BUS2003 Practice Final Exam

These questions are representative of the types of questions you may find on the final exam,
but in total are longer than the actual final exam.
QUESTION ONE
Bellow Division of Sound Corporation is currently operating at a loss. Bellow makes radios that
are sold to retail stores. The senior management of Sound Corporation is considering closing the
Bellow Division. Bellows statement of operations for the last year follows:
Bellow Division
Statement of Operations
for the past year
Revenues (80,000 units)
Operating expenses:
Variable costs
Traceable fixed costs
Allocated corporate overhead
Operating income (loss)

$ 5,300,000
4,095,000
1,500,000
800,000

6,395,000
$(1,095,000)

Recently, Sound Corporation acquired the Boom Speaker Company which manufactures
speakers that are sold to radio manufacturers.
In an effort to save the division from closing, the manager of the Bellow Division has asked that
the new Boom Speaker Division supply it with 80,000 speakers. The Bellow Division currently
purchases the speakers from outside suppliers for $28 each.
Boom Speaker produces and externally sells 400,000 speakers per year which represents 80% of
its operating capacity. At this production level the standard cost to produce one speaker is as
follows:
Direct materials
Direct labour
Overhead
Total unit cost

$ 8.00
6.00
3.00
$17.00

The standard direct labour rate is $12.00 per hour. The variable overhead rate is $2.00 per direct
labour hour and the fixed overhead rate is $4.00 per direct labour hour. Boom sells the speakers
for $32 each.
Required:
1. Calculate the minimum and maximum transfer prices. Show all your computations. (2
marks)
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2. Should the transfer take place? Calculate the effect on Sounds operating income if the
transfer takes place. Show all your computations. (3 marks)
3. Of the allocated corporate overhead, 10% is caused by the presence of Bellow and will be
avoided if Bellow is closed.
i.
Assume the transfer takes place. Should the Bellow Division still be
closed? Show all your calculations. (4 marks)
4. Assume the transfer does not take place. Should the Bellow Division be closed? Show
all your calculations. (2 marks)
5. Assume Bellow Division has unlimited demand for its radios. What is the maximum
number of speakers that should be transferred from Boom Speaker Division? Show all
your computations. (3 marks)
QUESTION ONE Solution (15 marks)
Part 1. (2 marks)
Minimum transfer price:
Direct materials
Direct labour
Variable overhead
Minimum transfer price

50% x 2.00 =

Maximum transfer price

8.00
6.00
1.00
15.00

mark
mark
1 mark

28.00

mark

Part 2. (3 marks)
With transfer:
Cost of units transferred
Without transfer:
External purchase cost of units

80,000 x 15 (cfwd) =

1,200,000

1 mark cfwd

80,000 x 28 =

2,240,000

1 mark

Savings (increase in operating income) with transfer

1,040,000

Or:
Saving (increase in operating income) with transfer = (28 - 15) x 80,000 = 1,040,000
1 mark cfwd

1 mark

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Yes, the transfer should take place. (1 mark, cfwd with quantitative analysis. No mark awarded
if a quantitative analysis is not completed)
Part 3. (i) (4 marks)
Revenues
Variable costs
4,095,000 - 1,040,000 cfwd =
Traceable fixed costs
avoidable allocated corporate overhead 10% x 800,000 =
Segment margin

5,300,000
3,055,000
1,500,000
80,000
665,000

mark
1 mark
mark
1 mark

If the transfer takes place Bellow Division should not be closed because it contributes $665,000
to Sounds operating income.
1 mark, cfwd with quantitative analysis. No mark awarded if a quantitative analysis is not
completed.
Part 3. (ii) (2 marks)
Calculation of Bellows Segment Margin if the transfer does not take place:
Operating income (loss)
Add back unavoidable corporate overhead 90% x 800,000 =
Segment margin

(1,095,000
)
720,000
(375,000)

1 mark

If the transfer does not take place Bellow Division should be closed because it decreases Sounds
operating income by $375,000.
1 mark, cfwd with quantitative analysis. No mark awarded if a quantitative analysis is not
completed.
Part 4. (3 marks)
Minimum transfer price if Boom has no idle capacity:
Variable cost from part 1
Lost contribution margin: $32 15 =
Minimum transfer price

