COMM 294 - Final #4

COMM 294 - Final #4 - Sauder School of Business DipIoma...

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Unformatted text preview: Sauder School of Business DipIoma Accounting Program University of British Columbia- BUSI 294 Sample Final' Examination Question 1 (20 marks, suggested time 24 minutes) Standard costing Helene’s Maple Syrup Co. is a manufacturer of maple syrup located in rurai Quebec. Helene purchases sap from local farmers in the area and then boils it down into maple syrup while constantly stirring it by hand (over a very hot gas powered stove). The hotter the stove is, the less time it takes to turn the sap into maple syrup. ' Helene used to do all of the stirring of the sap herself, until a year ago when she felt sorry for her nephew and hired him to do the stirring for her. The standard cost of 1000 miltiliters (ml). based on Helene's normal monthly production of 50,000ml. is as follows: Standard Cost Per ‘iODOmI 6.000 ml (a $015 er ml $ 9000 Direct labour- stirrin ' 8 hours (-3. $10.00 er hour $ 80.00 Variable overhead— as 8 hours (a $8.00 er hour $ 64.00 Fixed overhead- euiment amortization $ 235.00 Total standard cost er unit — 'During the month of April. Helene had the following results, based on actual production of 80,000mls. —_ Fixed overhead- euiment amortization _ '. T0181 actual Costs ' — 14,720.00 REQUIRED: a. Helene's nephew asked Helene to purchase bigger pots that could hold more sap during the boiling process. Without calculating any variances, fully describe how you would expect two variances to be affected by the purchase of the bigger pots. Be carefui to choose those variances that would be most affected. (6 marks) ' $ b. Calculate the following variances (10 marks): Material price variance Material quantity variance Labour efficiency variance Variable overhead efficiency variance Fixed overhead budget variance 0. Helene did not buy the bigger pots. Using the above variances. fully describe what you think happened in April. (4 marks) Question 2 ( 36'marks, suggested time 45 minutes) Transfer Pricing ABC Technologies consists of the Electronics Division and the Components Division, each of which operates as an independent profit centre. The Electronics Division employs highly skilled employees who produce two different electronic components, the new high-performance Alpha and an old er product called Beta. These two products have the following cost characteristics: Alpha Beta Direct materials $12.00 $ 6.00 Direct labour - 37.50 1250 Annual fixed overhead in the Electronics Division totals $600,000. Owing to the high skill level necessary for the employees, the Electronics division’s capacity is set at 40,000 hours per year. ' The employees are paid $25 per hour and they will not work overtime. Demand for Alpha is limited, as there is only one customer at the present time. That customer orders a maximum of 18,000 Alphas per year, at a price of $99 per unit. If ABC cannot meet this entire demand, the customer Curtails its 'own production. The rest of the Electronics Division's capacity is devoted to preducing Beta, for which there is unlimited demand at $28 per chip. If ABC Technologies fails to deliver 18,000 units of Alpha in a year, they pay the customer a penalty of $5 for each unit that is not delivered. The Components Division provides only One prod uct. Gamma, with the following Cost structure: Direct materials (circuit board, purchased externally) - $ 105 _ Direct labour (5 hours x $20) ' _ 100 Fixed overhead costs of the Components Division are $100,000 per year. The current market price of Gamma is $250 per unit. The division plans to sell 6,000 units in the next fiscal year. A re—engineering project has just revealed that a single Alpha could be substituted for the circuit board currently used to make one unit of Gamma. Using Alpha as a substitute would require an extra hour