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Management Accounting 6th Canadian edition Charles T. Horngren, Gary L. Sundem, William O. Stratton, Phillip Beaulieu - Solutions
Sally’s Subs is considering a proposal to invest in a speaker system that would allow its employees to service drive-through customers. The cost of the system (including installation of special windows and driveway modifications) is $60,000. Sally Holding, manager of Sally’s Subs, expects the
Suppose the Thunder Bay Parks Department is considering the purchase of a new, more efficient pool heater for its Moorcroft Swimming Pool at a cost of $15,000. It should save $3,000 in cash operating costs per year. Its estimated useful life is eight years, and it will have zero disposal value.
De Luca Company is considering two possible investments, each of which requires an initial investment of $12,000. Investment A will provide a cash flow of $3,000 at the end of each year for 4 years. Investment B will provide a cash flow of $2,000 at the end of each year for 10 years. 1.
Zielinsky Company has an opportunity to invest $5,000 in a new automated lathe that will reduce annual operating costs by $1,000 per year and will have an economic life of seven years. 1. Suppose Zielinsky Company has a minimum desired rate of return of 5 percent. Compute the NPV of the
The Halifax Office Equipment Company has offered to sell some new packaging equipment to the Bernard Company. The list price is $36,000, but Halifax has agreed to allow a trade-in allowance of $15,000 on some old equipment. The old equipment was carried at a book value of $8,700 and could be sold
Fill in the blanks. Number of Years 18 20 28 Amount of annual cash $ 9,000 $ 8,000 $12,000 $ inflow* $80,000 $65,000 $27,000 Required initial investment $ Minimum desired rate of 14% 20% 25% return $5,613 ($13,835) $2,225 NPV * To be received at the end of each year
Banerjee Company expects to receive $200 at the end of each of the next five years and an additional $1,000 at the end of the fifth year. Therefore, the total payments will be $2,000. What is the NPV of the payments at an interest rate of 8 percent?
1. Suppose you borrow $100,000 now at 12 percent interest, compounded annually. You will repay the borrowed amount plus interest in a lump sum at the end of eight years. How much must you repay? Use Table 1 (page 650) and the basic equation PV = future amount × conversion factor. 2. Assume
Suppose Honda Canada wishes to borrow money from BMO. They agree on an annual rate of 10 percent. 1. Suppose Honda agrees to repay $500 million at the end of four years. How much will BMO lend Honda? 2. Suppose Honda agrees to repay a total of $500 million at a rate of $125 million at the
Chinn Wong wishes to purchase a $600,000 house. She has accumulated a $120,000 down payment, but she wishes to borrow $480,000 on a 30-year mortgage. For simplicity, assume annual mortgage payments occur at the end of each year and there are no loan fees. 1. What are Wong’s annual payments
Name three ways to recognize risk in capital budgeting.
“We can’t use sensitivity analysis because our cash-flow predictions are too inaccurate." Comment.
Capital investments are always more profitable in inflationary times because the cash inflows from operations generally increase with inflation. Comment on this statement.
How much CCA is taken in the first year if a $10,000 asset is depreciated on a 20 percent declining-balance schedule? How much in the second year?
What are the major influences on the present value of a tax deduction?
Distinguish between average and marginal tax rates
What is the basic flaw in the payback model?
"The higher the interest rate, the less I worry about errors in predicting terminal values." Do you agree? Explain.
Why should the differential approach to alternatives always lead to the same decision as the total project approach?
"Not-for-profit organizations do not use DCF because their cost of capital is zero." Do you agree? Explain.
"The higher the minimum rate of return desired, the higher the price that a company will be willing to pay for cost-saving equipment." Do you agree? Explain.
Can net present value ever be negative? Why?
Why is discounted cash flow a superior method for capital budgeting?
