Group Case 3 (160 points)
Instructions:
- As a group, complete the following activities in good form. Use excel or
word only. Provide all supporting calculations to show how you arrived at
your numbers - Add only the names of group members who participated in the completion
of this assignment. - Submit only one copy of your completed work via Moodle. Do not send it to
me by email. - Due: No later than the last day of Module 7. Please note that your professor
has the right to change the due date of this assignment.
Part A: Capital Budgeting Decisions
Chee Company has gathered the following data on a proposed investment project:
Investment required in equipment…………. $240,000
Annual cash inflows……………………………. $50,000
Salvage value …………………………………….. $0
Life of the investment …………………………. 8 years
Required rate of return ………………………… 10%
Assets will be depreciated using straight
line depreciation method
Required:
Using the net present value and the internal rate of return methods, is this a good investment?
Part B: Master Budget
You have just been hired as a new management trainee 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 the last three months and budgeted sales for the next six months follow (in pairs
of earrings):
January (actual) 20,000 June (budget) 50,000
February (actual) 26,000 July (budget) 30,000
March (actual) 40,000 August (budget) 28,000
April (budget) 65,000 September (budget) 25,000
May (budget) 100,000
The 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, and the 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 commissions 4% of sales
Fixed:
Advertising $ 200,000
Rent $ 18,000
Salaries $ 106,000
Utilities $ 7,000
Insurance $ 3,000
Depreciation $ 14,000
Insurance 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:
Assets
Cash $ 74,000
Accounts receivable ($26,000 February sales; $320,000 March sales) 346,000
Inventory 104,000
Prepaid insurance 21,000
Property and equipment (net) 950,000
Total assets $ 1,495,000
Liabilities and Stockholders’ Equity
Accounts payable $ 100,000
Dividends payable 15,000
Common stock 800,000
Retained earnings 580,000
Total liabilities and stockholders’ equity $ 1,495,000
The company maintains a minimum cash 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:
- 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. - 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. - A budgeted income statement for the three-month period ending June 30. Use the
contribution approach. - A budgeted balance sheet as of June 30.
Part C: Variance Analysis for Decision Making
Bronfenbrenner 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) ………………………. $24.00
Direct labor (0.75 hours at $8 per hour)……………………………. $6.00
Variable overhead (0.75 hours at $3 per hour)…………………… $2.25
Actual experience for current year:
Units produced ……………………………………………………………… 22,400 units
Purchases of raw materials (21,000 grams at $17 per gram) .. $357,000
Raw materials used………………………………………………………… 33,400 grams
Direct labor (16,750 hours at $8 per hour)………………………… $134,000
Variable overhead cost incurred………………………………………. $48,575
Required:
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 Organizations
The 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 Flows
Boscia Corporation’s balance sheet appears below:
Comparative Balance Sheet
Ending
Balance
Beginning
Balance
Assets:
Cash and cash equivalents……………………. $ 44 $ 38
Accounts receivable ……………………………. 82 69
Inventory …………………………………………… 71 69
Plant and equipment ……………………………. 537 500
Accumulated depreciation……………………. ( 240) ( 201)
Total assets………………………………………… $494 $475
Liabilities and stockholders’ equity:
Accounts payable ……………………………….. $ 70 $ 60
Wages payable……………………………………. 24 21
Taxes payable …………………………………….. 19 22
Bonds payable ……………………………………. 226 300
Deferred taxes…………………………………….. 19 18
Common stock……………………………………. 22 20
Retained earnings……………………………….. 114 34
Total liabilities and stockholders’ equity .. $494 $475
The 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.