of labour, from theComponents division, to produce one Gamma. There is nolabour constraint in the Components division. ' REQUIRED 3. Calculate the contribution margin per hour of selling Alpha and Beta. lfnotransfers of Alpha were made to the Components Division, how many Alphas and Betas should the Electronics Division sell? (6 marks) -' b. You are employed as a financial analyst in ABC Technologies‘ head offiCe. From the viewpoint of ABC Technologies as a whole, should 6,000Alphas' be transferred to the Components Division to replace circuit boards? Show all calculations. ( 8 marks) c. As the manager of Electronics Division, what transfer price would satisfy you? Explain, with calculations. ( '4 marks) . - d. Is the manager of Components Division, what transfer price would satisfy you? Explain, with calculations. (4 marks) ' ' ' ' e. Assume that because of increased competitive pressure,_the price of Gamma drops to $200. If the division matches the price they wiil maintain sales of 6.000 units. Should ABC Technologies drop the selling price to $200? Expiain with calculations. ( 6 marks) (Assume that all other data are unchanged.) - f. If demand for Gamma is sure to be 12,000 units. and the price remains at $250. what should the transfer price of Alpha be to ensure that the division managers' actions maximize profit for ABC as a whole? Show calculations. ( 8 marks) (Assume that ali other data are unchanged.) Questions (40 marks, suggested time 50 minutes) Segmented reporting Koy Ventures specializes in producing and distributing organic fudge throughout Canada. The company operates three autonomous and decentralized divisions: Western, Central and Eastern. Each division’s managers are expected to return an ROI of 'at least 8% for their division. Cost of capital is only 3%. Sales for the ear ended 2005 are: . _ ' IE- Average Invested assets for each division: _m 34.256900 $4,125,000 ' $912,000- Total Fixed costs for Ko Ventures: 0 The variable cost to produce the fudge for Western and Eastern was $3 per bottle. Central's variable cost of production was 1:3 higher than the other divisions'. All divisions incurred $1.50 per unit to package the bottles. \_ o The divisions hire sales representatives to sell the product within their territory. The commissions paid were 10% of sales (except for the Eastern where it was 15%). o The productionlpackaging asset amortization expense was $155,000. $135300 and _ $128,000 for Central, Western and Eastern respectively. The divisions also have equipment . supplied by the head office. The Central and "Western divisions amortization expense Was ‘/2 of the $70,000 amortization expense belonging to the Eastern Division. The remaining amortization expense was for a computer used by all divisions located at the Head office. Advertising costs II er division: 3 101,250 $ 81,250 $ 98,750 o $240,000 was billed by a national advertising agency who worked equally and separately for each of the three divisions. Key was also bitled for a national T.V. advertisement. Central, Western and Eastern each had $155,000, $195,000 and $225,000 in divisional office salaries respectively. Salaries for each division included a controller hired by Head Office at $105,000 per year. The CEO was paid $100,000 and managed the sales forces for Central and Western. Eastern had their own sales manager at $150,000 per year hired by the Head Office. Remaining salaries were for employees who worked at the Head Office. It is not possible to specifically differentiate all audit expenses incurred for each of the divisions, but $45,000 was billed for the 50 hours spent auditing at each division. The company's net invested assets at the end of the year were $4,505,000 which was a 6% increase over the previous year. Required: PART I at) b) C) d) The Manager of Central has been bragging that he has the highest sales level and therefore he expects to