Case 1You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your first day on the job and a Manager asks you for some help with a

Case 1

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your first day on the job and a Manager asks you for some help with a client in the Technology & Entertainment sector. Eager to please on your first day, you start reading the background information provided by the Manager.

4D Entertainment, a division of Wave of the Future Corporation, manufactures two large-screen television models: the Zenith, which has been produced since 2008 and sells for $1,700, and the Pinnacle, a new model introduced in early 2008, which sells for $2,200. Based on the following income statement for the year ended November 30, 2014, senior management at Wave of the Future have decided to concentrate 4D Entertainment’s marketing resources on the Pinnacle model and begin to phase out the Zenith model.

Additional Information:

4D Entertainment

Income Statement

For the Year Ended November 30, 2014

  Zenith Pinnacle Total
Sales $30,600,000 $4,400,000 $35,000,000
COGS 19,890,000 3,080,000 22,970,000
Gross Margin 10,710,000 1,320,000 12,030,000
Selling and Admin Expense 8,032,500 925,000 8,957,500
Operating Income $2,677,500 $395,000 $3,072,500
Units Sold 18,000 2,000  
Operating Income per Unit Sold $148.75 $197.50  

 

Unit costs for Zenith and Pinnacle are as follows:

  Zenith Pinnacle
Direct Material $540.00 $1,089.00
Direct Labor    
Zenith (2.5 hours x $18 per hr) 45.00  
Pinnacle (7.0 hours x $18 per hr)   126.00
Machine costs*    
Zenith (8 hours x $25 per hr) 200.00  
Pinnacle (5 hours x $25 per hr)   125.00
Other Manufacturing Overhead** 320.00 200.00
Total $1,105.00 $1,540.00

*Machine costs include leasing of the machine, repairs, and maintenance.

** Other manufacturing overhead is allocated on the basis of machine hours at a rate of $40 per machine hour.

4D’s controller, Tina Wesley, is advocating the use of activity-based costing (ABC) and activity based management (ABM), and has gathered the following information about the company’s manufacturing overhead costs for the year ended November 30, 2014.

    Units of Cost Driver
  Total Activity Costs Zenith Pinnacle
Soldering $1,872,400 1,296,000 214,000
Shipments 1,480,000 1,500 500
Quality Control 1,749,600 54,000 18,000
Purchase Orders 582,400 16,640 4,160
Machine Power 61,600 144,000 10,000
Machine Set-up 414,000 360 100
Total Manufacturing Overhead $6,160,000    

 

Soldering is based on the number of solder points, shipments based on the number of shipments, quality control based on the number of inspections, purchase orders based on the number of PO’s, machine power based on machine hours, machine setups based on the number of setups.

After completing her analysis, Wesley showed the results to Donald Warden, the 4D Entertainment Division President. Warden did not like what he saw. “If you show headquarters this analysis, they are going to ask us to phase out the Pinnacle line, which we have just introduced. This whole costing thing has been a major problem for us. First Zenith was not profitable and now Pinnacle.

“Looking at the ABC analysis, I see two problems. We do many more activities than the ones you have listed. If you had included all activities, maybe your conclusions would have been different. Second, you used number of setups and number of inspections as allocation bases. The numbers would have been different had you used setup hours and inspection hours instead. I know that measurement problems precluded you from using these other cost allocation bases, but at least you ought to make some adjustments to our current numbers to compensate for these issues. I know you can do better. We can’t afford to phase out either product.”

Wesley knew her numbers were fairly accurate. On a limited sample, she had calculated the profitability of Zenith and Pinnacle using different allocation bases. The set of activities and activity rates she had chosen resulted in numbers that approximated closely those based on more detailed analyses. She was confident that headquarters, knowing that Pinnacle was introduced only recently, would not ask 4D Entertainment to phase it out. She was also aware that a sizable portion of Warden’s bonus was based on division sales. Phasing out either product would adversely affect the bonus. Still, she felt some pressure from Warden to do something.

4D Entertainment is unsure of the strategies to properly reflect information for their parent company. The manager would like the following questions addressed as soon as possible:

REQUIRED

1. Using activity-based costing (ABC), calculate the profitability of the Zenith and Pinnacle models.

2. Explain briefly why these numbers differ from the profitability of the Zenith and Pinnacle models calculated using 4D Entertainment’s existing costing system.

3. Comment on Warden’s concerns about the accuracy and limitations of ABC.

4. How might 4D Entertainment find the ABC information helpful in managing its business?

5. What should Tiny Wesley do?

Case 2

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. A consumer business partner within the firm notices your availability at 3:00pm on a Friday afternoon and pulls you into a meeting with one of his high profile clients.

Background

Dark and Bold Inc. manufactures a line of single-cup brewing machines for home and office use that brew a cup of coffee, tea, or hot chocolate in less than a minute. The machines use specially packaged portions of coffee, tea, or hot chocolate that can be purchased online directly from Dark and Bold or at Second Cup coffee shops who are licensed to distribute the company’s products. The appeal of the brewing machines is twofold. First, they offer a high level of convenience. The use of prepackaged coffee servings means no grinding of coffee beans and no mess. Also, the brewing machines have a water reservoir that for some models is large enough to make up to 20 cups of coffee. Second, the taste of

each cup of coffee, tea, and hot chocolate is very consistent. The brewers’ pressurized system uses the same amount of water for each cup and the airtight seal used in the individual portions keeps the

product fresh.

