Question 1) Mindy Norton Company reported the following information for 2004:
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Sales
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$500,000
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Average Operating Assets
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$300,000
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Desired ROI
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10%
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Net Income
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$ 45,000
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Based on this information, calculate the company's residual income for 2004.
Question 2) LeBron Company is considering two new machines that should produce considerable cost savings in its assembly operations. The cost of each machine is $15,000 and neither is expected to have a salvage value at the end of a 4-year useful life. LeBron's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life. The annual after-tax cash savings for each machine are provided in the following table:
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Annual After-tax Cash Savings
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Year
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Machine A
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Machine B
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1
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$ 5,000
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$ 8,000
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2
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5,000
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6,000
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3
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5,000
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4,000
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4
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5.000
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2.000
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Total
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$20.000
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$20.000
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a. Compute the payback period for each machine using the incremental approach.
b. Compute the unadjusted rate of return based on average investment for each machine. The machines will be depreciated on a straight-line basis.
c. Compute the net present value for each machine.
d. Which machine would you recommend? Explain your reasoning.
e. Compute the internal rate of return for Machine A.
How much would each company bid on the job?
f. What lesson should be learned from this exercise?
Question 3) Three competing manufacturing companies provided the following estimated costs and operating data for 2003:
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Austin Comp any Baldwin Comp any Crenshaw Company
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Direct material
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$ 400,000 $ 400,000 $ 400,000
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Direct labor
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$ 800,000
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$ 800,000
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$ 800,000
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Overhead
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$1,000,000
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$1,000,000
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$1,000,000
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Direct labor hours
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200,000
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200,000
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200,000
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The three companies use different allocation bases for allocating overhead costs to work in process:
Company Allocation Base
Austin Direct Labor Hours
Baldwin Direct Material Costs
Crenshaw Direct Labor Costs
All three companies use a cost plus pricing approach and set their prices at 25% above cost.
a. Compute the predetermined overhead rate that would be used by each company to allocate overhead costs to work in process.
b. Suppose all three companies bid on a job that is expected to consist of the following:
Direct material $30,000
Direct labor $50,000
Direct labor hours 12,000
How much would each company bid on the job?
c. What lesson should be learned from this exercise?
Question 4) The Kwiatkowski Company estimates that its production workers will produce 100,000 units during the upcoming period and that overhead costs will amount to $500,000.
a. Calculate the predetermined overhead rate based on expected production.
b. Assume that actual output totaled only 90,000 units. How much overhead cost was allocated to work in process?
c. Also assume the actual overhead cost incurred was $540,000. By how much was overhead over-applied or under-applied during the period? (Be sure to indicate whether over-or-under-applied.)
Question 5) The income statement and supplemental information for Xtra Company are provided below:
Xtra Company
Income Statement
Year Ended, Decamber 31, 2003
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Revenues:
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Sales
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$171,750
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Interest revenue
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6.000
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$177,750
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Expenses:
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Cost of goods sold
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$18,900
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Advertising expense
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8,250
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Depreciation
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21,750
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Salaries
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4,860
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Interest expense
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1,500
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Income tax expense
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6.750
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$ 62.010
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Net income
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$115 740
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Supplemental information:
a. Acquired equipment for $87,000 by paying cash of $75,750 and issuing a note payable for the difference
b. Beginning cash balance, $15,020; Increase in cash, $86,490
c. Collections from customers were $5,250 more than sales
d. Interest revenue, interest expense, and income tax expense equal their cash amounts
e. Issued stock for cash, $22,500
f. Payment of dividends, $8,250
g. Payment of long-term note payable, $11,250
h. Payments to employees were $750 more than salary expense
i. Payments to suppliers were $6,750 less than the sum of cost of goods sold plus advertising expense
j. Sold land for $10,500
Prepare the company's statement of cash flows. Use the direct method of reporting cash flow from operating activities.