15.00
17.00
32.00

1 mark cfwd
1 mark cfwd

Maximum transfer price

28.00
mark
As soon as regular sales are displaced, Boom will want to charge $32 but Bellow could use an
outside supplier for $28, which would be cheaper for both Bellow and the corporation.
Only the current idle capacity of Boom should be used to produce units for transfer, a total of
(400,000/80%) 400,000 = 100,000 units. 1 mark
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QUESTION TWO
Child Play Inc. produces a special kind of plastic toy car which does not contain lead paint, the
Scooter, for various manufacturers. Child Play produces Scooters in batches. After each batch
of Scooters is run, the moulds are cleaned. The labour costs of cleaning the moulds can be traced
directly to Scooters because of the unique mould required. Cleaning labour is paid on an hourly
basis. The following information pertains to June 2007:

Number of Scooters produced and sold

Batch size (number of Scooters per batch)
Cleaning labour hours per batch
Cleaning labour cost per hour

Static Budget

Actual

60,000
500
6
$16.80

45,000
450
7
$15.00

Required:
1. Calculate the rate variance for total cleaning labour costs in June 2007. Show all your
calculations. (3 marks)
2. Calculate the efficiency variance for total cleaning labour costs in June 2007. Show all
your calculations. (3 marks)
3. Comment on the efficiency variance. Your comments should include possible causes of
the variance and who should be held accountable for the variance. Do not include an
incorrect standard as a possible cause. (6 marks)
QUESTION Two Solution (12 marks)
Part 1. (3 marks)
{(45,000 450) x 7 x $15} {(45,000 450) x 7 x $16.80}
1 mark

1 mark

= $10,500 - $11,760
= $1,260F 1 mark cfd
Part 2. (3 marks)
{(45,000 450) x 7 x $16.80} - {(45,000 500) x 6 x $16.80}
1 mark

1 mark

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= $11,760 - $9,072
= $2,688U 1 mark cfd
Part 3. (6 marks)
The unfavourable (cfd) variance was caused by two factors:
1. a smaller batch size increased the number of batches, increasing the number of times the
moulds require cleaning, resulting in higher cleaning labour costs (1 mark)
the manager responsible for scheduling production (batches) should be held
accountable for the variance (1 mark)
possible causes: smaller orders, inefficient scheduling (1 mark for at least one
explanation)
2. the cleaning staff spent more time cleaning the moulds after each batch, resulting in
higher cleaning labour costs (1 mark)
the manager responsible for supervising the cleaning staff should be held accountable
for the variance (1 mark)
possible causes: poorly trained staff, inexperienced staff, poorly supervised staff,
moulds may be more difficult to clean than anticipated (1 mark for at least one
explanation)
QUESTION Three - MCQS
1. An assembly worker at a manufacturing company earns $12 per hour for regular work
hours. A regular work week consists of 40 hours. The assembler gets time and a half or
$18 per hour for overtime. In a given week, the assembler worked 47 hours. The amount
charged to direct labour is:
a. $564.
b. $480.
c. $606.
d. $846.
e. none of the above.
2. The YWG Company used a budgeted manufacturing overhead rate of $0.175 per
machine-hour during 2006. Two machine-hours were budgeted per unit produced. For
2006, actual manufacturing overhead incurred was $350,000 and overhead was overapplied by $10,500. How many units were produced in 2006?
a. 970,000.
b. 1,030,000.
c. 1,650,000.
d. 1,940,000.
e. 2,000,000.
f. 2,060,000.