achieve the highest bonus this year. Prepare segmented information to show the performance of both the managers and the divisions. {16 marks) Based on your analysis above, calculate the performance of both the Managers and the divisions using return on investment (ROI). Which manager and which division out performed the others this year. t 8 marks) Calculate the residual income for Western . (2 marks) Provide 2 disadvantages of using ROI (4 marks) PART ll 9) Holly, the manager of Western has been contacted by a soy sauce manufacturer to sell organic soy sauce under a Key—Soy brand name. The sales manager for Western has calculated that this will increase income by $295,000 for the division. An analysis of the soy fermenting process indicates that they will need to spend $75,000 on the necessary equipment. ' '. Would Holly be likely to accept this offer from the Soy manufacturer (6 marks) f) Identity and thoughtfully explain two other issues that the manager should consider before making this decision. (4 marks) ' Bu324 n. _ I9 suggested Solutionsto Practice Exam Question 1 (20 marks, suggested time 25 minutes) Standard costing ' REQUIRED: . a. Helene's nephew asked Heleneto purchase bigger pots that could hold more sap .during the boiling process- Without calculating any variances; tuin describe how you would expect two variances to be affected by the-purchase of the bigger pots. Be carefui to choose those ' variances that would be most affected. (6 marks) ' ' ‘ ' Variance #1 Sales or profit volume variance should become favourable, due to the increased capacity. '- Variance #2 Labour efficiencyivariable overhead efficiency variance should become favourable due to being _ able-to stir more sap at once. '_ ' ' Variance #3 . ' - 'I ' - . I J . ,9 UI' . Fixed overhead budget variance should become unfavourable due to the purchase of the new ,‘g a: H; pots. . ' _ I ' - - . “- i b. Calculate the following variances (10 marks): _ 41.0% _o[1 %k{.ii‘5’_ ' __ 3‘0”): fl! “'1 I Material rice v'ariance 3' m) not?!“ . - r“_ ‘L N I". . 4", ‘ «$6,800 400,000) - .015) * 400.000mls- = $800.00U f ' Material guantit: variance ' gamut; '_ v i W I (400500mtgj— (6.00011'000 * 60,000mls)} * $0.015 = $600.00U ' . Listed swear Labour efficiency variance . 430 m, .' ' fnlkM. . t;th FA.” ' I (360 hours — (a * (60.000r1000» * $1050 = $1,200.00F_ Variableo erhea efficien a'a ce ' . _ -- v ww vrIn IFsW-I I i._ I. __ (360 hours — (a ‘i (60.00011000n * $8 .00 = $960.00F .' WW _ 30 00 — (1 00 * 50 000M 000) = $30 oou ' 10 . . 3; c. Helene did not buy the bigger pots._ Using the above variances. fully describe what you think _ happened in April. (4 marks) . ' . _ - . '- '. Onepossibilit'y could be that Helene decided to trade in the stove for a more poWerful stove (fixed overhead budget variance-( U) that could heat up the sap to a higher temperature. Because of ' this, she wouldhave used less time .to stir the sap (labour efficiency vari'anceF and—variable overhead efficiency variance F). ' - ' . This Would allow Helene to produce more syrup'in less time, but because of the higher" volume, - ' - she may have had to pay more to purchase the sap. (material price variance U) ' ' Bus"! 294 _ Solution toQuestion 2 - TransferPriclng Part 1 Capacity Constraint is labour hours Variable costs: 250.00: $ - Hours avaialble: 40,000 To produce Alpha: I Labour cost per unit $ 3? .50 Labour cost per hour 25.00 Hours per unit 1.50 _ To produce Beta: _ _ Labour cost per unit $'. 12.50 Labour cost per hour 25.00 H0urs per unit 0.50. . unit Contribution Alpha Beta Unit selling price 1 $ 99.00 $ _ 28.00 . Variable costs: ' - A- ' ' Materials 12.00 - 6.00 Labour 37.50 gm Total variable costs 49.50. _ _ 18.50 Unit contribution margin $ 49.50 9.50' Contribution per unitof constraint: _' 'Unit contribution margin $ 49.50 $ - 9.50 ' Hours per unit 1.50 0.50 Contribution per labour hour $ 33.00 $ 19.00 '_ Production Plan 0% _ ' 919W ‘5“ L Jd’" _ ' 'Hou‘rs availablV Y . v - 40,000 Produce Alpha (18,000*1.5 hOurs) - ' 27,000- ExCess hours for Beta 13,000 Beta hours per unit . 