Additional Information

The company has three models of brewers that offer different features, such as the size of the water reservoir, the number of brewing sizes, and the types of filtering devices used in the machine. Data from the most recent fiscal year for the three models is shown below.

Model
  Home Brewer   Office Brewer   European Deluxe  
Sales volume (units)   12,000   30,000 6,000
Unit selling price   $150   $200 $300
Variable cost per unit   120   140   180
Contribution margin per unit   $30   $60 $120

 

Fixed costs are $1,500,000 per year. The company has no work in process or finished goods inventories. The company is facing increased levels of competition from manufacturers using similar brewing technologies and believes there is no room for any increases in unit selling prices.

Dark and Bold Inc. is unsure of the strategies to take in order to increase profitability. The engagement partner would like the following questions on his desk by Monday morning:

Required:

1. Calculate the company’s overall break-even point in sales dollars.

2. Calculate the sales dollars required for each product at the overall break-even level of sales calculated in (1) above.

3. Calculate the company’s overall break-even point in total units.

4. What impact would doubling the number of Office Brewer units sold next year have on the overall break-even point in sales dollars? Assume that there will be no changes to the Home Brewer or European Deluxe unit sales, that unit selling prices and variable costs will remain the same for each model, and that total fixed costs will be unchanged.

5. The company is considering a new advertising campaign to raise overall consumer awareness of the product offerings. The total cost of the year-long campaign would be $150,000. By how much would sales need to increase overall for the company to be able to justify the new campaign? Assume no change to the current product mix.

6. Suppose that instead of being designed to increase total sales volume, the new $150,000 advertising campaign will focus on getting customers who would have purchased the Office Brewer model to buy the European Deluxe model instead. To justify the cost of the new advertising, how many customers must purchase the European Deluxe model instead of the Office Basic model? Assume that the new advertising campaign will have no impact on sales of the Home Brewer model.

7. The company is considering adding a new product to its line of brewers targeted at the office use market (both the Office Brewer and European Deluxe are currently targeting office users). The new brewer, the Office Plus, would sell for $250 per unit and would have variable unit costs of $160. Introducing the new model would increase fixed costs by $102,000 annually and would reduce annual unit sales of the Office Brewer and European Deluxe models by 10% each. Assuming no change to the sales of the Home Brewer model, how many units of the Office Plus would need to be sold to justify its addition to the product line next year?

 

Case 3 

Background

You are a Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. One of the partners in your practice would like to give back to the community through helping a non-for-profit company, Guardian Angel, prepare a master budget without charging them service fees. She asks you to take the lead on this engagement with the hope that a successful outcome may lead to your promotion to Senior Consultant. You take the background files from the partner and get started.

Guardian Angel is a non-for-profit organization that helps give street youth a second chance by providing them with business clothing and teaching them work related skills. The company is getting ready for a fundraiser by selling crystal angle wing key chains. The information below about Guardian Angel’s operations has been assembled to assist budget preparation. The company is preparing its master budget for the first quarter of 2014. The budget will detail each month’s activity and the activity

for the quarter in total. The master budget will be based on the following information:

Additional Information

a. Selling price is $60 per unit in 2013 and will not change for the first two quarters of 2014. Actual and estimated sales are as follows:

Actual 2013 Estimated 2014
November: 10,000 units January: 11,000 units
December: 12,000 units February: 10,000 units
  March: 13,000 units
  April: 11,000 units
  May: 10,000 units

b. The company produces enough units each month to meet that month’s sales plus a desired inventory level equal to 20% of next month’s estimated sales. Finished Goods inventory at the end of 2011 consisted of 2,200 units at a variable cost of $33 each.

c. The company purchases enough raw materials each month for the current month’s production requirement and 25% of next month’s production requirements. Each unit of product requires 5 kilograms of raw material at $0.60 per kilogram. There were 13,500 kilograms of raw materials in inventory at the end of 2013. Guardian Angel pays 40% of raw material purchases in the month of purchase and pays the remaining 60% in the following month.

d. Each unit of finished product requires 1.25 labor-hours. The average wage rate is $16 per hour. e. Variable manufacturing overhead is 50% of the direct labor cost.

f. Credit sales are 60% of total sales. The company collects 50% of the credit sales during the first month following the month of sale and 50% during the second month.

g. Fixed overhead cost (per month):

Factory supervisor’s salary $75,000
Factory insurance 1,400
Factory rent 8,000
Depreciation of factory equipment 1,200

 

h. Total fixed selling and administrative expenses are as follows:

Advertising $300
Depreciation 9,000
Insurance 250
Salaries 4,000
Other 14,550

 

i. Variable selling and administrative expenses consist of $4 for shipping and sales commissions of 10% of sales.