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3. Widget Company sells widgets for $20 each. The manufacturing costs, all variable, are
$6 each. The company is planning on renting an exhibition booth for both display and
selling purposes at the annual convention. The companys sales manager will earn a
vacation bonus if she can earn a target profit of $150,000 for the sales operation at the
convention. The convention organizers provide the advertising and guarantee a certain
level of traffic in exchange for 15% of the profit earned at each booth.
How many widgets does the sales manager have to sell to earn the vacation bonus?
a. 7,500.
b. 8,824.
c. 9,108 .
d. 10,714
e. 10,715.
f. none of the above.
4. Worley Company has over-applied overhead of $45,000 for its first year ended December
31, 2006, which is considered material in amount. Before disposing of the over-applied
overhead, selected December 31, 2006, balances from Worleys accounting records are as
follows:
Revenue
Cost of goods sold
Raw materials inventory
Work in process inventory
Finished goods inventory

$1,200,000
691,200
57,600
43,200
129,600

After disposing the overhead variance, the balance of cost of goods sold in the income
statement for the year ended December 31, 2006 would be:
a. $724,950.
b. $646,200.
c. $655,200.
d. $657,450.
e. $727,200.
f. none of the above.

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5. At the end of the year, the company had 30,000 units in its ending inventory. Every year,
its variable production costs are $10 per unit, and its fixed manufacturing overhead costs
are $5 per unit. The company's operating income for the year was $12,000 higher under
variable costing than under absorption costing. Given these facts, what must have been
the number of units in inventory at the beginning of the year?
a. 27,600 units.
b. 28,800 units.
c. 32,400 units.
d. 42,000 units.
e. None of the above.
6. A packaging company produces cardboard boxes in an automated process. Expected
production per month is 40,000 units. The direct material cost is $0.30 per unit and the
fixed manufacturing overhead cost is $0.60 per unit. Contribution margin per unit is
$1.85 and administrative fixed costs are $7,500 per month.
What is the flexible budget amount for operating income (loss) if 20,000 units are
produced and sold?
a. $17,500.
b. $(500).
c. $29,500.
d. $37,000.
e. $5,500.
f. None of the above.
7. Central Medical Supply, Inc., a manufacturer of medical testing equipment, has $240,000
worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to
fit another line of testing equipment at a cost of $64,000; the market value would then be
$136,000. However, Tripac offered to purchase the obsolete equipment as is for $88,000.
What is the opportunity cost if Central accepts Tripacs offer?
a. $72,000.
b. $78,000.
c. $88,000.
d. $136,000.
e. $168,000.
f. $240,000.
g. $304,000.
8. At zero machine hours the total budgeted cost line intersects the vertical axis at $60,000.
At 20,000 machine hours, a horizontal line drawn from the total budgeted cost line
intersects the vertical axis at $180,000. Fixed and variable costs may be expressed as:
a. $60,000 fixed plus $3 per machine hour.
b. $90,000 fixed plus $3 per machine hour.
c. $180,000 fixed plus $9 per machine hour.
d. $60,000 fixed plus $6 per machine hour.
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e. $90,000 fixed plus $6 per machine hour.

f. $180,000 fixed plus $6 per machine hour.
g. none of the above.
9. A company provides the following information:
Sales
Net income
Return on investment
Tax rate
Minimum required return

$14,000,000
$336,000
14%
40%
$480,000

The companys residual income is:

a. ($144,000).
b. $435,000.
c. $80,000.
d. ($278,400).
e. $480,000.
f. none of the above.
10. The 2006 income statement for Crank Division follows:
Sales
Cost of goods sold
Gross margin
Selling & administrative expenses
Operating income

$3,120,000
1,650,000
1,470,000
1,282,800
$ 187,200

The divisions operating assets employed were $1,296,000 at the end of 2006, which
represents an 8% increase over the previous year-end balance. All investments in
operating assets are expected to earn a minimum required rate of return of 12%.
Crank has an investment opportunity that would yield an estimated return of 13%.
If Crank is evaluated on the basis of return on investment it will:
a. reject the investment opportunity because it will decrease its current return on
investment of 14.4%.
b. reject the investment opportunity because it will decrease its current return on
investment of 15%.
c. reject the investment opportunity because it will decrease its current return on
investment of 15.05%.
d. accept the investment opportunity because it yields a return greater than the
minimum required rate of return.
11. A company pays cash to purchase an investment that will generate interest income of
$50,000 per year. Return on investment will:
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a.
b.
c.
d.
e.
f.

increase because the turnover will increase.

increase because the margin will increase.
increase because the margin and turnover will increase.
decrease because turnover will decrease.
decrease because the margin will decrease.
none of the above.