The president of E-Games, an online gaming company, is considering the purchase of some equipment used for the development of new games. The cost is $400,000 and the economic life is five years. Annual cash inflows from operations would increase by $110,000, giving a total five-year savings of
A manager of Olympic Mutual Funds is contemplating acquiring servers to operate its Web site. The servers will cost $660,000 cash and will have zero terminal salvage value. The useful life will be three years. Annual savings from operations will be $260,000 and the required rate of return is 12
Panadagan Vacuums Limited (PVL) is a worldwide leader in the manufacturing of industrial vacuums. The company is located in Thorold, Ontario. PVL sells vacuums to distributors in North America, Europe, and Asia. Over the last 10 years, PVL has seen its sales and market share deteriorate due to
Maxim Auto Parts Ltd. has operated three automobile parts manufacturing plants in Ontario for many years. Two produce engine parts, and the third makes seats (“the seat division”). In recent years, the seat division’s plant has been operating well below capacity as a result of the loss of a
“I will give you my decision in about a week,” said Georges Villedary, director-general of the Le Centre Sheraton, Montreal, as he put down the phone and looked pensively at the letter before him. The letter, dated March 15, 1994, was from Alitalia requesting a one-year contract for 40 rooms at
JOB, PROCESS, AND HYBRID COSTING Form groups of three to six students. For each of the following production processes, assess whether a job-cost, process-cost, or hybrid cost system is most likely to be used to determine the cost of the product or service. Also, explain why you think that system is
Sonor Instruments Co. uses three operations in sequence to make two models of its depth finders for sport fishing. Consider the following:1. Operation 2 was highly automated. Product costs depended on a budgeted application rate for conversion costs based on machinehours. The budgeted costs for
Oak Furniture Co. manufactures a variety of wooden chairs. The company’s manufacturing operations and costs applied to products for June wereThree styles of chairs were produced in June. The quantities and direct materials costs wereEach unit, regardless of style, required the same cutting and
A Birmingham, UK, company manufactures and sells digital voice recorders. Business is booming. Various materials are added at various stages in the assembly department. Costs are accounted for on a process-cost basis. The end of the process involves conducting a final inspection and adding a
The following data pertain to the Blending Department at Fasten Chemicals for April:Units:Work-in-process, March 31 ....................................................................................0Units started
Given the following information, compute the unit conversion cost for the month of February for the Benjamin Company, using the FIFO process-costing method. Show details of your calculations.Units completed, 45,000.Conversion cost in beginning inventory, $30,000Beginning inventory, 10,000 units
The Fujita Company uses the FIFO process-costing method. Consider the following for July:Beginning inventory, 15,000 units, 70 percent completed regarding direct materials, which cost ¥89,250,000.Units completed, 80,000.Cost of materials placed in process during July, ¥580,000,000.Ending
Ajax Meter Company manufactures a variety of measuring instruments. One product is an altimeter used by hikers and mountain climbers. Ajax adopted a JIT viewpoint with an automated, computer-controlled, robotic production system. The company schedules production only after an order is received,
Canada Revenue Agency (CRA) must process millions of income tax returns yearly. When the taxpayer sends in a return, documents such as withholding statements and cheques are matched against the data submitted. Then, various other inspections of the data are conducted. Some returns are more
Consider the potato chip production process at a company such as Old Dutch Foods. Old Dutch uses a continuous flow technology that is suited for high volumes of product. The Calgary plant uses between 340,000 and 410,000 kilograms of potatoes each day. The plant operates three shifts per day. It
Management of Consolidated Industries Inc. is considering closing its Oilfield Supply Manufacturing Division due to unfavourable and uncertain conditions in the oil markets. Each of the following three points addresses one financial impact of this decision. 1. Manufacturing equipment in
A cable television network is considering cancelling the program Toronto Lawyer because it is watched by only 2.3 percent of the audience in its Monday evening time slot. It would be replaced by Gone, a new show being created from the same formula as the popular Lost. Market research indicates that
A large automobile-parts plant was constructed four years ago in an Ontario city served by two railroads. The PC Railroad purchased 40 specialized 20-metre freight cars as a direct result of the additional traffic generated by the new plant. The investment was based on an estimated useful life of
