Chapter 12 part 2

1) Provide the missing data in the following situations:

Phi Delta Theta

Division Division Division
Sales $ (A) $250,000 $ (G)
Operating assets $ (B) $ (D) $800,000
Net operating income $400,000 $10,000 $144,000
Margin 0.08 (E) 0.12
Turnover (C) (F) 1.5
Return on investment 16% 10% (H)

ANS:
A. Margin = operating income/ sales A = $5,000,000

$400,000/A = 0.08

B. ROI= operating income/ average assets = Margin*Turnover B = $2,500,000

$400,000/B = 0.16

C. C = Turnover = sales/ average assets

$5,000,000/$2,500,000 = 2.0

D. ROI= operating income/ average assets D = $100,000

$10,000/D = 0.10
E. E = Margin = operating income/ sales

$10,000/$250,000 = .04 or 4%

F. F = Turnover = sales/ average assets

$250,000/$100,000 = 2.5 times

G. Margin = operating income/ sales G = $1,200,000

$144,000/G = 0.12

H. ROI= = Margin*Turnover

0.12 * 1.5 = .18 or 18%

2) Monfett Manufacturing earned operating income last year as shown in the

following income statement:

Sales $620,000
Cost of goods sold $316,000
Gross margin $304,000
Selling and administrative $219,000
expense
Operating income $85,000
Less: Income taxes (at 40%)
$34,000
Net income
$51,000
At the beginning of the year, the value of operating assets was $263,000. At the
end of the year, the value of operating assets was $336,000. Monfett
Manufacturing requires a minimum rate of return of 15%. Total capital employed
equal $350,000 and actual cost of capital is 6%.
Calculate the following:
A. Residual income
B. EVA

ANS:

A.
Residual income = operating income - (minimum rate of return x average
operating assets)
$85,000 - (15% x $299,500) = $40,075

Average operating assets = Beginning assets +

ending assets/2
($263,000 + $336,000)/2 = $299,500

B.
EVA = after-tax operating income - (actual percentage cost of capital x total
capital employed)
$51,000 - (6% x $350,000) = $30,000
 3) Paige Inc. has a division that makes paint and another division that constructs
subdivision houses. The paint division incurs the following costs for one
gallon of paint:

Direct materials $1.10

Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60

The Paint Division can make 1,000,000 gallons per year, and is at capacity. The
Construction Division currently buys its paint from an outside supplier for $5.20 per
gallon (the same price that the Paint Division receives).

A. The maximum transfer price per gallon of paint is

$__________________; this price is set by which of the two
divisions?
B. The minimum transfer price per gallon of paint is
$__________________; this price is set by which of the two
divisions?

ANS:

A. $5.20; construction division

B. $5.20; paint division
 4) Paige Inc. has a division that makes paint and another division that constructs
subdivisions. The paint division incurs the following costs for one gallon of
paint:

Direct materials $1.10

Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60

The Paint Division can make 1,000,000 gallons per year, and expects to produce
800,000 gallons next year. The Construction Division currently buys 200,000 gallons
of paint from an outside supplier for $5.30 per gallon (the same price that the Paint
Division receives).

A. The maximum transfer price per gallon of paint is

$__________________.
B. The minimum transfer price per gallon of paint is
$__________________.
C. Assume that the transfer takes place at $5 per gallon; calculate the
amount by which each of the following will be better off with the
transfer than without it.
Paint Division $__________________
Construction Division $__________________
Paige Inc.as a whole $__________________

ANS:
A. $5.30 (market price)
B. $3.45 (variable cost per gallon)
C. Paint Division benefit = ($5.00 - $3.45) ´ 200,000 = $310,000
Construction Division benefit = ($5.30 - $5.00) ´ 200,000 = $60,000
Benefit to Paige Inc. = ($5.30 - $3.45) ´ 200,000 = $370,000

5) The Dear Division of Zimmer Company sells all of its output to the Finishing
Division of the company. The only product of the Dear Division is chair legs
that are used by the Finishing Division. The retail price of the legs is $20 per
leg. Each chair completed by the Finishing Division requires four legs.
Production quantity and cost data for 2011 are as follows:

Chair legs 30,000

Direct materials $135,000
Direct labor $ 90,000
Overhead (25% is variable) $ 90,000

Required: Compute the transfer price for a chair leg using:

A. market price.
B. variable product costs plus a fixed fee of 20 percent.
C. full cost plus 20 percent markup.
D. variable costs.