12. A company manufactures and sells a single product that has a positive contribution
margin. If the selling price and variable expenses both decrease by 5% and fixed
expenses do not change, then what would be the effect on the contribution margin per
unit and the contribution margin ratio?
a. The contribution margin per unit will decrease and the contribution margin ratio
will decrease.
b. The contribution margin per unit will decrease and the contribution margin ratio
will not change.
c. The contribution margin per unit will not change and the contribution margin ratio
will decrease.
d. The contribution margin per unit will not change and the contribution margin ratio
will not change.
e. None of the above.
Use the following information for questions 13 to 14:
Baked Brick Company has a bottleneck in the production process. The kiln has a total capacity
of 2,000 hours per year. Data concerning the companys four main products appear below:
Standard
Brick
Revenue per pallet
Contribution margin per pallet
Annual demand (pallets)
Hours required in the kiln per pallet

$756
$472
90
8

Quality Economy
Brick
Brick
$1,356
$632
110
8

$589
$376
100
4

Antique
Brick
$857
$440
120
5

13. The kiln could be operated for more than 2,000 hours per year by running it after normal
working hours. Up to how much per hour should the company be willing to pay in
incremental costs to operate the kiln additional hours?
a. $59.
b. $79.
c. $94.
d. $88.
e. $80.
14. Baked Brick Company is considering introducing a new product whose variable cost
would be $820 per pallet and that would require 10 hours in the kiln per pallet. What is
the minimum acceptable selling price for this new product?
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a.
b.
c.
d.
e.

$820.
$1,292.
$1,410.
$879.
None of the above.

15. Last year, a company reported $750,000 in sales (25,000 units) and an operating income
of $25,000. At the break-even point, the company's total contribution margin equals
$500,000. Based on this information, which of the following statements is true?
a. The company's contribution margin ratio is 40%.
b. The company's break-even point is 24,000 units.
c. The company's variable expense per unit is $9.
d. The company's variable expenses are 60% of sales.
e. None of the above.
16. A company has a margin of safety percentage of 20%. The break-even point is $400,000
and the variable costs are 40% of sales. Given this information, what is the operating
income?
a. $48,000.
b. $80,000.
c. $60,000.
d. $
0.
e. None of the above.
17. Iris Company makes two products from a common input. Joint processing costs up to the
split-off point total $42,000 a year. The company allocates these costs to the joint
products on the basis of their total sales values at the split-off point. The total sales value
at the split-off point is $40,000. Each product may be sold at the split-off point or
processed further. Data concerning these products appear below:

Allocated joint processing costs

Costs of further processing
Sales value after further processing

Product X

Product Y

Total

$22,680
11,600
40,800

$19,320
25,300
54,200

$42,000
36,900
95,000

The minimum amount the company should accept for Product Y if it is to be sold at the
split-off point is:
a. $19,320.
b. $25,300.
c. $27,600.
d. $28,900.
e. $52,900.
f. $54,200.
g. $56,500.

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Question Three Solution

1. a
2. b
3. f
4. c
5. c
6. e
7. a
8. c
9. c
10. b
11. a
12. b
13. a
14. c
15. c
16. c
17. d
Question Four:
The following are independent of each other:
a)
Flowers Inc. has budgeted cost of goods sold for August of $1,000 for plastic flowers.
Management also wants to have $500 in inventory at the end of the month to prepare for
the fall season. Beginning inventory in August was $400.
Required: What dollar amount of plastic flowers should be purchased to meet the above
objectives? 2 marks
Solution
$1,000 + $500 - $400 = $1100; 0.5 marks per item
b)

Lighting Inc.'s sales budget showed the following projections for the coming year:
Quarter
First
Second
Third
Fourth

Units
100,000
120,000
140,000
160,000
520,000

Inventory on December 31 of the current year is expected to be 20,000 units. The

quantity of finished goods inventory at the end of each quarter was to equal seven percent
of the next quarter's budgeted units to be sold.
Required: Calculate the units to be produced during the third quarter. 3 marks
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Solution:
Units of sales
Desired ending inventory 160,000 x 7%
=
Total units needed
Beginning inventory 140,000 x 7% =
Units to be produced

