Case
1 – Due on Jan 23, 2015
You are a Consultant for the professional service firm, BUSI 2083 LLP.
Your firm specializes in providing a
wide variety of internal business solutions for different clients. It is
your first day on the job and a Manager asks you for some help with a client in
the Technology & Entertainment sector. Eager to please on your first day,
you start reading the background information provided by the Manager.
4D Entertainment, a division of Wave of the Future Corporation,
manufactures two large-screen television models: the Zenith, which has been
produced since 2008 and sells for $1,700, and the Pinnacle, a new model introduced
in early 2008, which sells for $2,200. Based on the following income statement
for the year ended November 30, 2014, senior management at Wave of the Future
have decided to concentrate 4D Entertainment’s marketing resources on the
Pinnacle model and begin to phase out the Zenith model.
Additional Information:
4D Entertainment
Income Statement
For the Year Ended November 30, 2014
|
Zenith |
Pinnacle |
Total |
|
|
Sales |
$30,600,000 |
$4,400,000 |
$35,000,000 |
|
COGS |
19,890,000 |
3,080,000 |
22,970,000 |
|
Gross |
10,710,000 |
1,320,000 |
12,030,000 |
|
Selling |
8,032,500 |
925,000 |
8,957,500 |
|
Operating |
$2,677,500 |
$395,000 |
$3,072,500 |
|
Units |
18,000 |
2,000 |
|
|
Operating |
$148.75 |
$197.50 |
Unit costs for Zenith and Pinnacle are as follows:
|
Zenith |
Pinnacle |
|
|
Direct |
$540.00 |
$1,089.00 |
|
Direct |
||
|
Zenith |
45.00 |
|
|
Pinnacle |
126.00 |
|
|
Machine |
||
|
Zenith |
200.00 |
|
|
Pinnacle |
125.00 |
|
|
Other |
320.00 |
200.00 |
|
Total |
$1,105.00 |
$1,540.00 |
*Machine costs include leasing of the machine, repairs, and maintenance.
** Other manufacturing overhead is allocated on the basis of machine
hours at a rate of $40 per machine hour.
4D’s controller, Tina Wesley, is advocating the use of activity-based
costing (ABC) and activity based management (ABM), and has gathered the
following information about the company’s manufacturing overhead costs for the
year ended November 30, 2014.
|
Units |
|||
|
Total |
Zenith |
Pinnacle |
|
|
Soldering |
$1,872,400 |
1,296,000 |
214,000 |
|
Shipments |
1,480,000 |
1,500 |
500 |
|
Quality |
1,749,600 |
54,000 |
18,000 |
|
Purchase |
582,400 |
16,640 |
4,160 |
|
Machine |
61,600 |
144,000 |
10,000 |
|
Machine |
414,000 |
360 |
100 |
|
Total |
$6,160,000 |
Soldering is based on the number of solder points, shipments based on
the number of shipments, quality control based on the number of inspections,
purchase orders based on the number of PO’s, machine power based on machine
hours, machine setups based on the number of setups.
After completing her analysis, Wesley showed the results to Donald
Warden, the 4D Entertainment Division President. Warden did not like what he
saw. “If you show headquarters this analysis, they are going to ask us to phase
out the Pinnacle line, which we have just introduced. This whole costing thing
has been a major problem for us. First Zenith was not profitable and now
Pinnacle.
“Looking at the ABC analysis, I see two problems. We do many more
activities than the ones you have listed. If you had included all activities,
maybe your conclusions would have been different. Second, you used number of
setups and number of inspections as allocation bases. The numbers would have
been different had you used setup hours and inspection hours instead. I know
that measurement problems precluded you from using these other cost allocation
bases, but at least you ought to make some adjustments to our current numbers
to compensate for these issues. I know you can do better. We can’t afford to
phase out either product.”
Wesley knew her numbers were fairly accurate. On a limited sample, she
had calculated the profitability of Zenith and Pinnacle using different
allocation bases. The set of activities and activity rates she had chosen
resulted in numbers that approximated closely those based on more detailed
analyses. She was confident that headquarters, knowing that Pinnacle was
introduced only recently, would not ask 4D Entertainment to phase it out. She
was also aware that a sizable portion of Warden’s bonus was based on division
sales. Phasing out either product would adversely affect the bonus. Still, she
felt some pressure from Warden to do something.