ANS:
A. $20

B. 1.20 * [$135,000 + $90,000 + (0.25 * $90,000)]/30,000 = $9.90

C. 1.20 * ($135,000 + $90,000 + $90,000)/30,000 = $12.60

D. [$135,000 + $90,000 + (0.25 * $90,000)]/30,000 = $8.25

Figure 12-8
Bostonian Inc. has a number of divisions, including Delta Division and ListenNow
Division. The ListenNow Division owns and operates a line of MP3 players. Each
year the ListenNow Division purchases component AZ in order to manufacture the
MP3 players. Currently it purchases this component from an outside supplier for
$6.50 per component. The manager of the Delta Division has approached the
manager of the ListenNow Division about selling component AZ to the ListenNow
Division. The full product cost of component AZ is $3.10. The Delta Division can
sell all of the components AZ it makes to outside companies for $6.50. The
ListenNow Division needs 18,000 component AZs per year; the Delta Division can
make up to 60,000 components per year.

6) Refer to Figure 12-8.

Required:
A. Which division sets the maximum transfer price? Which division sets the
minimum transfer price?
B. Suppose the company policy is that all transfer take place at full cost. What is
the transfer price?

ANS:
A. The maximum transfer price is set by the buying division, in this case, the
ListenNow Division. The minimum transfer price is set by the selling division,
in this case, the Delta Division.

B. Full cost transfer price = $3.10

7) Refer to Figure 12-8. Assume that the company policy is that all transfer
prices are negotiated by the divisions involved.

Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. If the transfer takes place, what will be the transfer price?

ANS:
A. The maximum transfer price, set by the ListenNow Division, is $6.50. The
ListenNow Division would not pay any more than $6.50 because that is the price it
currently pays to outside suppliers.

B. The minimum transfer price, set by the Delta Division, is $6.50. This division is
operating at capacity and can sell all that it makes to outside buyers for $6.50.
C. If the transfer takes place, the transfer price will be $6.50.

8) Refer to Figure 12-8. Although the Delta Division has been operating at
capacity (60,000 components per year), it expects to produce and sell only
45,000 components for $6.50 each next year. The Delta Division incurs
variable costs of $1.50 per component. The company policy is that all
transfer prices are negotiated by the divisions involved.

Required:
A. What is the maximum transfer price? Which division sets it?
B. What is the minimum transfer price? Which division sets it?
C. Suppose that the two divisions agree on a transfer price of $5.75. What is the
change in operating income for the Delta Division? For the ListenNow Division? For
Bostonian Inc. as a whole?

ANS:
A. The maximum transfer price, set by the ListenNow Division, is $6.50.
B. The minimum transfer price, set by the Delta Division, is $1.50. In this case, only
variable costs of $1.50 per component are relevant because the Delta Division has
excess capacity.
C. Benefit to Delta Division:
Revenue ($5.75 * 18,000) $103,500
Less: Variable cost ($1.50 * 18,000) 27,000
Benefit $76,500

Benefit to ListenNow Division:

Outside supplier ($6.50 * 18,000) $117,000
 Transfer price ($5.75 * 18,000) 103,500
Benefit $ 13,500

Company benefit = $76,500 + 13,500 = $90,000

Or
Outside supplier ($6.50 * 18,000) $117,000
Less: Variable cost ($1.50 * 18,000) 27,000
Benefit 90,000

9) Paige Inc. has a division that makes paint and another division that constructs
subdivisions. The paint division incurs the following costs for one gallon of
paint:

Direct materials $1.10

Direct labor 1.45
Variable overhead 0.90
Fixed overhead 1.15
Total $4.60

The Paint Division can make 1,000,000 gallons per year, and expects to produce
1,000,000 gallons next year. The construction division currently buys 200,000
gallons of paint from an outside supplier for $5.20 per gallon (the same price that
the Paint Division receives).
A. The maximum transfer price per gallon of paint is
$__________________.
B. The minimum transfer price per gallon of paint is
$__________________.
C. Does it matter whether or not the two divisions transfer?