A new $300,000 machine is expected to have a five-year life and terminal value of zero. It can produce 40,000 units a year at a variable cost of $4 per unit. The variable cost is $6 per unit with an old machine, which has a book value of $100,000. It is being depreciated on a straight-line basis at
A petrochemical factory produces two products, L and M, as a result of a joint process. Both products are sold to manufacturers as ingredients for assorted chemical products. Product L sells at split-off for $0.25 per litre; M, for $0.30 per litre. Data for April follow. Joint processing
Assume that a division of Sony Inc. makes an electronic component for its speakers. Its manufacturing process for the component is a highly automated part of a just-intime production system. All labour is considered to be an overhead cost, and all overhead is regarded as fixed with respect to
Starbucks purchases and roasts high-quality, whole-bean coffees, its hallmark, and sells them, along with other coffee-related products, primarily through its company-operated retail stores. Suppose that the quality-control manager at Starbucks discovered a 1,000-kilogram batch of roasted beans
Tempor Corp. estimates it will produce 30,000 units of a part that goes into its final product. It currently produces this part internally, but is considering outsourcing this activity. Current internal capacity permits for a maximum of 60,000 units of the part. The production manager has prepared
Refer to 9-A3. 1. Suppose the “decision model favoured by top management consisted of a comparison of a three-year accumulation of wealth under each alternative. Which alternative would you choose? Why? (Accumulation of wealth means cumulative increase in cash.) 2. Suppose the
Consider the following data: 1. Prepare a cost comparison of all relevant items for the next three years together. Ignore taxes. 2. Prepare a cost comparison that includes both relevant and irrelevant items. 3. Prepare a comparative statement of the total charges against revenue for
Debraceny Company’s unit costs of manufacturing and selling a given item at the planned activity level of 10,000 units per month are Ignore income taxes in all requirements. These four parts have no connection with each other. 1. Compute the planned annual operating income at a selling
The manager of operations of Air Canada is trying to decide whether to adopt a new discount fare. Focus on one 134-seat airplane now operating at a 56 percent load factor. That is, on average the airplane has 0.56×134=75 passengers. The regular fares produce an average revenue of $0.12 per
A growing corporation in a large city has offered a 200-room hotel a one-year contract to rent 40 rooms at reduced rates of $50 per room instead of the regular rate of $86 per room. The corporation will sign the contract for 365-day occupancy because its visiting manufacturing and marketing
Magna International Inc., based in Aurora, Ontario, is a global engineer and manufacturer of highly advanced vehicles and automotive parts. Magna’s 2009 sales were US$23.7 billion. It frequently subcontracts work to other manufacturers, depending on whether its facilities are fully occupied,
Assume the same facts as in the preceding problem. However, also assume that the variable costs per room, per day, are $10. 1. Suppose the best estimate is a 62 percent general occupancy rate for the 50 rooms at an average $110 room rate for the next year. Should International Hotels accept
Hotels operates many hotels throughout the world. Suppose one of its Calgary hotels is facing difficult times because of the opening of several new competing hotels. To accommodate its flight personnel, WestJet has offered International a contract for the coming year that provides a rate of $70 per
An administrator at Sacred Heart Hospital is considering how to use some space made available when the outpatient clinic moved to a new building. She has narrowed her choices as follows: 1. Use the space to expand laboratory testing. Expected future annual revenue would be $320,000; future
Brandon Company produces and sells a product that has variable costs of $9 per unit and fixed costs of $110,000 per year. 1. Compute the unit cost at a production and sales level of 10,000 units per year. 2. Compute the unit cost at a production and sales level of 20,000 units per
Dr. Renee Behr is a psychiatrist who is in heavy demand. Even though she has raised her fees considerably during the past five years, Dr. Behr still cannot accommodate all the patients who wish to see her. Dr. Behr has conducted 6 hours of appointments a day, 6 days a week, for 48 weeks a
Thomas bought a new truck in Calgary with a list price, including options, of $21,000. The dealer had given her a “generous trade-in allowance ?of $5,000 on her old truck that had a wholesale price of $3,000. GST was $800. The annual cash operating costs of the old truck were $4,200. The new
Three years ago, the Oak Street TCBY bought a frozen yogurt machine for $8,000. A salesman has just suggested to the TCBY manager that she replace the machine with a new, $12,500 machine. The manager has gathered the following data: 1. Compute the difference in total costs over the next five