140,000
+ 11,200
151,200
- 9,800
141,400

0.5 marks for sales; 1 mark for EI, 1 mark for BI, 0.5 marks for total
c)

Lovely Pet Store has budgeted cost of goods sold for May of $6,000 for flea collars.
Management also wants to have $300 in inventory at the end of the month to prepare for
the summer season. Beginning inventory in May was $200.
Required: What dollar amount of flea collars should be purchased to meet the above
objectives? 2 marks

Solution
$6,000 + $300 - $200 = $6,100 ; 0.5 marks per item
d)

Allmakes Software budgeted August purchases of new software at $140,000.The store

had software costing $6,000 on hand at the beginning of August, and to cover part of
anticipated back-to-school sales in September they expect to have $15,000 of software on
hand at the end of August.
Required: What was the budgeted cost of goods sold for August? 3 marks
Solution
Beginning
inventory
Purchases
Total available
Ending
inventory
Cost of goods
sold

$
6,000
+140,0
00
$146,0
00
15,000
$131,0
00

1 mark for BI, EI and purchases

Question Five:

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Finish-It-Yourself Furniture Company manufactures replicas of antique oak filing

cabinets. Additional information is as follows:
Price
$500 per filing cabinet
Variable production cost
$170 per filing cabinet
Fixed production costs
$8,000 per month
Variable selling and administration
$20 per filing cabinet
Fixed selling and administration
$3,000 per month
Required:
a. Estimate operating income for a month in which 100 filing cabinets are manufactured
and 90 are sold, if the firm uses variable costing. Assume no beginning inventory.
Use the proper variable costing income statement format.
b. Estimate operating income for a month in which 100 filing cabinets are manufactured
and 90 are sold, if the firm uses absorption costing and actual costing. Assume no
beginning inventory. Use the proper absorption costing income statement format.
c. What is the cost assigned to ending inventory under each of the above costing
methods? Explain the differences between the two ending inventory valuations (do
not perform a computation for this answer).
d. Reconcile the operating incomes between variable costing and absorption costing.
e. If the manager of Finish-It-Yourself Furniture Company is given a bonus based on
income, which type of costing income statement would you recommend for
evaluating manager performance? Justify your choice.
Question Five Solution:
a. Variable costing
Revenue
Variable costs:
Production:
Selling

$45,000
$15,300
1,800

Contribution margin
Fixed costs:
Production
$8,000
Selling and administrative3,000

17,100
27,900

11,000
Operating income
$16,900
b. Absorption costing
Fixed overhead allocation rate = $8,000/100 = $80 per unit
Revenue
$45,000
Cost of goods sold:
22,500
Gross Margin
22,500
Selling and administrative:
Variable
$1,800
Fixed
3,000
4,800
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Operating income
$17,700
c. Inventory under variable costing is (10 x $170) = $1,700
Inventory under absorption costing is 10 x ($170 + $80) = $2,500
Inventory valuation under variable costing includes only variable costs, whereas
under absorption costing it includes an allocation of fixed production costs.
d. The income under variable costing is $16,900 and under absorption costing is
$17,700. The difference ($800) is the same as the difference between ending
inventory valuations ($2,500 - $1,700 = $800). $800 of fixed overhead cost is kept
off the income statement and is instead reported in the balance sheet for absorption
costing, whereas fixed overhead is fully expensed as a period cost under variable
costing.
e. Student answers to this question will vary, but they need to provide reasonable
justification for their choice. For example, they could argue that managers should be
compensated using absorption costing because it is the same method used to report to
outsiders under GAAP or that this method provides the best matching of revenues
against costs. Or, they could argue in favour of variable costing because it removed
the inventory effects of fixed overhead and discourages inappropriate building-up of
inventory. Or, they could argue in favour of throughput costing because it
encourages managers to seek ways to reduce labour and variable overhead costs.
Question Six
Flick Company uses a standard cost system. Manufacturing overhead is applied to units of
product on the basis of direct labour hours. The company's total budgeted variable and fixed
manufacturing overhead costs at the denominator level of activity are $20,000 for variable
overhead and $30,000 for fixed overhead. The predetermined overhead rate, including both fixed
and variable components, is $2.50 per direct labour hour. The standards call for two direct labour
hours per unit of output produced. Last year, the company produced 11,500 units of product and
worked 22,000 direct labour hours. Actual costs were $22,500 for variable overhead and $31,000
for fixed overhead.
Required:
a) What is the denominator level of activity? (2 marks)
b) What were the standard hours allowed for the output last year? (1 mark)
c) What was the variable overhead spending variance? (3 marks)
d) What was the variable overhead efficiency variance? (2 marks)
e) What was the fixed overhead budget variance? (2 marks)
f) What was the fixed overhead volume variance? (3 marks)

