CASE PROBLEM

CH 1- PROB 1-8 – MANAGERIAL ACCOUNTING AND THE INFORMATION AGE

INCREMENTAL ANALYSIS

The Riverview Hotel is a deluxe four-star establishment. Late on Friday, it had 20

of its 300 rooms available when the desk clerk received a call from the Pines
Hotel. The Pines Hotel made a booking error and did not have room for four guests
(each of whom had a “confirmed” room). The Pines wants to send its customers to
the Riverview but pay the rate the guests would have been charged at the Pines
($160 per room) rather than paying the normal rate of $260 per room at the
Riverview.

Required

a. If the Riverview accepts the guests, what will be the incremental revenue?
b. Provide examples of incremental costs that the Riverview will incur if it accepts
the guests.
c. In your opinion, will the incremental revenue be greater than the incremental
cost?
CASE PROBLEM - CH 2- PROB 2-14

Selection of an Overhead Allocation Base

Wolf Manufacturing expects the following overhead costs in the current year:

Indirect material $ 45,000

Indirect labor 55,000
Depreciation of machinery 160,000
Repair and maintenance on machinery 135,000
Utilities and taxes 55,000
Total $450,000

It expects to use 25,000 direct labor hours at a cost of $525,000 and 15,000
machine hours during the year.

Required

Justify the selection of an appropriate allocation base and calculate the

predetermined overhead allocation rate.
CASE PROBLEM

CASE PROBLEM - CH 3- EXERCISE 3-18

Incremental Analysis
Woodinville Cement uses a process costing system. In 2017, the company
produced and sold 100,000 bags of cement and incurred the following costs:

Total Per Equivalent Unit

Direct material $ 25,000 $0.25
Direct labor 100,000 1.00
Manufacturing overhead 200,000 2.00
Total $325,000 $3.25

The current selling price is $4 per unit, and the profit for 2017 was
($4 x 100,000) - $325,000 =$75,000. Sales projections for 2017 at the current
price look flat, but the sales manager believes that if the sales price is reduced to
$3.75, sales volume would increase by 12,000 units. Assume that direct material
and direct labor are variable costs and that manufacturing costs are primarily fixed.
Should Woodinville Cement lower the price?
CASE PROBLEM - CH 4- PROB 4-3

High-Low, Break-Even
Lancer Audio produces a high-end DVD player that sells for $1,300. Total
operating expenses for the past 12 months are as follows:

Units Produced and Sold Cost

August 165 $140,345
September 130 116,990
October 150 130,650
November 145 127,670
December 155 133,790
January 170 143,910
February 140 123,520
March 150 130,950
April 145 127,385
May 150 129,865
June 140 122,720
July 135 120,255

Required
a. Use the high-low method to estimate fixed and variable costs.
b. Based on these estimates, calculate the break-even level of sales in units.
(Round to the nearest whole unit.)
c. Calculate the margin of safety for the coming August assuming estimated
sales of 175 units.
d. Estimate total profit assuming production and sales of 175 units.
e. Comment on the limitations of the high-low method in estimating costs for
Lancer Audio.
CASE PROBLEM - CH 5- PROB5-10

Using Information from a Variable Costing Income Statement to Make a Decision

Below is a variable costing income statement for Trio Office Supplies, a company
well known for its quality high-volume automatic staplers. For the coming year,
the company is considering hiring three additional sales representatives at
$150,000 each in base salary. The company anticipates that each sales
representative will generate $400,000 of incremental sales.

Trio Office Supplies

Income Statement
For the Year Ending December 31, 2017
Sales $30,000,000
Less:
Variable cost of goods sold $15,000,000
Variable selling expense 3,000,000 18,000,000
Contribution margin 12,000,000
Less:
Fixed production expense 2,000,000
Fixed selling expense 1,500,000
Fixed administrative expense 3,000,000 6,500,000
Net income $ 5,500,000

Required
a. Calculate the impact on profit of the proposed hiring decision. Should the
company hire the three additional sales representatives?
b. Consider the analysis of the decision performed by the company’s chief
accountant and compare it to your analysis in part a. What is the
fundamental flaw in the chief accountant’s work?