0.50 Total Beta production 26.000 - '_ Therefore, produce 18,000 Alpha and 26,000 Beta '_ Part 2 . ' . From the-perspective of ABC (COMM _ _' Purchase I Transfer ' - __ _ r0 -. ' ' _ ' I Externally .‘Alpha Unit Selling Price ' _ ' _ - $ '(F 256.60 pu mum WHJEEN( C , . : GRIND“ . I _ I % [H.l’Hfi' Flwt LLELiniM “(9 ON I Materials (05!“ Tmti‘ulfl ‘33-) 105,00 g 4950 ....— V_ 0f- .Dt'mj" "f .r Labour - Cam" 100.00 120.00 proow’m . Total variable costs ' ' . . . 205.00 169.50 ' 1' Unit contribution margin ' _ 45.00 ' ._ 3050 Ex“; Hit" N“? rut.“ 92;, Volume ' ' e 000' -. 0,000 10 / Hi» (i g Total contribution . l '. 270.000 ' 483,000 ' . Alpha contribution ( lgoohUat'b )1 4H5“ C “*9 891,000 301,000 .~ i Beta contribution ( 2‘ an new x €1.50 OH MT) 24?.000 76 000 (W100 HM 0L5“ Owl/UV” Total contribution ' - $ 1,408,000 $ 1,450,000 - Production Plan I‘! SH’IULD‘ WNWQJ Quilfo Hours available _ 40,000 L 5 HM. Produce Alpha (24,000’1 .5 hours) 36 000 Excess hours for Beta 4,000 Beta hours per unit -_ ' 0.50 r00!) 00 Total Beta production Q$M (It'd) 8:000 ( [l3 Phi-'1' It ‘1‘”) Gauho I. f) 1, Z _ 0r lamb .Pnuun- lg. for" ‘49. 0””? J _ Part3 . . gm ALPIM can; [tau BE PM“ 5 General Transfer Pricing Guidelineig-r W . '- ' Variable costs _ [‘er . ' $ 49.50 (V- C Ofilliortunity costs PM“ I ' ' I Lost sales of Beta f" . - " Volume lost _ . (15000" 300' 18000 Unit contribution _ § - 9.50 - Total lost contribution I - $ 171,000.00 .' _ - ' _ Units tranSferred - - . ' 6 000 _ ' _ _ Opportunity cost per unit ' - - ' '23,5o_.(0N- Minimum Transfer Price ' 78.00 -' ' OR . . "-""""" Variable costs . .. Opportunity costs (3 units of Beta are not produced _ N“? ' 28.50 ' ' to produce one more unit of Alpha ' _ .0, Nail lfiltfi 78.00 _ Minimum Transfer Price ' WW9 - -' _ . . 1' _ . #150 CM Wt . ( monster 0.310 in?“ $ 40.50 ,- 3” mm (“at 6611 Until" Part4» ' ' Any price below the external page w__ ill acid to the contr' Litton of the Component Division. I - _ I. I‘LL}, They should accept any transfer price up to $105.00. Cur To _ ' am”- 6558-9 Em“ ' Part 5 . ' I ' ' $1.00 - . .- . - - . . {o if 'price drops to $910: . l Purchase Transfer _ Lu . I ' . 4 " ' ' Externally - _.'Alpha (WW ELEGTW d ' U I .46 mt: ' COMM”: 9‘ “l1” 9““ P a: 1 200.00 5 200.00 M _ IN'WEMMJ- ' . . 105.00 f 4950(1MNJW But; Wulim Emwslfl 5cm» L036“! - 100.00 120.00 Tom. V.G- 205.00 169.50 "é. 000’ CM — I 5.00) 30.50 061.000 6 000 6 000 Wm, on - (30,000) 133,000 .. Production Plan - Volume . Gamma - _ _— _ 6,000 Alpha ' 18,000 . 18,000 ' Beta - 26.000 6,000 " - Contribution Gamma $ - $ 183,000 (L Alpha ' " ' _ 891 .000 .- 391,000 pmvf Beta 247,000 76 000 ' . ' 1,138,000 1,150,000 Company is still better off to produce Gamma. Electronics manager would want same transfer-price. Compnents manager a: MM would 0 I_y produce If transfer price was no higher than ’1“ "gm; .5 On 1:. 0 SN - $60..» 2: CM f5» man” 16 Awn- Uum um 10 mumémt J ' t ' - - ' = we. or- 161) Margaux». _ r . 2.3 so can- of no 10160 Part5 Him 00!!” Of $0; {L0 u _ My “0 CH (limb?) Production Plan , : W9 Pawnee“ . J Hours available 40,000 (um; x (.5 m) Produce Alpha for transfer (1 .000 units) I 16,000 Excess hours ' ' 22,000 . . . ProdLIce Alpha for customer (14,667 units) ' - 22.000 (Ill-6&1 56 {I a”) _ Exoe'ss hours - 0 ' _ Beta hours per unit - ' Total Bela production - Company will now not be able to satisfy external Alpha sales. Penalty comes into play. Corporate Perpsective - . _ .Gamma - Alpha Beta Total Volume ' _ 12,000 . 