COMM 354 Feb 2013 Midterm Solution

# COMM 354 Feb 2013 Midterm Solution - Commerce 354 Mid-term...

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Commerce 354 Mid-term Examination (February 5, 2013) First Name: _______________________ Last Name:______________________________ Student #: _______________________ Please Circle Section M/W201 (8:30am), 202 (10 am) 203 (11:30 am)T/TH 204 (11:00 am) Question 1 (36 marks) Shenwin Ltd produces computer parts using leased machines that each have a capacity to make #25,000 per year. Shenwin can fit a total of 8 machines in its existing factory and can lease machines conveniently on a year -by-year basis. The cost of one machine lease in 2012 was \$440,000 per machine. The factory is owned and is being depreciated at \$218,000 per year for the next 10 years. The company always seeks to maximize profits and the CFO has indicated that inflation has been 10% but this has not impacted direct material costs since she signed a 4 year contract with the supplier in 2010. The labor costs were set for five years in a negotiated agreement in 2010 so there is no inflation in the labor figures. 2010 2012 Direct Materials 910,000 1,240,000 Direct Labor 1,365,000 1,860,000 Overhead 8,458,000 11,174,000 Total Costs \$ 10,733,000 14,274,000 Units Produced & Sold # 91,000 # 124,000 "Average cost" 117.95 115.11 Industry experts expect inflation to be 3% in 2013. The selling price per unit was \$119 in 2012. Shenwin feels it can increase its selling price at the rate of inflation. Demand for 2013 is expected to be #124,000. Prepared by J. Kroeker, 2013 © Sauder School of Business, UBC Page 1
a) Calculate the expected contribution margin for 2013? (6 marks) \$119(1.03) – 10 – 15 - \$44(1.03) \$122.57 - \$70.32 = \$52.25 Direct materials \$10 Direct labor \$15 Variable overhead - Remove \$218,000, which is a constant due to straight-line, from each year - Remove known amounts of batch \$400,000 and \$440,000 from respective years - Move the other element in the formula to either 2012 or 2010 [\$11,174,000 – (5 x 440,000) – 218,000] [(8,458,000)(1.1) – (4x 400,000) – 218,000] #124,000 – 91,000 b) Calculate the expected cost to lease one machine in 2013? (2 marks) \$440,000 / 1.1 \$400,000 ( or could use 1.21 if inflation was calculated annually) \$440,000 (1.03) \$453,200 c) Calculate the number of units required to justify the leasing of an additional machine. (4 marks) \$440,000 (1.03) \$453,200 \$453,200 / \$52.25 #8,674 NOTE: If it is interpreted as additional “from current level”. Then 5 machines has 125,000 in capacity and 124,000 in demand and thus from this “starting point” they would need 9,674 (regular break-even plus the additional #1,000). Prepared by J. Kroeker, 2013 © Sauder School of Business, UBC Page 2
d) The CFO would like to know the cash flow that could be expected from 2013 if sales volume remains the same as in 2012? (4 marks) Revenue #124,000 ( \$122.57) 15,198,680 Variable cost #124,000 (\$ 70.32) 8,719,680 Batch #5 (440,000)(1.03) 2,266,000 Fixed costs \$3,300,000 (1.03) 3,399,000 Fixed costs calculation (from 2012) 11,174,000 – 218,000 – 5(440,000) – #124,000(44) \$3,300,000 Prepared by J. Kroeker, 2013 © Sauder School of Business, UBC Page 3
e) A special order has been received to produce #6,000 units in 2013 for \$125 each.

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