Analysis by Chief Accountant

Incremental sales $1,200,000
Income per dollar of sales in 2017:
($5,500,000 ÷ $30,000,000) .183
Net increase in income from sales 219,600
Less increase in base salary 450,000
Effect on profit ($ 230,400)
CASE PROBLEM - CH 6- PROB6-4
Allocated Cost and Opportunity Cost
Brennen produces a mint syrup used by gum and candy companies. Recently, the
company has had excess capacity due to a foreign supplier entering its market.
Brennen is currently bidding on a potential order from Quality Candy for 5,000
cases of syrup. The estimated cost of each case is $23, as follows:

Direct material $9
Direct labor 5
Overhead 9
Total $23

The predetermined overhead rate is $1.80 per direct labor dollar. This was
estimated by dividing estimated annual overhead ($1,080,000) by estimated annual
direct labor ($600,000). The $1,080,000 of overhead is composed of $270,000 of
variable costs and $810,000 of fixed costs. The largest fixed cost relates to
depreciation of plant and equipment.

Required

a. With respect to overhead, what is the opportunity cost of producing a case

of syrup?
b. Suppose Brennen can win the Quality Candy business by bidding a price of
$19 per case (but no higher price will result in a winning bid). Should
Brennen bid $19?
c. Discuss how an allocation of overhead based on opportunity cost would
facilitate an appropriate bidding decision.
CASE PROBLEM - CH 7- PROB7-5

Keep-or-Buy Decision, Sunk Costs

Susan Crossing purchased a used Ford Focus for $12,000. Since purchasing the
car, she has spent the following amounts on parts and labor:

New stereo system $1,500

New paint job 2,500
New tires 1,200
New muffler 250
Total $5,450

Unfortunately, the car needs a few major repairs now; among other things, the
brake rotors and pads must be replaced, and the radiator has sprung a leak. (A new
radiator is needed.) The repairs are estimated to cost $2,500. Susan has looked
around at other used cars and has found a used Honda Civic for $10,500 that is in
very good condition and is approximately the same age as the Ford Focus. Susan
can sell the Ford Focus “as is” for $8,500.

Required
a. In trying to decide whether to repair the Ford Focus or buy the Honda Civic,
Susan is upset because she has already spent $17,450 on the Focus. The car
seems like it costs too much to sell at such a large loss. How would you react
to her dilemma?
b. Assuming that Susan would be equally happy with either the Ford Focus or
the Honda Civic, should she buy the Civic or repair the Focus? Explain your
answer.
c. Are there any qualitative factors that might enter into this decision? Explain.
CASE PROBLEM - CH 8- EXER 8-8

Analyzing a Special Order Service Company

Flamingos to Go is a service company owned by Irvin Vonnet that will “plant”

plastic flamingos on a special day in people’s yards to help celebrate and advertise
birthdays, births, anniversaries, and other important milestones.
The average delivery is priced at $75. The costs of providing 775 deliveries in the
past year were:

Direct labor $13,950

Variable overhead 9,300
Fixed overhead (advertising costs,
phone service, insurance) 17,000
Total cost $40,250

At the start of the current year, Irv received a phone call from the local Rotary
club. The club would like to contract with Flamingos to Go to have flamingos
delivered to the yards of each of its members in the upcoming year; this contract
would provide an additional 130 deliveries for Flamingos to Go. However, the club
wants a special price since it is ordering a large number of deliveries; it has said it
would like a price of $57 per delivery. Flamingos to Go can make up to 1,000
deliveries per year without incurring additional fixed costs.

Required
What will be the affect on profit if Irv accepts the special order?
CASE PROBLEM - CH 9- EXER 9-7
Net Present Value, Internal Rate of Return, Payback, Accounting Rate of
Return, and Taxes

Adrian Sonnetson, the owner of Adrian Motors, is considering the addition of a

paint and body shop to his automobile dealership. Construction of a building
and the purchase of necessary equipment is estimated to cost $800,000, and both
the building and equipment will be depreciated over 10 years using the straight-
line method. The building and equipment have zero estimated residual value at the
end of 10 years. Sonnetson’s required rate of return for this project is 12 percent.
Net income related to each year of the investment is as follows:

Revenue $650,000
Less:
Material cost 70,000
Labor 150,000
Depreciation 80,000
Other 10,000
Income before taxes 340,000
Taxes at 40% 136,000
Net income $204,000

Required
a. Determine the net present value of the investment in the paint and body
shop. Should Sonnetson invest in the paint and body shop?
b. Calculate the internal rate of return of the investment (approximate).
c. Calculate the payback period of the investment.
d. Calculate the accounting rate of return.
CASE PROBLEM - CH 10- PROB 10-3

Master Budget

Techlabs operates a computer training center. The following data relate to the
preparation of a master budget for January 2018.