ANS:

A. $5.20 (market price)

B. $5.20 (market price)
C. No, it doesn't matter since the appropriate transfer price is equal to
the market price.
The pager manufacturing cell has 1,200 hours of time available per quarter. The cell
could make 7,200 pagers but only made 6,000 during that time. Calculate the
following:

A. Theoretical cycle time in minutes.

B. Theoretical velocity per hour.
C. Actual cycle time in minutes.
D. Actual velocity per hour.
E. MCE is __________________ percent (round your answer two digits).

ANS:
A. Theoretical cycle time = production time/ units could be produced
 = 1,200(60 minutes)/7,200 = 10 minutes/pager

B. Theoretical velocity per hour = units could be produced/ production time

= 7200/1200 =6 pagers per hour

Or = 60 /10 = 6 pagers per hour

C. Actual cycle time = production time/ actual units produced

=1,200(60 minutes)/6,000 = 12 minutes/pager

D. Actual velocity = actual units produced/ production time

= 6000/ 1200 = 5 pagers per hour

= 60 / 12 = 5 pagers per hour

E. MCE = Theoretical cycle time/ Actual cycle time

= 10/12 = 0.8333 or 83.33%

Figure 12-6.

The First National Bank has a mortgage loan office with conversion cost of $73,950
per month. There are five employees who each work 170 hours per month. Last
month, 1,020 loan applications were processed, but the staff believes that system
improvements could lead to the processing of as many as 1,700 per month.

20. Refer to Figure 12-6. Calculate the following:

A. Actual cycle time in minutes.

B. Theoretical cycle time in minutes.
C. Actual velocity per hour.
D. Theoretical velocity per hour.

ANS:

A. Actual cycle time = [5(170)(60)]/1,020 = 50 minutes/application

B. Theoretical cycle time = [5(170)(60)]/1,700 = 30 minutes/application

C. Actual velocity = 60/50 = 1.2 applications per hour

 D. Theoretical velocity = 60/30 = 2 applications per hour

21. Refer to Figure 12-6. Calculate the following:

A. Conversion cost in minutes
B. Theoretical conversion cost per unit.
C. Actual conversion cost per unit.

D. How much more is the department spending per application than it should
be if perfect efficiency could be attained?
ANS:
A. Conversion cost in minutes = Conversion cost / no of minutes

$73,950/[5(170)(60)] = $1.45 per minute

B. Theoretical conversion cost per unit = conversion cost / units could be

produced

=73950/1700=43.50$43.50 per application

Or = Conversion cost in minutes * Theoretical cycle time in minutes

=1.45 * 30 = $43.50 per application

C. Actual conversion cost per unit = conversion cost / actual units produced
 =73950/1020 =$72.50 per application

Or = Conversion cost in minutes * actual cycle time in minutes

=1.45 * 50 = $72.50 per application

D. The department is spending $29 (actual – theoretical = $72.50 - $43.50) more

per application than it should be.
Marshal Company has the following data for one of its manufacturing plants:

Maximum units produced in a quarter = 425,000 units

Actual units produced in a quarter = 354,500 units
Productive hours in one quarter = 35,450 hours
Required:
A. Computer the theoretical cycle time (in minutes).
B. Computer the actual cycle time (in minutes).
C. Compute the theoretical velocity in units per hour.
D. Compute the actual velocity in units per hour.

ANS:

A.(35,450 hours x 60 minutes per hour)/425,000 units = 5.00 minutes per unit

B.(35,450 hours x 60 minutes per hour)/354,500 units = 6.00 minutes per unit
C.60 minutes per hour/5 minutes per unit = 12 units per hour

D.60 minutes per hour/6 minutes per unit = 10 units per hour