14,667 _ - Unit contribution 80.50 49.50 ._ - ' otal . $ - _- 966.000 $ 726,017_ m anally - . . A'GBS‘ Uz “9 r1 115.352 -' t w J I Question 2 Seeexcelme Question 3 ‘ segmented reporting Requned: PART A' . a) The Manager of Central has been'bragging that he has the highest sales level and. - - "therefore he expects to achieve the highest bonus this year. Prepare segmented ' information to show the performance of both the managers and the divisions. (12 marks . ‘ ) Waste? Ltnskumasx‘tt qstmuxWfl _ —-:em‘|l§amu 9,046.4 . ' - - 60150.0 [gammy—m ____ mm— m - “_—_— - 70,000 ' Advertisin ewe - M- (mm-m ‘ SementMarin -. _—__— __——_ ' m—IIMHW- - M—_— M—_— ——— ——_ —__ - _—— b} Based on your analysis above, calculate the performance of both the Managers and the divisions using return on investment. Which manager and which division out performed the others this yeaxi'j 6 marks) Punt“ 0mm W Av. Dawns new _ - R0! Centre! =Ni/average invested a ets = 306,410/4,256,000 = 7.2% t . i ROi Western = 407, 750/4,000 = 9.9% cm) . wed) ROI Eastern = 523,900/3; 12,00 = 13.4% Give.) . . . “Carer «M: J DIVISIonS' . ROi'Centrai =Ni average invested assets = 214 “to/4,256, 000 = 0.50% ROI Western = 122, 750/4,125, 000 = 3.00% I R0! Eastern = 103,900/3,9i2,000 = 2.7% - Based on the anaiysis. The Managers Of the Eastern and Western are doing the better _ jobs with the Eastern on top. Centrai is not meeting the Head Ofiices’ expectations Based on the diirision, oniy the Western. division is meeting the 3% expectatiOn of the _ owners. ' ' ' ' figment. 1m “‘1‘ c) Calculate-the RI for Western division assuming that itwas to be used instead of ROI. (2 marks) ' ' ' ' Ri Western =Ni- (avf invested assets x interest) = 122,750 —'(4,125,000x. 03) = 1227504 123,450 = (1000) . - d) _ Provide disadvantages of using ROI instead of IR! _(4 marks) it encourages. managers to focus on the short run at the expense of the long fun. For ~ exampie,-a manager might out research and deveiopment expenses in the short run to improve ROi, but the cuts may not be in the best tong-term interestsoi {he division. - _ ' _ ' _ . ' . it discowages managers from investing in projeCts that wouid decrease the division's ROI but wooid increase the profitability-of the company as awhoie. Generain, ' projects with an ROi iess than a division’s current R0! wouid be rejected by the ' division manager: - ' ' - ' ' ' PART ll. 8) 0 Holly, the manager of Western has been contacted by a soy sauce manufacture to sell organic soy sauce under a Key-Soy brand name. The sales manager'for Western has Calculated that this will increase income.by $35,000 for the division. An analysis of the soy fermenting process indicates that they will need to spend $458,000 on the necessary equipment. Would Holly be likely to accept this offer from the Soy manufacturer? (6 marks) Since Holly has been contracted directly, and the divisions are autonomous, Holly would likely consider this project using here own ROl as a benchmark. Soy project inc in” income = $35, 000, additional-invested capital I: $458, 000 ROl of protect = $35, 000/458, 000 = 7.64% The manager is likely to refuse since his ROl is 9.9% and she would risk reducing his ROI. if she adds the project to the above calculation, she will also reject: Manager = (407, 750 +35, 000)/(4, 125, 000 + 458,000) = 442, 750/4, 583, 000= 9.7% ll we look at the project incrementally to the division: - Division = {122,750 + 35, cow/(4,377, 500 + 4580000) = 157,750/4,583,000= 3. 4.4 % Since this is higher than the previous ROl, the company would be better-off if the manager accepts this contract. Provide 2 other issues that-the manager should consider before making this decision. (ll-marks) ' -. Does the sales force have the experience to sell soy sauce ' ls this a new market, or will the current customers embraces it Do we have the expertise._ - is this a new strategic direction for the company . is the organic soy market sustainable f.‘ Any other reasonable point e ease ...
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COMM 294 - Final #4 - Sauder School of Business DipIoma...

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