CASE STUDY 1 -
PART A - Steve and Linda Hom live in Bartlesville, Oklahama. Two years ago, they visited Thailand. Linda, a professional chef, was impressed with the cooking methods and the spices used in the Thai food. Bartlesville does not have a Thai restaurant, and the Homs are contemplating opening one. Linda would supervise the cooking and Steve would leave his current job to be the maître d'. The restaurant would serve dinner Tuesday - Saturday.
Steve has noticed a restaurant for lease. The restaurant has seven tables, each of which can seat four. Tables can be moved together for a large party. Linda is planning two seatings per evening, and the restaurant will be open 50 weeks per year.
The Toms has drawn up the following estimates:
|
Average Revenue, including beverages and dessert
|
$45 per meal
|
|
Average cost of food
|
$15 per meal
|
|
Chef's and dishwasher's salaries
|
$61,200 per year
|
|
Rent (premises,equipment)
|
$4,000 per month
|
|
Cleaning (linen and premises)
|
$800 per month
|
|
Replacement of dishes, cutlery, glasses
|
$300 per month
|
|
Utilities, advertising and telephone
|
$2,300 per month
|
Requirements:
1. Compute the annual breakeven number of meals and sales revenue for the restaurant.
2. Also compute the number of meals and the amount of sales revenue needed to earn operating income of $75,600 for the year.
3. How many meals must the Homs serve each night to earn their target income of $75,600?
4. Should the couple open the restaurant?
PART B - You have just begun your summer internship at Omni Instruments. The company supplies sterilized surgical instruments for physicians. To expand sales, Omni is considering paying a commission to its sales force. The controller, Matthew Barnhill, asks you to compute: (1) the new breakeven sales figure, and (2) the operating profit is sales increase 15% under the new sales commission plan. He thinks you can handle this task because you learned CVP analysis in your accounting class.
You spend the next day collecting information from the accounting records, performing the analysis, and writing a memo to explain the results. The company president is pleased with your memo. You report that the new sales commission plan will lead to a significant increase in operating income and only a small increase in breakeven sales.
The following week, you realize that you made an error in the CVP analysis. You overlooked the sales personnel's $2,800 monthly salaries and you did not include this fixed marketing cost in your computations. You are not sure what to do. If you tell Matthew Barnhill of your mistake, he will have to tell the president. In this case, you are afraid Omni might not offer you permanent employment after your internship.
Requirements:
1. How would your error affect breakeven sales and operating income under the proposed sales commission plan? Could this cause the president to reject the sales commission proposal?
2. Consider your ethical responsibilities. Is there a difference between: (a) initially making an error, and (b) subsequently failing to inform the controller?
3. Suppose you tell Matthew Barnhill of the error in your analysis. Why might the consequences not be as bad as you fear? Should Barnhill take any responsibility for your error? What could Barnhill have done differently?
4. After considering all the factors, should you inform Barnhill or simply keep quiet?
CASE STUDY 2 -
Each year you are asked to provide input for your company's budget. You just received a memo from your boss asking you to prepare a plan to update the equipment, software, furniture, and supplies you think will enhance effectiveness and productivity within your company. You have been given a target budget of RM 25,000.
Your company requires that you get quotes from at least two vendors for any item that costs more than RM 500.
Prepare a list of the equipment, software, furniture, and supplies you think the company needs.
1. Review catalogs, advertisements, the Internet, or other sources to identify vendors and prices for each item.
2. Prepare a proposed budget for your boss. Attach vendor, price, and description of the quality of the items you selected.
3. Present your budget in written format (according to instructions provided by your teacher), and provide justifications for the items you selected.
Evaluation - This project will be evaluated on how thorough and accurate your budget is in relation to the company you work for, the quality of items selected in relation to the cost, and the creativity of your presentation.
CASE STUDY 3 -
FASTPACK Manufacturing produces filament packaging tape. In 2009, FASTPACK produced and sold 15 million rolls of tape. The company has recently expanded its capacity, so it now can produce up to 30 million rolls per year. FASTPACK's accounting records show the following results from 2009:
|
Sale price per roll
|
$3.00
|
|
Variable manufacturing costs per roll
|
$2.00
|
|
Variable marketing and administrative costs per roll
|
$0.50
|
|
Total fixed manufacturing overhead costs
|
$8,400,000.00
|
|
Total fixed marketing and administrative costs
|
$1,100,000.00
|
|
Sales
|
15 million rolls
|
|
Production
|
15 million rolls
|
There were no beginning or ending inventories in 2009.