1. At the end of 2017, the company’s general ledger indicated the following
balances:

Debits Credits
Cash $ 60,000 Accounts Payable $ 40,000
Accounts receivable 40,000 Note payable 60,000
Equipment (net) 120,000 Common stock 30,000
Retained earnings 90,000
Total $220,000 $220,000

2. Tuition revenue in December 2017 was $80,000, and tuition revenue

budgeted for January 2018 is $110,000.
3. Fifty percent of tuition revenue is collected in the month earned, and 50
percent is collected in the subsequent month. The receivable balance at the
end of 2017 reflects tuition earned in December 2017.
4. Monthly expenses (excluding interest expense) are budgeted as follows:
salaries, $60,000; rent, $4,000; depreciation on equipment, $8,000; utilities,
$2,000; other, $800.
5. Expenses are paid in the month incurred. Purchases of equipment are paid
in the month after purchase. The $40,000 payable at the end of 2017
represents money owed for the purchase of computer equipment in
December 2017.
6. The company intends to purchase $50,000 of computer equipment in
January 2018. The anticipated $8,000 per month of depreciation (see
number 4) reflects the addition of $2,000 of monthly depreciation related
to this purchase.
7. The note is at 15 percent per annum and requires monthly interest
payments of $750. The payments are made on the 20th of each month. The
principal must be paid in February 2019.
8. The tax rate is 35 percent.

Required
Complete the following budgets:

a. Techlabs
Cash Budget
For January 2018

Cash receipts
Collection of December 2017 tuition $______________
Collection of January 2018 tuition ______________
Total cash receipts ______________
Cash disbursements
Payment of salaries _______________
Payment of rent _______________
Payment of utilities _______________
Payment of other expenses _______________
Payment for purchases of computer equipment ______________
Payment of interest on note _______________
Payment of taxes ______________
Total disbursements _______________
Excess disbursements over receipts _______________
Plus beginning cash balance _______________
Ending cash balance $________________

PAGE 12/15

b. Techlabs
Budget Income Statement
For January 2018
Tuition revenue $______________
Less:
Salaries ______________
Rent _______________
Utilities _______________
Depreciation _______________
Other _______________
Interest expense _______________
Total expense _______________
 Income before taxes _______________
Taxes on income _______________
Net income $________________

c. Techlabs
Budget Balance Sheet
As of January 31, 2018

Assets
Cash $___________
Accounts Receivable ___________
Equipment (net) ___________
Total Assets ___________

Liabilities
Accounts Payable $___________
Notes Payable ____________
Total Liabilities $___________

Stockholders’ Equity
Common Stock $___________
Retained earnings ___________
Total Stockholders’ Equity $___________

Total Liabilities and Stockholders’ Equity $___________

CASE PROBLEM - CH 11- PROB 11-13

Variance Analysis

Will Norton, the general manager of Cummings Manufactured Siding, is reviewing

a monthly variance summary. The summary reveals a large favorable material
price variance and large unfavorable material quantity and labor efficiency
variances. All other variances are small. Will’s initial instinct is to reward the
purchasing manager with a substantial bonus and withhold the plant manager’s
monthly bonus until material quantity and labor efficiency variances improve.

Required

a. Should Will act according to his initial instinct?

b. What scenario(s) other than good performance in purchasing and poor
performance in manufacturing could lead to the same variances as those
noted?
c. What should Will do to determine whether the purchasing manager’s
performance is especially good and the plant manager’s performance is
poor?
CASE PROBLEM - CH 12- PROB 12-10

Economic Value Added and the Balanced Scorecard

The Spectrum Book Company has two divisions: The Brick and Mortar division
sells books through more than 100 bookstores throughout the United States; the
Internet division was formed 18 months ago and sells books via the Internet. Data
for the past year are:

Brick and Mortar Internet

Division Division

Total assets $162,000,000 $15,480,000

Noninterest-bearing current liabilities 7,020,000 2,520,000
Interest expense 1,260,000 418,500
Net income (loss) 27,810,000 (1,125,000)
Tax rate 40% –0–
Cost of capital 10% 12%

Required
a. Evaluate the two divisions in terms of economic value added (EVA).
b. Explain why it might be better to evaluate the Internet division in terms of a
balanced scorecard rather than just using EVA.
c. Consider the customer and internal processes dimensions of the balanced
scorecard. Suggest two measures for each dimension that would be
appropriate for the Brick and Mortar division and two measures for each
dimension that would be appropriate for the Internet division.
d. A strategy map diagrams the relationship across the dimensions of the
balanced scorecard. Identify the potential links between the customer and
internal processes dimensions you identified in part c.