4D Entertainment is unsure of the strategies to properly reflect
information for their parent company. The manager would like the following
questions addressed as soon as possible:
REQUIRED
1.
Using activity-based costing (ABC),
calculate the profitability of the Zenith and Pinnacle models.
2.
Explain briefly why these numbers
differ from the profitability of the Zenith and Pinnacle models calculated
using 4D Entertainment’s existing costing system.
3.
Comment on Warden’s concerns about
the accuracy and limitations of ABC.
4.
How might 4D Entertainment find the
ABC information helpful in managing its business?
5.
What should Tiny Wesley do?
Case 2- Due on Jan 30, 2015
You are a Consultant for the professional service firm, BUSI 2083 LLP.
Your firm specializes in providing a wide variety of internal business
solutions for different clients. A consumer business partner within the firm
notices your availability at 3:00pm on a Friday afternoon and pulls you into a
meeting with one of his high profile clients.
Background
Dark and Bold Inc. manufactures a line of single-cup brewing machines
for home and office use that brew a cup of coffee, tea, or hot chocolate in
less than a minute. The machines use specially packaged portions of coffee,
tea, or hot chocolate that can be purchased online directly from Dark and Bold
or at Second Cup coffee shops who are licensed to distribute the company’s
products. The appeal of the brewing machines is twofold. First, they offer a
high level of convenience. The use of prepackaged coffee servings means no
grinding of coffee beans and no mess. Also, the brewing machines have a water
reservoir that for some models is large enough to make up to 20 cups of coffee.
Second, the taste of
each cup of coffee, tea, and hot chocolate is very consistent. The
brewers’ pressurized system uses the same amount of water for each cup and the
airtight seal used in the individual portions keeps the
product fresh.
Additional Information
The company has three models of brewers that offer different features,
such as the size of the water reservoir, the number of brewing sizes, and the
types of filtering devices used in the machine. Data from the most recent
fiscal year for the three models is shown below.
|
Model |
||||||
|
Home |
Office |
European |
||||
|
Sales |
12,000 |
30,000 |
6,000 |
|||
|
Unit |
$150 |
$200 |
$300 |
|||
|
Variable |
120 |
140 |
180 |
|||
|
Contribution |
$30 |
$60 |
$120 |
Fixed costs are $1,500,000 per year. The company has no work in process
or finished goods inventories. The company is facing increased levels of
competition from manufacturers using similar brewing technologies and believes
there is no room for any increases in unit selling prices.
Dark and Bold Inc. is unsure of the strategies to take in order to
increase profitability. The engagement partner would like the following
questions on his desk by Monday morning:
Required:
1.
Calculate the company’s overall
break-even point in sales dollars.
2.
Calculate the sales dollars required
for each product at the overall break-even level of sales calculated in (1)
above.
3.
Calculate the company’s overall
break-even point in total units.
4.
What impact would doubling the number
of Office Brewer units sold next year have on the overall break-even point in
sales dollars? Assume that there will be no changes to the Home Brewer or
European Deluxe unit sales, that unit selling prices and variable costs will
remain the same for each model, and that total fixed costs will be unchanged.
5.
The company is considering a new
advertising campaign to raise overall consumer awareness of the product
offerings. The total cost of the year-long campaign would be $150,000. By how
much would sales need to increase overall for the company to be able to justify
the new campaign? Assume no change to the current product mix.
6.
Suppose that instead of being
designed to increase total sales volume, the new $150,000 advertising campaign
will focus on getting customers who would have purchased the Office Brewer
model to buy the European Deluxe model instead. To justify the cost of the new
advertising, how many customers must purchase the European Deluxe model instead
of the Office Basic model? Assume that the new advertising campaign will have
no impact on sales of the Home Brewer model.
7.
The company is considering adding a
new product to its line of brewers targeted at the office use market (both the
Office Brewer and European Deluxe are currently targeting office users). The
new brewer, the Office Plus, would sell for $250 per unit and would have
variable unit costs of $160. Introducing the new model would increase fixed
costs by $102,000 annually and would reduce annual unit sales of the Office
Brewer and European Deluxe models by 10% each. Assuming no change to the sales of
the Home Brewer model, how many units of the Office Plus would need to be sold
to justify its addition to the product line next year?
