Question 1. Acme Company manufactures a variety of industrial products sold throughout the United States. Jim Beam has been manager of Central Division for the past three years. In years 2 and 3, he was able to qualify for an annual bonus of $100,000 by meeting a target growth rate of 10% of gross sales. Income statements for the division (in $thousands):
Year 1 Year 2 Year 3
Gross sales 40,200 45,300 50,500
Returns and allowances 250 310 400
Net sales 39,950 44,990 50,100
COGS 23,170 28,300 33,000
Gross profit 16,780 16,690 17,100
Expenses:
Sales commissions 4,020 4,530 5,050
Manager salary/bonus 250 350 350
Advertising 560 780 975
Other division overhead 2,850 3,290 4,130
General and administrative 8,040 9,060 10,100
15,720 18,010 20,605
Net income/loss 1,060 (1,320) (3,505)
All advertising and other division overhead is local to the division and controlled by the manager. General and administrative expense represents corporate overhead which is allocated at the rate of 20% of gross sales.
Required:
1) Because Central Division is showing increasing losses, a senior vice president has suggested that the division be closed. Comment on the advisability of this plan.
2) Comment on the effectiveness of the bonus plan used by Acme. Provide evidence in support of your comments.
3) How might the bonus plan be revised to be more effective?
Question 2.
a. Preston Company has budgeted the following sales for the first four months of next year:
January $500,000
February $540,000
March $470,000
April $320,000
Actual sales for November of this year were $530,000, and for December $620,000. Gross profit is 60% of sales.
The pattern of accounts receivable collection is: 45% in month of sale; 38% in first month following; 14% in second month following; remainder uncollectible.
Preston has a policy of having an ending inventory each month equal to the following month's budgeted cost of sales. Trade accounts payable are paid 60% in the month of purchase and 40% in the following month. Cash operating expenses of $20,000 are paid each month.
Prepare a schedule of budgeted cash receipts and disbursements, by month, for the first quarter of next year.
b. Walden Company has developed a new product that it plans to bring to market. Walden will build a new plant at a cost of $10,000,000 that will have a capacity of 80,000 units per year. Initial budget is for annual production and sales of 50,000 units. Fixed costs are expected to be $4,500,000 per year. Targeted selling price per unit is $360, and manufacturing cost is budgeted at $291/unit. Unit cost consists of: materials, $125; direct labor, $46; overhead (25% variable), $120
1. What is the breakeven sales volume, to the nearest whole unit?
2. What sales volume, to the nearest whole unit, is required to earn ROI of 12%?
3. Assume that, prior to construction, the product is re-engineered. Materials cost would be reduced by 12%, but fixed costs would rise by $600,000/year. What sales volume would have to be exceeded for this re-design to be profitable?
Question 3. Bigelow Company manufactures industrial equipment. Tentative net income before taxes for the current year is $10,000,000. However, the following facts have recently come to your attention. Recompute net income before taxes, giving effect to these items, explaining your reasoning and showing any necessary calculations.
a. Office building rent of $3,000/mo for the last quarter of the year was not paid nor recorded.
b. Bigelow had acquired some trademarks from a competitor a number of years ago for $3,000,000. A recent study show that these trademarks have permanently declined in value to $2,200,000.
c. Bigelow recorded a sale of equipment on December 30 for $1,205,000 and related COGS of $722,000. The contract required installation and testing of the equipment, which was done in January of the following year.
d. The sale of 1,000 units of a standard product was properly recorded, but the related COGS was recorded on a LIFO basis, where FIFO should have been used instead. Inventory records show this activity:
Beginning inventory 200 @ $25
First acquisition 500 @ $27
Second acquisition 600 @ $28
Third acquisition 300 @ $30
e. The beginning balance in Allowance for Bad Debts was $110,000. Write-offs of $95,000 were properly recorded. Aging of the accounts shows that the ending balance should be $117,000, but no entry has been made.
f. On July 1, a large machine was sold with a 3-year service contract. The sale was recorded at the full contract price of $1,000,000, though $300,000 of that related to the service contract. COGS was recorded correctly.
Question 4. Major Mills is a large manufacturer of breakfast cereal. One of its most popular products is Choco-Bombs, which sells at wholesale for $50/case. The cost to produce is $36.30 per case, as follows: Ingredients, $8.40; Packaging, $4.70; Labor, $3.20; Overhead, $20 (30% variable). A large grocery retailer has approached Major Mills with a proposal to create a house-brand version of Choco-Bombs. The retailer offers to purchase 10,000 cases per month of the house brand for one year, after which the contract could be renewed. The retailer will purchase the house brand for $32/case. A slight change in the recipe would reduce ingredients cost by 40 cents per case. Packaging cost would increase by 10 cents per case because of a new ink required. There would be an initial setup cost of $15,000. Because Major Mills has excess capacity of only 9,000 cases per month on the production line, they would lose 1,000 cases per month of sales of Choco-Bombs.
a. Would accepting the retailer's offer be profitable for Major Mills?
b. What other factors should be considered in deciding whether to accept the offer?