In January 2010, FASTPACK hired a new president, Kevin McDaniel. McDaniel has a one-year contract that specifies he will be paid 10% of FASTPACK's 2010 absorption costing operating income, instead of a salary. In 2010, McDaniel must make two major decisions:
Should FASTPACK undertake a major advertising campaign? This campaign would raise sales to 24 million rolls. This is the maximum level of sales FASTPACK can expect to make in the near future. The ad campaign would add an additional $2.3 million in fixed marketing and administrative costs. Without the campaign, sales will be 15 million rolls.
How many rolls of tape will FASTPACK produce?
At the end of the year, FASTPACK Manufacturing's Board of Directors will evaluate McDaniel's performance and decide whether to offer him a contract for the following year.
Requirements: Within your group, form two subgroups. The first subgroup assumes the role of Kevin McDaniel, FASTPACK Manufacturing's new president. The second subgroup assumes the role of FASTPACK Manufacturing's Board of Directors. McDaniel will meet with the Board of Directors shortly after the end of 2010 to decide whether he will remain at FASTPACK. Most of your effort should be devoted to advance preparation for this meeting. Each subgroup should meet separately to prepare for the meeting between the Board and McDaniel.
(Hint: Keep computations other than per-unit amounts in millions)
Kevin McDaniel should:
1. Compute FASTPACK Manufacturing's 2009 operating income.
2. Decide whether to adopt the advertising campaign. Prepare a memo to the Board of Directors explaining this decision. Give this memo to the Board of Directors as soon as possible (before the joint meeting).
3. Assume FASTPACK adopts the advertising campaign. Decide how many rolls of tape to produce in 2010.
4. (Given the response to requirement 3) prepare an absorption costing income statement for the year ended December 31, 2010, ending with operating income before bonus. Then compute the bonus separately. The variable cost per unit and the total fixed costs (with the exception of the advertising campaign) remain the same as in 2009. Give this income statement and bonus computation to the Board of Directors as sson as possible (before the meeting with the Board).
5. Decide whether he wishes to remain at FASTPACK for another year. He currently has an offer from another company. The contract with the other company is identical to the one he currently has with FASTPACK - he will be paid 10% of absorption costing operating income instead of a salary.
The Board of Directors should:
1. Compute FASTPACK's 2009 operating income.
2. Determine whether FASTPACK should adapt the advertising campaign.
3. Determine how many rolls of tape FASTPACK should produce in 2010.
4. Evaluate MCDaniel's performance, based on his decisions and the information he provided the Board. (Hint: You may want to prepare a variable costing income statement.)
5. Evaluate the contract's bonus provision. Is the Board satisfied with this provision? If so, explain why. If not, recommend how it should e changed.
After McDaniel has given the Board his memo and income statement, and after the Board has had a chance to evaluate McDaniel's performance, McDaniel and the Board should meet. The purpose of the meeting is to decide whether it is in their mutual interest for McDaniel to remain with FASTPACK, and if so, the terms of the contract FASTPACK will offer McDaniel.
CASE STUDY 4 -
Each autumn, as a hobby, Anne Magnuson weaves cotton place mats to sell through a local creaft shop. The mats sell for $20 per set of four. The shop charges a 10% commission and remits the net proceeds to Magnuson at the end of December. Magnuson has woven and sold 25 sets each of the last two years. She has enough cotton in inventory to make another 25 sets. She paid $7 per set for the cotton. Magnuson uses a four-harness loom that she purchased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The accounts payable relate to the cotton inventory and are payable by September 30.
Magnuson is considering buying an eight-harness loom so that she can weave more intricate patterns in linen. The new loom costs $1,000; it would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 18% interest, with $200 principal plus accrued interest payable each December 31. Magnuson believes she can weave 15 linen place mat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. Magnuson's suppliers will sell her linen on credit, payable on December 31.
Magnuson plans to keep her old loom whether or not she buys the new loom. The balance sheet for her weaving business at August 31, 2011, is as follows:
|
ANNE MAGNUSON, WEAVER Balance Sheet August 31, 2011
|
|
Current assets:
|
$
|
Current liabilities:
|
$
|
|
Cash
|
25
|
Accounts payable
|
74
|
|
Inventory of cotton
|
175
|
|
|
|
200
|
|
|
|
Fixed assets:
|
|
|
|
|
Loom
|
500
|
Stochkolders' equity
|
386
|
|
Acumulated depreciation
|
-240
|
|
|
|
260
|
|
|
|
$460
|
|
$460
|
Requirements:
1. Prepare a cash budget for four months ending December 31, 2011, for two alternatives: weaving the place mats in cotton using the existing loom, and weaving the place mats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31, 2011, and a budgeted balance sheet at December 31, 2011.
