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ADM2223 .. Final Examination .. Page 1 UNIVERSITY OF NEW BRUNSWICK Faculty of Administration FINAL EXAMINATION - ADM2223 Winter 2011 J.

Abekah , J. Adda, E. Maher, H. Whalen

NAME_________________________

INSTRUCTOR___________________________ CLASS TIME OR SECTION NUMBER_______________

STUDENT NUMBER_______________

INSTRUCTIONS: 1. 2. This examination consists of six questions and has a three hour time limit. Answer all questions in the spaces provide - marks are assigned as stated on the individual questions. State clearly any NECESSARY assumptions. SHOW COMPUTATIONS. Unsupported answers do not merit marks. Indicate your NAME, STUDENT NUMBER, INSTRUCTORS NAME and CLASS TIME OR SECTION NUMBER in the spaces above. You may temporarily unstaple the examination. Do not, however, remove any pages, and ensure the examination is stapled together when handing it in. A stapler is available at the front desk for this purpose.

3. 4. 5.

6.

QUESTION

TOPIC Budgeting Cost Behaviour Cost Concepts, Allocation of Overhead Cost-Volume-Profit Relationships Relevant Costs for Decision Making Reporting for Control

MAXIMUM MARKS 9 marks 3 marks 8 marks 13 marks 12 marks 3 marks 48 Marks

SUGGESTED TIME 34 minutes 11 minutes 30 minutes 49 minutes 45 minutes 11 minutes 180 Minutes

MARKS AWARDED

One Two Three Four Five Six TOTAL

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QUESTION ONE (9 marks, 34 minutes) Melt Ltd. seeks your assistance in developing budget information for the month of April, 2011. On March 31, 2011 the company had cash of $5,500, accounts receivable of $326,700, direct material inventory of $15,129(3,690 kgs), finished goods inventory of $52,000(2,600 units) and accounts payable of $22,509. The budget for April is based on the following assumptions. Sales: Sales are collected 10% in the month of sale and the remainder in the following month. Production: The company wishes to produce enough units to meet monthly sales plus have an ending inventory equal to 20% of the next months sales. Direct materials: Each unit of product requires 1.5kgs. of direct material. The direct material costs $4.10 per kg. The company purchases enough direct material to meet current month production needs plus 10% of the next months production needs. Seventy percent of direct material purchases are paid for in the month of purchase and the rest are paid for in the following month. Manufacturing overhead: Manufacturing overhead is budgeted at $40,000 per month. Included in the budgeted overhead is $3,000 for depreciation on factory equipment and $1,000 for property taxes. Property taxes are paid for once a year when invoiced by the city in June. All other cash-related manufacturing overhead is paid for as incurred. Sales - actual and projected: Dollars $363,000 $390,000 $375,000 $345,000 Units 12,100 13,000 12,500 11,500

March April May June

REQUIRED: a. Prepare a production budget for the months of April and May.

b. Prepare a direct material purchases budget for the month of April.

c. Compute the budgeted cash payments for purchases for April.

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d. Compute budgeted Accounts Payable at April 30.

e. Compute budgeted cash payments for manufacturing overhead for April.

f. Compute budgeted cash collections from sales for April.

QUESTION TWO (3 marks, 11 minutes) Harvey Trucking has used historical data and Microsoft Excel to try and determine a cost function for its delivery business. The input to the spreadsheet consisted of km driven and total costs. The results from the spreadsheet were: Intercept 12500 Slope .51 R Square .655231 a. What is the equation of the cost function?

b. Is this function a good estimate of the costs? Explain why you believe this to be true? (NOTE: if you do not explain your answer you will receive 0 marks.)

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QUESTION THREE (8 marks, 30 minutes) Solutions Co. is a technology consulting firm that focuses on website development and integration of internet business applications. President Ayla Wygants ear is ringing after an unpleasant call from client Shamus Elfan. Elfan was irate after opening his bill for Solutions redesign of his companys website. Elfan said that Solutions major competitor charged fees than were half that of Solutions. Wygant was puzzled for two reasons. First she is confident that her firm knows website design and support as well as any of its competitors. Wegant cannot understand how her major competitor can undercut her rates by one-half and still make a profit. Second, just yesterday Weygant received a call from another client Ken Grange. Grange was happy with the excellent service and reasonable fees Solutions charged him for adding a database-driven job-posting feature to his companys website. Weygant was surprised by Granges compliments because this was an unusual job for Solutions that required development of complex database management applications and she had felt a little uneasy accepting it. Direct material costs are insignificant and are included as a part of indirect costs. Solutions charges direct labour to individual engagements (jobs) at a rate of $100 per hour and allocates indirect costs to engagements using a budgeted rate based on direct labour hours. At the beginning of the year Solutions estimated that indirect costs for the year would equal $706,000 and her firm would work 5,000 direct labour hours. Clients are billed at cost plus 80%. Solutions accountant has suggested that the company consider moving to an activity based costing system and to that end the following activities and activity costs were gathered for the last year. Activity Document preparation Information technology support Training Total indirect costs Estimated cost Allocation base/ cost driver Estimated quantity of the allocation base/cost driver 3,125 pages 780 applications 5,000 hours

$200,000 Pages 234,000 Applications used 272,000 Direct labour hours $706,000

The Elfan and Grange engagements used the following resources: Allocation base/cost driver Elfan Grange Direct labour hours 100 100 Pages 50 300 Application used 1 78

REQUIRED: a. Determine the amount that would be billed to Grange using the current method of determining job costs.

