Managerial Accounting-Group Case 3

Part A: Capital Budgeting DecisionsChee Company has gathered the following data on a proposed investment project:Investment required in equipment.............$240,000Annual cash inflows..................................$50,000Salvage value............................................$0Life of the investment...............................8 yearsRequired rate of return..............................10%Assets will be depreciated using straightline depreciation method Required:Using the net present value and the internal rate of return methods, is this a good investment? Part B: Master BudgetYou have just been hired as a new managementtrainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. Since you are well trained in budgeting, you have decided to prepare a master budget for the upcoming second quarter. To this end, you have worked with accounting and other areas to gather the information assembled below.The company sells many styles of earrings, but all are sold for the same price—$10 per pair. Actual sales of earrings for thelast three months and budgeted sales for the next six months follow (in pairs of earrings):January (actual)20,000June (budget)50,000February (actual)26,000July (budget)30,000March (actual)40,000August (budget)28,000April (budget)65,000September (budget)25,000May (budget)100,000The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month.Suppliers are paid $4 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, andthe remaining 10% is collected in the second month following sale. Bad debts have been negligible.Monthly operating expenses for the company are given below:Variable:Sales commissions4% of salesFixed:Advertising$200,000Rent$18,000Salaries$106,000Utilities$7,000Insurance$3,000Depreciation$14,000Insurance is paid on an annual basis, in November of each year.The company plans to purchase $16,000 in new equipment during May and $40,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $15,000 each quarter, payable in the first month of the following quarter.The company’s balance sheet as of March 31 is given below: AssetsCash$74,000Accounts receivable ($26,000 February sales; $320,000 March sales)346,000Inventory104,000Prepaid insurance21,000Property and equipment (net)950,000Total assets$1,495,000Liabilities and Stockholders’ EquityAccounts payable$100,000Dividends payable15,000Common stock800,000Retained earnings580,000Total liabilities and stockholders’ equity$1,495,000The company maintains a minimumcash balance of $50,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month.The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month.The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $50,000 in cash.Required:Prepare a master budget for the three-month period ending June 30. Include the following detailed schedules:1.a. A sales budget, by month and in total.b. A schedule of expected cash collections, by month and in total.c. A merchandise purchases budget in units and in dollars. Show the budget by month and in total.d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.2.A cash budget. Show the budget by month and in total. Determine any borrowing that would be needed to maintain the minimum cash balance of $50,000.3.A budgeted income statement for the three-month period ending June 30. Use the contribution approach.4. A budgeted balance sheet as of June 30. Part C: Variance Analysis for Decision MakingBronfenbrenner Co. uses a standard cost system for its single product in which variable overhead is applied on the basis of direct labor hours. The following information is given:Standard costs per unit:Raw materials (1.5 grams at $16 per gram)............................$24.00Direct labor (0.75 hours at $8 per hour)..................................$6.00Variable overhead (0.75 hours at $3 per hour)........................$2.25Actual experience for current year:Units produced........................................................................22,400 unitsPurchases of raw materials (21,000 grams at $17 per gram)..$357,000Raw materials used..................................................................33,400 gramsDirect labor (16,750 hours at $8 per hour)..............................$134,000Variable overhead cost incurred..............................................$48,575Required:Compute the following variances for raw materials, direct labor, and variable overhead, assuming that the price variance for materials is recognized at point of purchase:a.Direct materials price variance.b.Direct materials quantity variance.c.Direct labor rate variance.d.Direct labor efficiency variance.e.Variable overhead spending variance.f.Variable overhead efficiency variance.g.As a manager, why is variance analysis important? Part D: Evaluation of Decentralized OrganizationsThe Clipper Corporation had net operating income of $380,000 and average operating assets of $2,000,000. The corporation requires a return on investment of 18%.Required:a.Calculate the company's return on investment (ROI) and residual income (RI).b.Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. Would it be in the best interests of the company to make this investment?c.Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a return on investment of 20% and its manager is evaluated based on the division's ROI, will the division manager be inclined to request funds to make this investment?d.Clipper Corporation is considering an investment of $70,000 in a project that will generate annual net operating income of $12,950. If the division planning to make the investment currently has a residual income of $50,000 and its manager is evaluated based on the division's residual income, will the division manager be inclined to request funds to make this investment? Part E: Preparing Statement of Cash FlowsBoscia Corporation's balance sheet appears below:Comparative Balance SheetEnding BalanceBeginning BalanceAssets:Cash and cash equivalents.........................$44$38Accounts receivable..................................8269Inventory...................................................7169Plant and equipment..................................537500Accumulated depreciation.........................(240)(201)Total assets................................................$494$475Liabilities and stockholders’ equity:Accounts payable......................................$70$60Wages payable...........................................2421Taxes payable............................................1922Bonds payable...........................................226300Deferred taxes............................................1918Common stock...........................................2220Retained earnings......................................11434Total liabilities and stockholders’ equity..$494$475The net income for the year was $108. Cash dividends were $28.Required:Prepare a statement of cash flows in good form using the indirect method.

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