2. On the basis of financial considerations only, what should Magnuson do? Give your reason.
3. What nonfinancial factors might Magnuson consider in her decision?
CASE STUDY 5 -
Wonderful Wally's Widget Wholesale (WWWW)
Wally Walker recently began a business which he calls Wonderful Wally's Widget Wholesale (WWWW). Wally has asked for advice regarding the relationships between the cost of his product (a widget), other expenses, the volume of sales, and his profit levels.
Wally's business is a simple one. He purchases a partially complete widget (called a pre-widget) from a local manufacturer for $5.00 each. This price includes the cost of the widget and delivery to Wally's warehouse. Wally then hires local students to make some minor modifications to the pre-widget using simple tools like pliers and screwdrivers. The students receive $2.00 for each widget that they complete. The students are too young to pay Canada Pension Plan (CPP), and do not work enough to pay Unemployment Insurance (UI), and receive no other benefits from WWWW so the $2.00 is the entire labour cost of the modifications. The modifications also require some parts. These additional parts cost $1.00 per widget.
Wally has only two other expenses: Rent is $6,000 per year ($500 per month) and interest expenses are $4,000 per year.
Wally can sell all the widgets he can modify as soon as they are complete so there is never any inventory of finished widgets on hand. Customers purchase the finished widgets at the warehouse so there are no delivery expenses. The suppliers of the pre-widgets will also deliver at any time. WWWW does not need to keep a supply of pre-widgets or materials on hand.
(Note: The selling price $12)
1. What is the variable cost of one widget?
2. What is the contribution margin per unit?
3. What is WWWW total fixed cost for a year?
4. How many widgets must WWWW modify and sell to break even?
5. How many widgets must WWWW modify and sell to earn an annual profit of:
a) $20,000.00?
b) $50,000.00?
c) $100,000.00?
6. Change in Variable Cost
Suppose Wally found some students that were willing to modify the pre-widgets for $1 per widget. All other costs and the selling price are expected to remain the same as given in the original data.
|
Pre-widget
|
$5.00
|
|
Labour (modifications)
|
1.00
|
|
Additional materials
|
1.00
|
|
Variable cost per widget
|
$7.00
|
How many widgets must WWWW modify and sell to:
a) break even for the year?
b) earn an annual profit of $20,000?
c) earn an annual profit of $50,000?
d) earn an annual profit of $100,000?
7. Compare your answers in 6 a-d with those of 4 and 5 a-c. What can you conclude about the effect of a decrease in variable cost on profits?
8. Change in Fixed Cost
Refer to the original data for WWWW. Suppose that Wally finds a new warehouse that he can rent for $4,200 per year ($350 per month). All other cost and the selling price are expected to remain the same as those in the original data.
|
Rent
|
$4,200
|
|
Interest
|
4,000
|
|
Total fixed costs per year
|
$8,200
|
How many widgets must WWWW modify and sell to:
a) break even for the year?
b) earn an annual profit of $20,000?
c) earn an annual profit of $50,000?
d) earn an annual profit of $100,000?
9. Compare your answers in 8 a) to d) with those of 4 and 5 a) to c). What can you conclude about the effect of a decrease in fixed cost on profits with all other factors remaining constant?
10. Change in Selling Price
Refer to the original data for WWWW. Suppose that Wally has found a new market for the widgets which will pay $13 for each. All costs remain the same as given in the original data.
How many widgets must WWWW modify and sell to:
a) break even for the year?
b) earn an annual profit of $20,000?
c) earn an annual profit of $50,000?
d) earn an annual profit of $100,000?
11. Compare your answers in 10 a) to d) with those of 4 and 5 a) to c). What can you conclude about the effect of an increase in the selling price on profits (all other factors remain the same)?
12. Missing Selling Price Given Costs, Volume and Desired Profit
Refer to the original data for WWWW. Suppose that Wally plans to modify and sell 20,000 widgets per year. What price must Wally charge for the widget in order to earn an annual profit of $50,000 if all costs remain the same as that in the original data?
13. Missing Variable Cost Given Selling Price, Other Costs, Volume and Desired Profit
Refer to the original data. Suppose that Wally plans to modify and sell 20,000 widgets per year. What is the maximum price that Wally can pay the students to modify each widget in order that WWWW will earn an annual profit of $50,000 if all other cost and prices remain the same?
14. Calculate Contribution Margin (CM) Ratio
Refer to the original data and calculate the contribution margin ratio.
15. Conclude your study on cost in relation on the effect to the net income.