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b. Determine the amount that would be billed to Grange using the activity based costing.

c. Which method of costing jobs do you think Solutions should use? You must explain your answer to receive marks.

d. Assume the company uses the current method to determine job costs. Would indirect costs be under-applied or over-applied for the year, given the following actual costs and cost driver volume: Actual indirect costs: $ 715,000 Actual direct labour hours: 4,900

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QUESTION FOUR (13 marks, 49 minutes) The Epple Company manufactures MP3 players. This is a high volume but low margin business. Variable costs are high but fixed costs are low per unit. In a typical month the company has the following sales and costs: Sales (2,000 units) Variable expenses Contribution Margin Fixed Expenses Operating Income REQUIRED: a. Calculate the companys breakeven point in dollars. $300,000 260,000 40,000 30,000 $10,000

b. Calculate the companys breakeven point in units.

c. What is the companys degree of operating leverage?

d. By what percentage would income drop if sales decreased by 3%?

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e. The company is considering moving production to another country where wages and consequently variable costs will be lower by 10%. However, the company would have higher fixed expenses. They would increase by 50%. Should the company do this?

f. An alternative to moving production is to try to increase their margins by increasing the selling price by 5%. In order to do this they would have to launch an aggressive international marketing campaign that will cost $18,000 a month. Should they do this?

g. Using the information in part f) above what is the new breakeven point in units?

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QUESTION FIVE (12 marks, 45 minutes) Unless otherwise indicated, each of the following parts is independent. In all cases you must show your computations to support your answers.

a. Winkin, Blinkin and Nood an accounting partnership provides accounting services and tax advice to its clients. The results from last year show the following:

Accounting Revenue Less: Variable costs Contribution margin Fixed Costs Operating Income (loss) $300,000 250,000 50,000 75,000 ($25,000)

Tax $800,000 400,000 400,000 250,000 $150,000

The firm is thinking about dropping its accounting services to concentrate on providing tax advice. This will not reduce the fixed costs, which consist primarily of office space and associated costs. It will also cause an increase in Tax Advice revenue by 10% as the partners are freed up to spend more time soliciting clients for the Tax Advice Business. Should they do this?

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b. Jolly Jewelers makes gold jewelry. Because of the recent increase in the price of gold, many people are buying up the metal and keeping it as an investment. Because of this, Jolly Jewelers cannot buy all the gold it needs and consequently cannot manufacture all the jewelry it can sell. The company has two products necklaces and bracelets. They have compiled the following information about these two products: Necklaces Selling Price Variable Cost Grams of gold needed $800 600 15 Bracelets $500 350 8

Should the company manufacture all the necklaces it can sell and use the remainder of the gold to manufacture bracelets or should it manufacture all the bracelets it can sell and use the remainder of the gold to manufacture necklaces? Show the calculations that support your answer.

c. Monterey Smelting takes ore and extracts four metals Zinc, Lead, Copper and Iron. in a joint manufacturing process. The company can sell the metals as is or process them further into a number of different product such as wire or sheeting. Zinc Units produced Sales value at split off Cost per unit to process further Per unit sales value if processed 10,000 $20,000 $1 $3.25 Lead 4,000 $4,000 $0.50 $1.40 Copper 12,000 $36,000 $2 $6 Iron 20,000 $10,000 $0.50 $0.90

Cost of the units up to the split off point are $50,000. Which of the products, if any should be processed beyond the split off point?

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d. J. A. Pizza currently delivers the pizzas it sells. It has its own delivery vehicles with special ovens that keep the pizzas warm. The company has been approached by another company DeeLivery specializing in pizza delivery which has offered to deliver pizzas for $2 each. The company currently sells 5,000 pizzas a month. 40% of these are delivered by the company. If the company stops its own delivery it will save $1 in variable cost for every pizza it does not deliver. In addition, it will save $500 per month in fixed costs. However, the DeeLivery vehicles do not have ovens. J. A. Pizza estimates it will lose 5% of its delivery business if it switches because some of the pizzas will be delivered cold. A pizza has a contribution margin of $3. Should the company stop delivering its own pizzas and give the business to DeeLivery?

QUESTION SIX (3 marks, 11 minutes) Gerbig Companys Electrical Division produces a high quality transformer. The Electrical Division sales and cost data on the transformer follow: Selling price per unit on the outside market Variable cost per unit Fixed costs per unit (based on capacity) Capacity in units $40 $21 $9 60,000

The Electrical division is currently selling 50,000 transformers on the outside market and expects demand to continue at the level into the future. Gerbig Company has a Motor division that would like to begin purchasing this transformer from the Electrical Division. The Motor Division is currently purchasing 10,000 transormers each year from another company at a cost of $38 per transformer. Gerbig Company evaluates its division managers on the basis of divisional profits. REQUIRED: a. From the standpoint of the Electrical division, what is the lowest acceptable transfer price for transformers sold to the Motor division.

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b. From the standpoint of the Motor division, what is the highest acceptable transfer price for transformers purchased from the Electrical division.

c. From the standpoint of the entire company, should a transfer take place? You must explain your answer to receive marks.

!!!The end!!!!

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