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Management Accounting _ 6 Questions




Question;Answers;to the essay questions should be concise.;For the problems you must show work.;Submit answers using either Word or Excel. Make sure to label answers. The answer to a question must be either all;Word or all Excel for that particular question.;Format the Excel portion of the;exam so that it may be easily printed.;1.;(8 points) Pretty Lady is an upscale boutique that operates various;stores throughout Florida. The company, which has three divisions (Miami;Naples, and Tampa), reported the following information for the year just ended;(in thousands);Pretty Lady also reported $600 of common fixed;expenses that top management wants to allocate to the divisions on the basis of;sales revenue. As the company's chief executive officer notes, "Each;division helped to incur a portion of these costs and, as a result, each should;absorb its fair share." The firm has adopted various responsibility;accounting procedures to evaluate division personnel.;Required;A. Compute the company's total sales revenue.;B. Calculate the amount of variable operating expense incurred by the Naples;Division.;C. Calculate the fixed costs controllable by Miami's management.;D. Calculate the fixed costs traceable to the Tampa Division but controllable;by others.;E. Pretty Lady desires to promote a division manager to the corporate office to;oversee selected operations. In determining which individual to promote, should;Pretty Lady's top management focus on the profit margin controllable by the;division manager or the overall divisional profit margin? Briefly explain.;F. If the company follows the desires of top management, how much of the common;fixed expenses would be allocated to the Tampa Division?;G. Do cost allocations such as those in part "F" typically appear on;a segmented income statement?;2.;(6 points) Lee-Vie Company has;met all production requirements for the current month and has an opportunity to;manufacture additional units with its excess capacity. Unit selling prices and;unit costs for three product lines follow.;Variable overhead is applied on the basis of direct labor dollars, whereas;fixed overhead is applied on the basis of machine hours. There is sufficient;demand for the additional manufacture of all products.;Required;A. If Lee-Vie has excess machine capacity and can add more labor as needed;(i.e., neither machine capacity nor labor is a constraint), which product is;the most attractive to produce?;B. If Lee-Vie has excess machine capacity but a limited amount of labor time;available, which product or products should be manufactured in the excess;capacity?;3.;(6 points) Greg Smithson builds custom homes;in Cincinnati. Smithson was approached not too long ago by a client about a;potential project, and he submitted a bid of $590,000, derived as follows;Smithson adds a 25% profit margin to all jobs, computed on the basis of total;cost. In this client's case the profit margin amounted to $118,000 ($472,000;25%), producing a bid price of $590,000. Assume that 60% of construction;overhead is fixed.;Required;A. Suppose that business is presently very slow, and the client countered with;an offer on this home of $455,000. Should Smithson accept the client's offer?;Why?;B. If Smithson has more business than he can handle, how much should he be;willing to accept for the home? Why?;4. (8;points) Eagle Airways Company is planning a project that is expected to last;for six years and generate annual net cash inflows of $75,000. The project will;require the purchase of a $280,000 machine, which is expected to have a salvage;value of $10,000 at the end of the six-year period. The machine will require a;$50,000 overhaul at the end of the fourth year. The company presently has a 12%;minimum desired rate of return.;Based on this information, an accountant prepared the following analysis;The;accountant recommends that the project be rejected because it does not meet the;company's minimum desired rate of return. Ignore income taxes.;Required;A. What criticism(s) would you make of the accountant's evaluation?;B. Use the net-present-value method and determine whether the project should be;accepted.;C. Based on your answer in requirement "B," is the internal rate of;return greater or less than 12%? Explain.;5. (8 points);Jasper Corporation is organized in three separate divisions. The three;divisional managers are evaluated at year-end, and bonuses are awarded based on;ROI. Last year, the overall company produced a 12% return on its investment.;Managers of Jasper's Iowa Division recently studied an investment opportunity;that would assist in the division's future growth. Relevant data follow.;Required;A. Compute the current ROI of the Iowa Division and the division's ROI if the;investment opportunity is pursued.;B. What is the likely reaction of divisional management toward the acquisition?;Why?;C. What is the likely reaction of Jasper's corporate management toward the;investment? Why?;D. Assume that Jasper uses residual income to evaluate performance and desires;an 11% minimum return on invested capital. Compute the current residual income;of the Iowa Division and the division's residual income if the investment is;made. Will divisional management likely change its attitude toward the;acquisition? Why?;6. (6 points) Gamma Division of Vaughn;Corporation produces electric motors, 20% of which are sold to Vaughan's Omega;Division and 80% to outside customers. Vaughn treats its divisions as profit;centers and allows division managers to choose whether to sell to or buy from;internal divisions. Corporate policy requires that all interdivisional sales;and purchases be transferred at variable cost. Gamma Division's estimated sales;and standard cost data for the year ended December 31, based on a capacity of;60,000 units, are as follows;Gamma;has an opportunity to sell the 12,000 units shown above to an outside customer;at $80 per unit. Omega can purchase the units it needs from an outside supplier;for $92 each.;Required;A. Assuming that Gamma desires to maximize operating income, should it take on;the new customer and discontinue sales to Omega? Why? (Note: Answer this;question from Gamma's perspective.)


Paper#37411 | Written in 18-Jul-2015

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