A local bookstore bought more “NHL Stars ?calendars than it could sell. It was nearly April and 200 calendars remained in stock. The store paid $4.50 each for the calendars and normally sold them for $8.95. Since February, they had been on sale for $6.00, and two weeks ago the price was dropped
From a particular joint process, Edgerton company produces three products, A, B, and C. Each product may be sold at the point of split-off or processed further. Additional processing requires no special facilities, and production costs of further processing are entirely variable and traceable to
Refer to the preceding exercise. Suppose Vernon Nectars can use the released facilities in another manufacturing activity that makes a contribution to profits of $75,000 or can rent them out for $55,000. Prepare a schedule that compares the four alternative courses of action. Which alternative
Assume that Vernon Nectars reports the following costs to make 500-ml bottles for its Juice Cocktails: Another manufacturer offers to sell Vernon Nectars the bottles for $0.25. The capacity now used to make bottles will become idle if the company purchases the bottles. Further, one supervisor
Oliver Kamp has just made the final payment on his mortgage. He could continue to live in the home; cash expenses for repairs and maintenance (after any tax effects) would be $500 monthly. Alternatively, he could sell the home for $200,000, invest the proceeds in 5 percent bonds, and rent an
Martina Bridgeman is a lawyer employed by a large law firm at a salary of $110,000 per year. She is considering whether to become a sole practitioner, which would probably generate $350,000 in operating revenues and $220,000 in operating expenses annually. 1. Present two tabulations of the
Give an example of a situation where the performance evaluation model is not consistent with the decision model.
"Machinery sales personnel sometimes erroneously brag about the low unit costs of using their machines." Identify one source of an error concerning the estimation of unit costs.
"Variable costs are irrelevant whenever they do not differ among the alternatives at hand." Do you agree? Explain.
"Some expected future costs may be irrelevant." Do you agree? Explain.
"Recovering sunk costs is a major objective when replacing equipment." Do you agree? Explain.
“Choices are often mislabelled as simply make or buy." Do you agree? Explain.
The differential costs or incremental costs of increasing production from 1,000 automobiles to 1,200 automobiles per week would be the additional costs of producing the additional 200 automobiles. If production were reduced from 1,200 to 1,000 automobiles per week, what would the decline in costs
"Accountants do not ordinarily record opportunity costs in the formal accounting records." Why?
"I had a chance to rent my summer home for two weeks for $800. But I chose to leave it empty. I didn’t want strangers living in my summer house." What term in this chapter describes the $800? Why?
Distinguish between an opportunity cost and an outlay cost.
On January 2, 2010, the S.H. Park Company installed a brand-new $90,000 special moulding machine for producing a new product. The product and the machine have an expected life of three years. The machine’s expected disposal value at the end of three years is zero. On January 3, 2010, Kimiyo
The Mussina Chemical Company produced three joint products at a joint cost of $117,000. These products were processed further and sold as follows. The company has had an opportunity to sell at split-off directly to other processors. If that alternative had been selected, sales would have been
Sunshine State Fruit Company sells premium-quality oranges and other citrus fruits by mail order. Protecting the fruit during shipping is important, so the company has designed and produces shipping boxes. The annual cost to make 80,000 boxes is Therefore, the cost per box averages
Shepton Specialty Products Ltd. is a manufacturer of surgical instruments. Given the changes in surgical technology, Shepton has had to invest heavily in maintaining and upgrading its state-of-the-art product line. Shepton has become noted for the high quality of its product and the reasonableness
Fence Company Ltd. (FC) was incorporated in March 2011, and is equally owned by Robert and Morris Wood. The company constructs residential wood fences. FC’s first year was a difficult one. It is now late March 2012, and the Wood brothers are making plans to improve FC’s performance. Having
Milt Pearson, the president of Supergrip Corporation Limited (SCL), is concerned with the results achieved by SCL for the fiscal year ended May 31, 2010, and has called a meeting of the Executive Committee. Present are the vice president of manufacturing, the vice president of sales, and Diane
Banyan Industries Limited (Banyan) manufactures various models of alternators, mainly for the North American automobile industry. The company, located in Canada, has grown steadily over the past 15 years and, two years ago, installed a computer automated manufacturing system that significantly
