Assignment: Financial and Managerial Accounting
I. Assume a local gluten-free pizzeria, on Harrison street, reported the following results for June and July
|
June
|
July
|
|
Unit Sales
|
2,500
|
2,900
|
|
Cost of Food Sold
|
$ 5,000
|
$ 5,800
|
|
Wages and Salaries
|
3,700
|
4,000
|
|
Rent
|
2,000
|
2,000
|
|
Depreciation
|
500
|
500
|
|
Utilities
|
1,400
|
1,500
|
|
Supplies
|
500
|
540
|
|
Total
|
$ 13,100
|
$ 14,340
|
a. Identify each cost as being fixed, variable or mixed.
b. Determine the equation for total operating costs (Fixed + Unit Variable Cost * # of pizzas)
c. Predict the total operating costs for 3000 pizzas
d. Determine the average costs for 3000 pizzas
II. Cruisin' with Lincoln Alumni
After successfully earning a MBA, Lincoln alumni decide to form their own cruise ship company based out of San Francisco. Lincoln Alumni cruises offers luxury trips along the Pacific Coast and to the Hawaiian Islands. They are debating what to do with their existing ship, S.S.
Mission Bay which was built 15 years ago for $90 M and is now fully depreciated. To replace the Mission Bay would cost $180M and its current market value is $150M. Lincoln Alumni Cruises' cost of capital is 15%.
Lincoln Alumni, dusting off some accounting materials, were able to determine the operating costs for a two-week cruise to Alaska, which would be a change from a three week cruise from travelling down to Guatemala. Here are their estimates (based on 2,000 passengers per cruise and 25 cruises per year):
PER CRUISE
|
Variable Costs
|
Fixed Costs
|
|
Labor
|
750,000
|
150,000
|
|
Food
|
750,000
|
75,000
|
|
Fuel
|
|
650,000
|
|
Port fees and services
|
|
125,000
|
|
Marketing, ads, promotion
|
|
350,000
|
|
Supplies
|
500,000
|
150,000
|
|
Totals
|
2,000,000
|
1,500,000
|
a. Assuming that the two-week Alaskan cruise will be priced at $3,000 per passenger, please calculate the break-even number of passengers per cruise based on the data above.
b. What do the Lincoln Alumni need to consider beyond these estimates, and if they included this consideration, what would happen to the break-even point? Would there be an issue if the max capacity of the ship was 1,150 passengers?
III. Sevall Surfware is a company that specializes in selling towels, swimsuits, and beach accessories. The sales mix is 5:5:10 (i.e. for every 5 towels sold, 5 swimsuits and 10 beach accessories are sold). Find the break-even point for each product. The company's annual fixed costs are 68,000 Additionally, Sevall wants to achieve an operating profit of $136,000. How many units would it need to sell to achieve a profit of $136K?
|
Selling Price Per Unit
|
Variable Cost Per Unit
|
|
Towels
|
20
|
6
|
|
Swimsuits
|
50
|
20
|
|
Beach Accessories
|
30
|
18
|
IV. Fixing our Environment
Externality enterprises are contemplating how to react to California regulations regarding their proposed oil refinery in Redwood City.
They face two options. Under option A, the initial investment would cost $0.8B ($800M) to build without fully meeting regulatory requirements. The unit price and variable cost per barrel of this product is estimated to be $150 and $100 respectively. While California would permit this facility to be built, Externality would have to pay a penalty of $15M per year after taxes.
Under Option B, the initial outlay for the oil refinery would triple to $2.4 B ($2,400M). However, with the added cost, there would be improvements with regard to increased operating efficiencies and perceived quality.
Estimates suggest that the variable cost per barrel of product would be reduced to $75 and the price that Externality could charge customers would be raised to $200 per barrel.
Lastly, there would not be the annual $15M fee imposed by the State of California.
Under both conditions, they would expect to produce and sell 5 million barrels per year. Additionally, the initial investment would be expected to have a useful life of 20 years, without any salvage value at the end of the 20 years; for depreciation purposes, straight-line depreciation would be used.
The tax rate is 40% and the cost of capital is 16% for both options. Lastly, the pricing, variable costs and demand levels are estimated to be constant for the next 20 years.
Which option should Externality choose that would maximize Externality's financial value? How did the California penalty ($15M annually) affect your recommendation?
Support your recommendation with a Net Present Value calculation using discounted cash flow analysis.
(A suggestion: keep your answers in the millions---don't get wrapped up around all the zeros; also, you may want to look at 3-33 and 3-35 as this problem is a blend between the two).
V. Industrial Grinders
During the term, we had a case study, Industrial Grinders, which focused on Sunk and Opportunity Costs.
Refer to the table below, which comes from data in the Industrial Grinders case
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Competitor 100 Plastic Rings
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Industrial Grinders 100 Steel Rings (Finished)
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Industrial Grinders 100 Steel Rings (Unfinished or Specialized Steel)
|
|
Selling Price
|
$ 320.40
|
$ 320.40
|
|
|
Costs
|
|
|
|
|
Direct Material
|
$ 4.20
|
$ 76.65
|
|
|
Direct Labor
|
15.60
|
46.80
|
|
|
Overhead
|
|
|
|
|
Departmental
|
31.20
|
93.60
|
|
|
Administrative
|
15.60
|
46.80
|
|
|
Total Manufacturing Costs
|
$ 66.60
|
$ 263.85
|
|
Regarding the Overhead costs, these are allocated based on Direct Labor;
The Variable Overhead costs are 80% of the Direct Labor amount, and relate to the benefits for the labor force.
As you recall from the case, Industrial Grinders has the opportunity to hire the German Labor Force at a rate of 70% of the normal rate. What would be the RELEVANT costs for Decision-Making to produce the UNFINISHED (or Specialized Steel) to FINISHED steel? Please indicate your answers in the YELLOW boxes above.
Also, what PRICE POINT would the customer expect to see for the Steel Rings given that the Competitors Plastic Rings last FOUR times as long? Indicate in the YELLOW BOX in Cell E9.
Lastly, briefly comment on whether it would be cheaper to produce the Plastic Rings or to hire the German Labor from a RELEVANT COST perspective. No more than two sentences are required.
VI. Death Spiral and Opportunity Costs
In addition to Professor's On Call, Dan owns a video shop in San Francisco. He is considering dropping a line of videos (comedies), which has consistently had an operating loss.
Below are the income statements for Dan's three lines of videos:
|
Total
|
Drama
|
Action
|
Comedy
|
|
Sales
|
7,700
|
5,000
|
1,900
|
800
|
|
Variable Costs
|
4,800
|
3,500
|
1,000
|
300
|
|
Contribution Margin
|
2,900
|
1,500
|
900
|
500
|
|
Fixed Costs
|
2,250
|
750
|
750
|
750
|
|
Operating Income
|
650
|
750
|
150
|
(250)
|
Fixed costs relate to the amount of space that is used in the video store. Given constraints on his ability to sell videos, Dan cannot use this space for anything else. In other words, Dan can only sell videos and can't use the space for other things.
Should Dan close the comedy section? Support your answer with calculations and discussion.
Now, suppose that if he replaced the comedy with additional drama or action, he could get $1,000 in additional drama or action revenue. The contribution margin percentages would be the same as in the first case. Using opportunity cost concepts, should Dan replace comedy with either drama or action films?