j. The company is going to acquire assets for use in the sales office at a cost of $300,000, which will be paid at the end of January 2014. The monthly depreciation expense on the additional capital assets will be $6,000.

k. The balance sheet as of December 31, 2013, is as follows:

Assets
Cash   $80,000
Accounts receivable   612,000
Inventory: raw materials $8,100  
Finished goods 72,600 80,700
Plant and equipment 1,000,000  
Less: accumulated depreciation (100,000) 900,000
Total Assets   $1,672,700
     
Liabilities and Equity
Accounts payable   $24,000
6% long term notes payable   900,000
Common shares   735,000
Retained earnings   13,700
Total liabilities and equity   $1,672,700

 

Additional information:

o All cash payments except purchases of raw materials are made monthly as incurred.

o All loan repayments and borrowings, when appropriate, occur at the end of each month.

o All interest on borrowed funds is paid at the end of each month at the rate of 6% per year.

o Loan repayments and borrowings, when appropriate, may be made in any amount.

o A minimum cash balance of $30,000 is required at the end of each month.

Having a better grasp of the client and information required in order to prepare a master budget, you get to work on solving the client’s needs:

Required:

1. Prepare the following budgets for the first three months of 2014:

a. Sales budget

b.Production budget

c. Raw materials purchases budget

d.Direct labor and manufacturing overhead budget

e.Selling and administrative budget

f. Budgeted income statement (using variable costing). Ignore income taxes.

g.Cash budget

 

Case 4

Background

You have recently been promoted to Senior Consultant for the professional service firm, BUSI 2083 LLP thanks in part to the hard work in leading the engagement for your client Guardian Angel. Your firm specializes in providing a wide variety of internal business solutions for different clients. After a weekend of celebrations from your promotion, a Senior Manager calls you into her office first thing Monday morning to help with a manufacturing client who is making a tough decision about closing a plant:

Low Rider (LR) manufactures seats for automobiles, vans, trucks, and boats. The company has a number of plants, including the Waterloo Cover Plant, which makes seat covers.

Bill Rice is the plant manager at the Waterloo Cover Plant but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Waterloo plant.

Additional Information

Rice has just heard that LR has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Waterloo Cover Plant for $42 million. Rice was astonished at the low outside bid because the budget for the plant’s operating costs for the coming year was set at $48.6 million. If this bid is accepted, the Waterloo operation will be closed down.

The budget for the Waterloo Cover Plant’s operating costs for the coming year is presented below.

Materials   $16,000,000
Labor:    
Direct $13,400,000  
Supervisor 800,000  
Indirect plant 3,800,000 18,000,000
Overhead:    
Depreciation – equipment 2,600,000  
Depreciation – building 4,200,000  
Pension expense 3,200,000  
Plant manager and staff* 1,200,000  
Corporate expenses** 3,400,000 14,600,000
Total budgeted costs   $48,600,000

 

*Expenses for Rice and his regional staff

** Fixed corporate expenses allocated to plants and other operating units based on total budgeted wage and salary costs.

The following are additional facts regarding the plant’s operations:

a. Due to the plant’s commitment to use high-quality fabrics in all of its products, the Purchasing Department was instructed to place blanket purchase orders with major suppliers to ensure the receipt of sufficient materials for the coming year. If these orders are cancelled as a consequence of the plant closing, termination charges would amount to 25% of the cost of direct materials.

b. Approximately 350 employees will lose their jobs if the plant is closed. This includes all of the direct laborers and supervisors, management and staff, and the plumbers, electricians, and other skilled workers classified as indirect plant workers. Some of these workers would have difficulty finding new jobs. Nearly all the production workers would have difficulty matching the plant’s base pay of $12.50 per hour, which is the highest in the area. A clause in the plant’s contract with the union may help some employees; the company must provide employment assistance and job training to its former employees for 12 months after a plant closing. The estimated cost to administer this service would be $1.6 million.

c. Some employees would probably choose early retirement because LR has an excellent pension plan. In fact, $1.4 million of the annual pension expenditures would continue whether the plant is open or not.

d. Rice and his regional staff would not be affected by the closing of the Waterloo plant. They would still be responsible for running three other area plants.

e. If the plant was closed, the company would realize about $4 million salvage value for the equipment in the plant. If the plant remains open, there are no plans to make any significant investments in new equipment or buildings. The old equipment is adequate for the job and should last indefinitely.

Required:

1. Without regard to costs, identify the advantages to LR of continuing to obtain covers from its own Waterloo Cover Plant.

2. LR plans to prepare a financial analysis that will be used in deciding whether or not to close the

3. Waterloo Cover Plant. Management has asked you to identify:

a. The annual budgeted costs that are relevant to the decision regarding closing the plant (show the dollar amounts).

b. The annual budgeted costs that are not relevant to the decision regarding closing the plant and explain why they are not relevant (again show the dollar amounts).

c. Any non-recurring costs that would arise due to the closing of the plant and explain how they would affect the decision (again show any dollar amounts).

4. Looking at the data you prepared in (2) above, should the plant be closed? Show computations and explain your answer.

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