Case 3 – Due on Feb 23, 2015
Background
You are a Consultant for the professional service firm, BUSI 2083 LLP.
Your firm specializes in providing a wide variety of internal business
solutions for different clients. One of the partners in your practice would
like to give back to the community through helping a non-for-profit company,
Guardian Angel, prepare a master budget without charging them service fees. She
asks you to take the lead on this engagement with the hope that a successful
outcome may lead to your promotion to Senior Consultant. You take the
background files from the partner and get started.
Guardian Angel is a non-for-profit organization that helps give street
youth a second chance by providing them with business clothing and teaching
them work related skills. The company is getting ready for a fundraiser by
selling crystal angle wing key chains. The information below about Guardian
Angel’s operations has been assembled to assist budget preparation. The company
is preparing its master budget for the first quarter of 2014. The budget will
detail each month’s activity and the activity
for the quarter in total. The master budget will be based on the
following information:
Additional Information
a. Selling price is $60 per unit in 2013 and will not change for the
first two quarters of 2014. Actual and estimated sales are as follows:
|
Actual |
Estimated |
|
November: |
January: |
|
December: |
February: |
|
March: |
|
|
April: |
|
|
May: |
b. The company produces enough units each month to meet that month’s
sales plus a desired inventory level equal to 20% of next month’s estimated
sales. Finished Goods inventory at the end of 2011 consisted of 2,200 units at
a variable cost of $33 each.
c. The company purchases enough raw materials each month for the current
month’s production requirement and 25% of next month’s production requirements.
Each unit of product requires 5 kilograms of raw material at $0.60 per
kilogram. There were 13,500 kilograms of raw materials in inventory at the end
of 2013. Guardian Angel pays 40% of raw material purchases in the month of
purchase and pays the remaining 60% in the following month.
d. Each unit of finished product requires 1.25 labor-hours. The average
wage rate is $16 per hour. e. Variable manufacturing overhead is 50% of the
direct labor cost.
f. Credit sales are 60% of total sales. The company collects 50% of the
credit sales during the first month following the month of sale and 50% during
the second month.
g. Fixed overhead cost (per month):
|
Factory |
$75,000 |
|
Factory |
1,400 |
|
Factory |
8,000 |
|
Depreciation |
1,200 |
h. Total fixed selling and administrative expenses are as follows:
|
Advertising |
$300 |
|
Depreciation |
9,000 |
|
Insurance |
250 |
|
Salaries |
4,000 |
|
Other |
14,550 |
i. Variable selling and administrative expenses consist of $4 for
shipping and sales commissions of 10% of sales.
j. The company is going to acquire assets for use in the sales office at
a cost of $300,000, which will be paid at the end of January 2014. The monthly
depreciation expense on the additional capital assets will be $6,000.
k. The balance sheet as of December 31, 2013, is as follows:
|
Assets |
||
|
Cash |
$80,000 |
|
|
Accounts |
612,000 |
|
|
Inventory: |
$8,100 |
|
|
Finished |
72,600 |
80,700 |
|
Plant |
1,000,000 |
|
|
Less: |
(100,000) |
900,000 |
|
Total |
$1,672,700 |
|
|
Liabilities and Equity |
||
|
Accounts |
$24,000 |
|
|
6% long |
900,000 |
|
|
Common |
735,000 |
|
|
Retained |
13,700 |
|
|
Total liabilities |
$1,672,700 |
Additional information:
o
All cash payments except purchases of
raw materials are made monthly as incurred.
o
All loan repayments and borrowings,
when appropriate, occur at the end of each month.
o
All interest on borrowed funds is
paid at the end of each month at the rate of 6% per year.
o
Loan repayments and borrowings, when
appropriate, may be made in any amount.
o
A minimum cash balance of $30,000 is
required at the end of each month.
Having a better grasp of the client and information required in order to
prepare a master budget, you get to work on solving the client’s needs:
Required:
1.