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Question Six Solution

a) Total overhead at the denominator level of activity $50,000
Denominator level of activity = $50,000 / $2.50
= 20,000 DLHs
b) Actual output
Standard DLH per unit
Standard DLHs allowed

11,500 units
X 2 DLH per unit
23,000 DLHs

c) Computation of variable overhead spending variance:

Spending variance = (AH x AR) - (AH x SR)
= ($22,500) - (22,000 DLHs x $1.00*)
= $500 unfavourable (2 marks)
* $20,000 / 20,000 DLHs = $1.00 (1 mark)
d) Computation of variable overhead efficiency variance:
Spending variance = (AH x SR) - (SH x SR)
= (22,000 DLHs x $1.00) - (23,000 DLHs* x $1.00)
= $1,000 favourable
* 2 DLHs per unit x 11,500 units = 23,000 DLHs
e) Computation of the fixed overhead budget variance:
Budget variance = Actual fixed overhead - Flexible budget fixed overhead
= $31,000 - $30,000
= $1,000 unfavourable
f) Computation of the fixed overhead volume variance:
Volume variance = Fixed portion of predetermined overhead rate x
(Denominator hours - Standard hours allowed)
= $1.50* (20,000 DLH - 23,000 DLH)
= $4,500 favourable (2 marks)
*$30,000 / 20,000 DLH = $1.50 (1 mark)
Question Seven:
Norex Corporation is a manufacturer of electronic equipment. The large, diversified
organization is decentralized and has a number of different divisions. The components
division makes electronic components that can be sold either internally to the equipment
division or sold to outside customers. Currently, the components division is producing a
tiny motor that is often used to run fans to cool equipment. The variable cost of making
the motors is $15 per unit, the fixed cost is $5, and the market price is $28. Production is
100,000 units.

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The equipment division uses the motor when assembling small fans that are sold to
computer manufacturers. Currently, the equipment division sells 50,000 fans. The
additional variable cost for processing the motors into fans is $8 per unit. Top
management is re-evaluating Norex transfer pricing policies. The managers are
considering the following price options: variable cost, fully allocated cost, and market
price.
Required:
a. Assume the components division has enough capacity to meet both internal and
external demand. If the transfer price is set using the opportunity cost for the
components division, what transfer price would be most appropriate? Explain your
reasoning.
b. Assume the components division is operating at full capacity and could sell more
units to the outside market. If the transfer price is set using the opportunity cost for
the components division, what transfer price would be most appropriate? Explain
your reasoning.
c. Now assume the selling price for fans is $40 per unit, the transfer price is set at
variable cost, and the components division could sell all of the units it produces
externally.
1. What is the contribution margin for Norex if the motors are sold externally?
What is the contribution margin for the components division if the motors are
sold externally?
2. What is the contribution margin for Norex if the motors are sold internally?
What is the contribution margin for the components division if the motors are
sold internally?
3. Would the managers of the components division be willing to sell any units to
the equipment division? Explain.
4. Calculate the opportunity cost of selling all of the motors externally.
5. Recommend a transfer price policy to Norex that could potentially solve any
problems of suboptimal decision-making.
Question Seven Solution:
a. Using the general rule that the transfer price should equal the variable cost plus any
opportunity cost results in a price of $15 per unit. Because the components division
has plenty of capacity to meet demand, there is no market for additional units
produced, and the transfer price would be the variable cost plus the opportunity cost
of zero.
b. Using the general rule that the transfer price should be equal to the variable cost plus
any opportunity cost results in a price at $28 per unit because now the opportunity
cost is the contribution margin foregone by selling the unit internally. So, the transfer
price is variable cost plus contribution margin = market price.
c. Transfer price questions
1. Norex and components division contribution margin = $13 x 100,000 =
$1,300,000.
2. Norex contribution margin = $17 x 50,000 + $13 x 50,000 = $850,000 +
$650,000 = $1,500,000. Components division CM = $13 x 50,000 + 0 =
$650,000.
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3. Managers of the components division will not be willing to sell internally at

