You are an Analyst for the professional service firm, MANACC LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. After 4 months on the job, you walk into the partner’s office to provide him with your two-week notice. Given your excellent performance over the past few months, rival professional service firm, FININV LLP has provided you with an offer you cannot refuse by providing you with a promotion to Consultant and a significant raise. Although sad to see you go, lead partner requested assistance on a few engagements for several clients.
Julia Child Company
Julia Child Company is a local small business and it sells baby car seats. Since the economy condition is changing due to recession, the company wants to understand the operational risks they have to face this year. Normally, the company sells its product through retailers for an average of $85 each but this year they have to decrease the average price to $80. The variable cost of each car seat is $40 and monthly fixed manufacturing costs totals $5,000 and fixed selling costs total $6,000. The clients have a few questions for you and need you give them the answers during the upcoming meeting next week.
What is the breakeven point in number of car seats?
What is the margin of safety, assuming sales total $32,000?
What is the breakeven level in car seats, assuming variable costs decrease by 10%?
What is the breakeven level in car seats, assuming the selling price goes up by 5%, fixed manufacturing costs decline by 5%, and other fixed selling decline by $1,000?
Gregory Enterprises is a manufacture, which producing customized bikes for other companies. Currently, the company has considered to switch to ABC to calculate the manufacture overhead costs.
It has identified three cost pools to allocate overhead costs. The following estimates are provided for the coming year:
|Cost pool||Overhead costs||Cost driver||Activity level|
|Supervision of direct labour||$320,000||Direct labour hours||800,000|
|Machine maintenance||$120,000||Machine hours||960,000|
|Facility rent||$200,000||Square metres of area||100,000|
|Total overhead costs||$640,000|
The accounting records show the Mossman Job consumed the following resources:
|Cost driver||Actual level|
|Square metres of area||50|
If Gregory Enterprises uses a simple cost system based on direct labour hours then what amount of indirect costs will be allocated to the Mossman job? What is the activity rate for machine maintenance costs?
If Gregory Enterprises uses an ABC system then what amount of indirect costs will be allocated to the Mossman job?
Big Spenders Inc
Big Spenders Inc. has been working on diversifying its portfolio of investments and requires accounting advice for a decision between two car cleaning and detailing companies. Annual cash inflows from two competing investment opportunities are given below. Each investment opportunity will require the same initial investment Cleaning $3,000 and Detailing $3,200. Compute the present value of the cash inflows for each investment using an 8% discount rate for Cleaning and 10% for Detailing.
|Year||cleaning||Detailing||Discount factor 8%||Discount factor 10%|
Calculate Net present value and payback. Also, you need to give your recommendation of which project they should move forward with based on your quantitative analysis.
A recent accounting graduate from Lethbridge University evaluated the operating performance of Fane Company’s three divisions. The following presentation was made to Fane’s Board of Directors. During the presentation, the accountant made the recommendation to eliminate the Southern Division stating that total net income would increase by $20,000, as shown in the analysis below.
Other Two Divisions Southern Division Total
Sales $1,000,000 $300,000 $1,300,000
Cost of Goods Sold 650,000 200,000 850,000
Gross Profit 350,000 100,000 450,000
Operating Expenses 100,000 120,000 220,000
Net Income $ 250,000 $ (20,000) $ 230,000
Cost of goods sold is 80% variable and operating expenses are 70% variable. If the division is eliminated, 40% of the fixed costs will be eliminated.
The client wants to your professional opinion whether you concur with the new accountant’s recommendation? Present a schedule to support your answer.
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