 15,000 (5%) 2,500 (1.25%) Total variable expenses 318,500 (63.7%) 191,000 (63.7%) 127 500 63.75% Contribution margin 181,500 (36.3%) 109,000 (36.3%) 72,500 ( 6.25%) Less traceable fig! mag Sales salaries (2) ‘ 6,000 (1.2%) 4,000 (1.3%) 2,000, (1%) District advertising 50,000 (10%) 20,000 (6.7%) 30,000 (15%) District sales mgmt salaries 25,000 L94) 10,000 (3.3%) 15,000 (7.5%) ' Total traceable fixed expenses 81,000 (16.2%) 34,000 (11.3%) 47,000 (23.5%) District segment margin 100,500 (20.1%) 75,000 (25%) . 25,500 (12.75%) Warehouse rent (3) 40,000 (8%) Central ofice expenses (4) 32,509 6.5% ( . Total common fixedexpenses 72,500 14.5% ~ Operating income (loss) $28,000 5.6% (1) (2) - (3) (4) ,b. $17,500 order processing costs / 3,500 orders = $5 per order $5 per order x 3,000 orders; and, $00 orders Each salesperson earns $500 per month. 8 .saleSpersons; and, 4 salespersons. Avoid arbitrary cost allocations; thus, treat as common fixed expense. $50,000 - $17,500 variable order processing costs = $32,500 Based on the segmented income statements, fully discuss ANY TWO points (relating to the districts) that should be brought to the attention of management? (6 marks) The following points can be brought to the attention of management: (1) (ID (iii) Based on the analysis below, East District rs taking many small orders, resulting in a contribution margin per order that' rs only One-fourth that of West District. Given the high variable cost of processing an order ($5 vs. $9 cost of goods sold), the sales staff should try to get customers to order less frequently in larger amounts. (Apparently, it seems possible to get fewer orders in larger amounts, as shown by the experience in West District. However, this approach rs contrary to the JIT trend which emphasizes smaller, more frequent orders. A better solution may be to use process re- engineering‘ to reduce the costs of processing an order.) East District West District Sales in units ($20/unit) ' 1...
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