variable cost, when they can get market price if all units are sold externally.
4. The opportunity cost is $200,000 ($1,500,000 - $1,300,000)
5. The dual rate method would be best, so that seller is credited for the market
price (its opportunity cost) and buyer is charged the variable cost. In this
problem, market price or negotiated prices would also work, so students may
give this response.
Question Eight:
Following is information for the Krishnan Companys three business divisions:
Division A
Division B
Division C
Pretax operating income
$800,000
$400,000
$600,000
Current assets
80,000
60,000
80,000
Long-term assets
3,200,000
2,600,000
1,600,000
Current liabilities
400,000
200,000
300,000
Krishnans tax rate for the divisions is 30%, and its after-tax weighted-average cost of
capital (WACC) for each segment is 12%. The WACC is also used as a required rate of
return.
Required:
a.
b.
c.
d.

Determine the division with the highest ROI. Show your calculations.
Determine the division with the highest residual income. Show your calculations.
Determine the segment with the highest EVA. Show your calculations.
Compare and contrast these three performance measures and their influence on
managers.
e. Why is it better to use multiple measures for evaluating manager performance rather
than a single measure such as ROI or EVA?

Question Eight Solution:

a. ROI: Division C is highest
Division A = $800,000/$3,280,000 = 24%
Division B = $400,000/$2,660,000 = 15%
Division C = $600,000/$1,680,000 = 36%
b. RI: Division A is highest
Division A = $800,000 (12% x $3,280,000) = $406,400.
Division B = $400,000 (12% x $2,660,000) = $80,800
Division C = $600,000 (12% x $1,680,000) = $398,400
c. EVA: Division C is highest
Division A = (70% x $800,000) (12% x $2,880,000) = $214,400
Division B = (70% x $400,000) (12% x 2,460,000) = $(15,200)
Division C = (70% x $600,000) (12% x $1,380,000) = $254,400
d. RI and EVA provide information about the dollar amount of return, whereas ROI is a
percentage. RI and EVA incorporate a required rate of return, while ROI does not.
ROI can easily be compared among divisions, whereas RI and EVA are not easily
compared because size has an influence. ROI is subject to greater accounting
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manipulation than the other two methods. EVA allows development of a measure
that is less subject to manipulation and results in more optimal decision-making.
e. No one single measure can capture all aspects of a managers performance, and all
measures have both strengths and weaknesses. Multiple measures also reduce the
likelihood that managers will focus on too narrow an aspect of operations.
Question Nine:
Hoshi is the chair of the Accounting Department at Big City College. The college has
recently developed a balanced scorecard for its operations and is encouraging
departments to do the same. For each perspective, develop one objective and one
performance measure that Hoshi might use in a first draft of a balanced scorecard for the
Accounting Department (the academic unit, not the accounting function for the college).
Financial
perspective
Customer
perspective
Internal business
process
perspective
Learning and
growth
perspective

Objectives
Increased enrollment in
school.
Increased student
satisfaction
Increased capacity of
classrooms.

Performance Measures
# of students enrolled

Increased training and

hiring of skilled
instructors

Aptitude of incoming
hirees and dollars spent
on training

# of students who view

courses as satisfactory
# of empty seats in
classrooms

Question Nine Solution:

Below are examples of balanced scorecard objectives and measures for the Accounting
Department at Big City College; student answers will vary:
Objective
Performance Measure
Financial
Meet budget expectations Budget variances
perspective
Customer
Provide classes that
Average students
perspective
satisfy students
evaluation ratings per
class
Internal business
Reduce the number of
Number of classes that
process
students that are waitare full during
perspective
listed
registration
Learning and
Increase faculty quality
Number of faculty with
growth
Ph.D. or other terminal
perspective
degree

