Acc301 Essentials of Accounting: Week 5 Assignment (E9-6, E9-11, P9-1A, P9-5A, BYP9-5, BYP9-6)

Acc301 Essentials of Accounting

Week 5 Homework

E9-6

SY Telc has recently started the manufacture of RecRobo, a three-wheeled robot that can scan a home for fires and gas leaks and then transmit this information to a mobile phone. The cost structure to manufacture 20,000 RecRobo’s is as follows.

Cost
Direct materials ($40 per robot) $ 800,000
Direct labor ($30 per robot) 600,000
Variable overhead ($6 per robot) 120,000
Allocated fixed overhead ($25 per robot) 500,000
Total $2,020,000
SY Telc is approached by Chen Inc. which offers to make RecRobo for $90 per unit or $1,800,000.

Instructions

(a) Using incremental analysis, determine whether SY Telc should accept this offer under each of the following independent assumptions.

(1) Assume that $300,000 of the fixed overhead cost can be reduced (avoided).

(2) Assume that none of the fixed overhead can be reduced (avoided). However, if the robots are purchased from Chen Inc., SY Telc can use the released productive resources to generate additional income of $300,000.

(b) Describe the qualitative factors that might affect the decision to purchase the robots from an outside supplier.

E9-11

Twyla Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.

Current Machine New Machine
Original purchase cost $15,000 $25,000
Accumulated depreciation $ 6,000 —
Estimated annual operating costs $24,000 $18,000
Useful life 5 years 5 years
If sold now, the current machine would have a salvage value of $5,000. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after five years.

Instructions

Should the current machine be replaced?

P9-1A

Pro Sports Inc. manufactures basketballs for the National Basketball Association (NBA). For the first 6 months of 2008, the company reported the following operating results while operating at 90% of plant capacity and producing 112,500 units.

Amount
Sales $4,500,000
Cost of goods sold 3,600,000
Selling and administrative expenses 450,000
Net income $ 450,000
Fixed costs for the period were: cost of goods sold $1,080,000, and selling and administrative expenses $225,000.

In July, normally a slack manufacturing month, Pro Sports receives a special order for 10,000 basketballs at $28 each from the Italian Basketball Association (IBA). Acceptance of the order would increase variable selling and administrative expenses $0.50 per unit because of shipping costs but would not increase fixed costs and expenses.

Instructions

(a) Prepare an incremental analysis for the special order.

(b) Should Pro Sports Inc. accept the special order? Explain your answer.

(c) What is the minimum selling price on the special order to produce net income of $4.10 per ball?

(d) What nonfinancial factors should management consider in making its decision?

P9-5A

Lewis Manufacturing Company has four operating divisions. During the first quarter of 2008, the company reported aggregate income from operations of $176,000 and the following divisional results.

Division


I II III IV
Sales $250,000 $200,000 $500,000 $400,000
Cost of goods sold 200,000 189,000 300,000 250,000
Selling and administrative expenses 65,000 60,000 60,000 50,000
Income (loss) from operations $(15,000) $(49,000) $140,000 $100,000
Analysis reveals the following percentages of variable costs in each division.

I II III IV
Cost of goods sold 70% 90% 80% 75%
Selling and administrative expenses 40 70 50 60
Discontinuance of any division would save 50% of the fixed costs and expenses for that division.

Top management is very concerned about the unprofitable divisions (I and II). Consensus is that one or both of the divisions should be discontinued.

Instructions

(a) Compute the contribution margin for Divisions I and II.

(b) Prepare an incremental analysis concerning the possible discontinuance of (1) Division I and (2) Division II. What course of action do you recommend for each division?

(c) Prepare a columnar condensed income statement for Lewis Manufacturing, assuming Division II is eliminated. Use the CVP format. Division II’s unavoidable fixed costs are allocated equally to the continuing divisions.

(d) Reconcile the total income from operations ($176,000) with the total income from operations without Division II.

BYP9-5

Jeff Howell is a production manager at a metal fabricating plant. Last night he read an article about a new piece of equipment that would dramatically reduce his division's costs. Jeff was very excited about the prospect, and the first thing he did this morning was to bring the article to his supervisor, Nathan Peas, the plant manager. The following conversation occurred:

Jeff: Nathan, I thought you would like to see this article on the new PDD1130; they've made some fantastic changes that could save us millions of dollars.

Nathan: I appreciate your interest Jeff, but I actually have been aware of the new machine for two months. The problem is that we just bought a new machine last year. We spent 2 million on that machine, and it was supposed to last us 12 years. If we replace it now we would have to write its book value off of the books for a huge loss. If I go to top management now and say that I want a new machine, they will fire me. I think we should use our existing machine for a couple of years, and then when it becomes obvious that we have to have a new machine, I will make the proposal.

Instructions

Jeff just completed a course in managerial accounting, and he believes that Nathan is making a big mistake. Write a memo from Jeff to Nathan explaining Nathan's decision-making error.

BYP9-6

Robert Buey became Chief Executive Officer of Phelps Manufacturing two years ago. At the time, the company was reporting lagging profits, and Robert was brought in to stir things up." The company has three divisions, electronics, fiber optics, and plumbing supplies. Robert has no interest in plumbing supplies, and one of the first things he did was to put pressure on his accountants to reallocate some of the company's fixed costs away from the other two divisions to the plumbing division. This had the effect of causing the plumbing division to report losses during the last two years; in the past it had always reported low, but acceptable, net income.

Robert felt that this reallocation would shine a favorable light on him in front of the board of directors because it meant that the electronics and fiber optics divisions would look like they were improving. Given that these are "businesses of the future," he believed that the stock market would react favorably to these increases, while not penalizing the poor results of the plumbing division. Without this shift in the allocation of fixed costs, the profits of the electronics and fiber optics divisions would not have improved. But now the board of directors has suggested that the plumbing division be closed because it is reporting losses. This would mean that nearly 500 employees, many of whom have worked for Phelps their whole lives, would lose their jobs.

Instructions

(a) If a division is reporting losses, does that necessarily mean that it should be closed?

(b) Was the reallocation of fixed costs across divisions unethical?

(c) What should Robert do?
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