MBA 6100 - Summer 2016 Block 1 Case Study 2 Problem 1 - Budgeting: Alpha Corporation, Inc. has prepared the following income statement for the year ended December 31, 2015. The following assumptions have been made regarding the calendar year 2016. - Sales volume is expected to increase by 10%. - Prices are expected to increase by 4% - Direct material costs per unit are expected to increase by 8%. - Variable manufacturing overhead costs per unit are expected to decrease by 3%. - Fixed manufacturing overhead costs are expected to decrease by 6%. - Variable general & administrative expenses per unit will remain constant. - Fixed general & administrative expenses are expected to increase by 5%. - All depreciation is a fixed cost. An existing machine used in manufacturing is to be replaced at the beginning of the year. The old machine had an annual depreciation expense of $15,000. The new machine will have an annual depreciation expense of $24,500. Requirements: (a) Prepare a budgeted income statement for the year ending December 31, 2016. (b) Will Alpha Corporation be able to generate enough cash from operations to make a debt payment of $3,200,000 using only funds generated from 2016 operations? You must support your answer with calculations. Problem 2 - Relevant Costs with Special Order and Make or Buy Beta Corporation, Inc. has prepared the following income statement for the year ended December 31, 2015. The company has reported a net loss for the last several years and is attempting to find a solution other than ceasing operations. The current level of production is 20,000 units. The relevant range for production is between 15,000 and 40,000 units per year. Requirements (unless otherwise indicated, consider each requirement as a unique offer): (a) An offer has been made by a discount store. The store wishes to purchase 4,000 units and plans to sell the units under a store brand label. The sale of these units would have no effect on Beta's current sales. Because the discount store would be selling the units, Beta would not be required to pay Sales Commissions on the sales. The discount store will pay Beta $10.25 per unit. Using only relevant costs, should Beta accept the offer. You must support your answer with calculations. (b) An offer has been made by a small startup manufacturing company. The startup company will be able to produce a virtually identical product for $9.75 per unit. Beta Corporation would purchase the product and then sell/distribute the product as it would its own manufactured product. If Beta buys the product, the production supervisor will no longer be needed. Using only relevant costs, should Beta buy the product needed to match the current level of production or continue to make the product? You must support your answer with calculations. (c) Using the same facts as in (b) above, would your answer change if Beta was able to increase sales to 30,000 units and, therefore, would increase the amount of product purchased from the startup company? Show only relevant costs. You must support your answer with calculations