Prepare the following budgets for the
first three months of 2014:
a. Sales budget
b.Production budget
c. Raw materials purchases budget
d.Direct labor and manufacturing overhead budget
e.Selling and administrative budget
f. Budgeted income statement (using variable costing). Ignore income taxes.
g.Cash budget
Case 4- Due on Feb 28, 2015
Background
You have recently been promoted to Senior Consultant for the professional
service firm, BUSI 2083 LLP thanks in part to the hard work in leading the
engagement for your client Guardian Angel. Your firm specializes in providing a
wide variety of internal business solutions for different clients. After a
weekend of celebrations from your promotion, a Senior Manager calls you into
her office first thing Monday morning to help with a manufacturing client who
is making a tough decision about closing a plant:
Low Rider (LR) manufactures seats for automobiles, vans, trucks, and
boats. The company has a number of plants, including the Waterloo Cover Plant,
which makes seat covers.
Bill Rice is the plant manager at the Waterloo Cover Plant but also
serves as the regional production manager for the company. His budget as the regional
manager is charged to the Waterloo plant.
Additional Information
Rice has just heard that LR has received a bid from an outside vendor to
supply the equivalent of the entire annual output of the Waterloo Cover Plant
for $42 million. Rice was astonished at the low outside bid because the budget
for the plant’s operating costs for the coming year was set at $48.6 million.
If this bid is accepted, the Waterloo operation will be closed down.
The budget for the Waterloo Cover Plant’s operating costs for the coming
year is presented below.
|
Materials |
$16,000,000 |
|
|
Labor: |
||
|
Direct |
$13,400,000 |
|
|
Supervisor |
800,000 |
|
|
Indirect |
3,800,000 |
18,000,000 |
|
Overhead: |
||
|
Depreciation |
2,600,000 |
|
|
Depreciation |
4,200,000 |
|
|
Pension |
3,200,000 |
|
|
Plant |
1,200,000 |
|
|
Corporate |
3,400,000 |
14,600,000 |
|
Total |
$48,600,000 |
*Expenses for Rice and his regional staff
** Fixed corporate expenses allocated to plants and other operating
units based on total budgeted wage and salary costs.
The following are additional facts regarding the plant’s operations:
a. Due to the plant’s commitment to use high-quality fabrics in all of
its products, the Purchasing Department was instructed to place blanket
purchase orders with major suppliers to ensure the receipt of sufficient
materials for the coming year. If these orders are cancelled as a consequence
of the plant closing, termination charges would amount to 25% of the cost of
direct materials.
b. Approximately 350 employees will lose their jobs if the plant
is closed. This includes all of the direct laborers and supervisors, management
and staff, and the plumbers, electricians, and other skilled workers classified
as indirect plant workers. Some of these workers would have difficulty finding
new jobs. Nearly all the production workers would have difficulty matching the
plant’s base pay of $12.50 per hour, which is the highest in the area. A clause
in the plant’s contract with the union may help some employees; the company
must provide employment assistance and job training to its former employees for
12 months after a plant closing. The estimated cost to administer this service
would be $1.6 million.
c. Some employees would probably choose early retirement because LR has
an excellent pension plan. In fact, $1.4 million of the annual pension
expenditures would continue whether the plant is open or not.
d. Rice and his regional staff would not be affected by the closing of
the Waterloo plant. They would still be responsible for running three other
area plants.
e. If the plant was closed, the company would realize about $4 million
salvage value for the equipment in the plant. If the plant remains open, there
are no plans to make any significant investments in new equipment or buildings.
The old equipment is adequate for the job and should last indefinitely.
Required:
1.
Without regard to costs, identify the
advantages to LR of continuing to obtain covers from its own Waterloo Cover
Plant.
2.
LR plans to prepare a financial
analysis that will be used in deciding whether or not to close the
3.
Waterloo Cover Plant. Management has
asked you to identify:
a.
The annual budgeted costs that are
relevant to the decision regarding closing the plant (show the dollar amounts).
b.
The annual budgeted costs that are
not relevant to the decision regarding closing the plant and explain why they
are not relevant (again show the dollar amounts).
c.
Any non-recurring costs that would
arise due to the closing of the plant and explain how they would affect the
decision (again show any dollar amounts).
4.
Looking at the data you prepared in
(2) above, should the plant be closed? Show computations and explain your
answer.
5.
Identify any revenues or costs not
specifically mentioned in the problem that AI should consider before making a
decision.