The Home Appliance Company manufactures small appliances, such as electric can openers, toasters, food mixers, and irons. The peak season is at hand, and the president is trying to decide whether to produce more of the company’s standard line of can openers or of its premium line that includes a
Zimmerman Manufacturing Limited produces and sells flags. During 2009, the company manufactured and sold 50,000 flags at $25 each. Existing production capacity is 60,000 flags per year. In formulating the 2010 budget, management is faced with a number of decisions concerning product pricing and
Many automobile dealers have an operating pattern similar to that of City Motors. Each month, City initially aims at a unit volume quota that approximates a break-even point. Until the break-even point is reached, City has a policy of relatively lofty pricing, whereby the “minimum deal must
Zurich Day School is a private elementary school. In addition to regular classes, after-school care is provided between 3:00 p.m. and 6:00 p.m. at 12 Swiss francs (CHF) per child per hour. Financial results for the after-school care for a representative month are shown below, in CHF. The
Fargo Manufacturing Company produces two industrial solvents for which the following data have been tabulated. Fixed manufacturing cost is applied to product at a rate of $1 per machine-hour. The sales manager has had a $160,000 increase in her budget allotment for advertising and wants to
Mastercraft Inc. makes a variety of motor-driven products for homes and small businesses. The market research department recently identified power lawn mowers as a potentially lucrative market. As a first entry into this market, Mastercraft is considering a riding lawn mower that is smaller and
SaskPlastics makes plastic parts for other manufacturing companies. SaskPlastics has an ABC system for its production, marketing, and customer service functions. The company uses target costing as a strategic decision-making tool. One of the SaskPlastics product lines—consumer products—has over
Belleville Electrical makes small electric motors for a variety of home appliances. Belleville sells the motors to appliance makers, who assemble and sell the appliances to retail outlets. Although Belleville makes dozens of different motors, it does not currently make one to be used in garage-door
Goldwyn Electronics had a fixed factory overhead budget for 2010 of $10 million. The company planned to make and sell 2 million units of a particular communications device. All variable manufacturing costs per unit were $10. The budgeted income statement contained the following: For
The Wittred division of Melbourne Sports Company manufactures boomerangs, which are sold to wholesalers and retailers. The division manager has set a target of 250,000 boomerangs for next month’s production and sales and developed an accurate budget for that level of sales. The manager has also
In a recent year Continental Airlines filled about 50 percent of the available seats on its flights, a record about 15 percent below the national average. Continental could have eliminated about 4 percent of its runs and raised its average load considerably. The improved load factor would have
Is it more profitable to sell your product for $50 or $15? This is a difficult question for many movie studio executives. Consider a movie that cost $60 million to produce and required another $40 million to promote. After its theatre release, the studio must determine whether to sell DVDs directly
The budget for the Oxford University Printing Company for 2011 follows: The company typically uses a so-called cost-plus pricing system. Direct materials and direct labour costs are computed, overhead is added at a rate of 125 percent of direct labour costs, and 10 percent of the total cost is
The following data have been condensed from LaGrande Corporation’s report of 2011 operations (in millions of euros): 1. Prepare the 2011 income statement in contribution form, ignoring income taxes. 2. LaGrande’s operations have been fairly stable from year to year. In planning for
Suppose the historical costs for the manufacture of a calculator were as follows: direct materials, $5 per unit; direct labour, $3 per unit. Management is trying to decide whether to replace some materials with different materials. The replacement should cut material costs by 5 percent per unit.
The Ibunez Tool Company has two products: a plain circular saw and a fancy circular saw. The plain circular saw sells for $66 and has a variable cost of $50. The fancy circular saw sells for $100 and has a variable cost of $70. 1. Compute the contribution margin and contribution margin ratios
1. Several successful chains of warehouse stores such as Costco have merchandising policies that differ considerably from those of traditional department stores. Name some characteristics of these warehouse stores that have contributed to their success. 2. Food chains such as Loblaws have
Quality Corporation believes that there is a market for a portable electronic toothbrush that can be easily carried by business travellers. Quality’s market research department has surveyed the features and prices of electronic brushes currently on the market. Based on this research, Quality
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