Page 18 of 24

Question Ten
Geneva Corporation has a Castings Division that does casting work of various types. The
company's Machine Products Division has asked the Castings Division to provide it with
10,000 special castings each year on a continuing basis. The special castings would
require $20 per unit in variable production costs. The Machine Products Division has a
bid from an outside supplier of $30 per unit for the castings.
In order to have time and space to produce the new casting, the Castings Division would
have to cut back production of another casting: the NW2, which it presently is producing.
The NW2 sells for $40 per unit, and requires $25 per unit in variable production costs.
Boxing and shipping costs of the NW2 are $4 per unit. Boxing and shipping costs for the
new special casting would be only $2 per unit. The company is now producing and
selling 100,000 units of the NW2 each year. Production and sales of this casting would
drop by 10% if the new casting were produced.
Required:
a) What is the range of transfer prices, if any, within which both the divisions' profits
would increase as a result of agreeing to the transfer of 10,000 castings per year from the
Castings Division to the Machine Products Division? 5 marks
b) Is it in the best interests of Geneva Corporation for this transfer to take place? Explain.
3 marks
Question Ten Solution:
a) From the perspective of the Castings Division, profits would increase as a result of the
transfer providing that:
Transfer price > Variable cost + Opportunity cost
The opportunity cost is the contribution margin on the lost sales, divided by the
number of units transferred:
Opportunity cost = [($40 - $25 - $4) x 10,000] / 10,000 = $11 (1 mark)
Therefore,
Transfer price > ($20 + $2) + $11 = $33 (2 marks)
From the viewpoint of the purchasing division, the transfer price must be less than
the cost of buying the units from the outside supplier.
Transfer price < $30 (1 mark)
Combining the two requirements, we find that no feasible range of transfer prices
exists under current conditions. (1 mark)

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b) No, the transfer should not take place. (1 mark) From the viewpoint of the entire
company, the cost of transferring the units within the company is $33, but the cost
of purchasing them from the outside supplier is $30. Therefore, the company's
profits decrease by $3 for each casting that is produced within the company rather
than purchased in the outside market. (2 marks)
Question Eleven
Redner, Inc. produces three products. Data concerning the selling prices and unit costs of
the three products appear below:

Fixed costs are applied to the products on the basis of direct labour hours.
Demand for the three products exceeds the company's productive capacity. The grinding
machine is the constraint, with only 2,400 minutes of grinding machine time available
this week.
Required:
a) Given the grinding machine constraint, which product should be emphasized? Support
your answer with appropriate calculations. 4 marks
b) If there is still unfilled demand for the product that the company should emphasize in
part a) above, up to how much should the company be willing to pay for an additional
hour of grinding machine time? (2 marks)
Question Eleven Solution:
a) The product to emphasize can be determined by computing the contribution
margin per unit of the scarce resource, which in this case is grinding machine time.

1 mark for each CM/min calculation

Product L should be emphasized because it has the greatest contribution margin per
unit of the scarce resource. (1 mark)
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b) If additional grinding machine time is used to produce more of Product L, the

time would be worth 60 x $5 = $300 per hour. (2 marks)
QUESTION Twelve (13 marks, 21 minutes)
Timer Limited, a manufacturer of quality clocks, is facing increasing competition. The president
of the company believes an aggressive marketing campaign will be necessary next year to
maintain the companys present growth.
To prepare for next years marketing campaign, the companys controller has prepared the
following data for the current year, 2008:
Unit cost per clock:
Variable costs:
Direct manufacturing labour
Direct materials
Variable manufacturing, selling & administrative overhead
Fixed costs:
Manufacturing
Selling
Administrative
Total unit cost per clock
Selling price per clock
Expected sales volume in 2008
Income tax rate

$9.60
3.90
3.00
1.50
2.40
4.20

16.50

8.10
$24.60
$30.00

20,000 units
40%

Required:
1. Calculate the projected net income for 2008. Show all your computations. (2 marks)
2. The president believes an additional marketing cost of $13,500 for advertising in 2009
will be necessary to attain the desired growth in revenue. Calculate the breakeven point
in revenues for 2009 if the additional $13,500 is spent for advertising. Show all your
computations. (3 marks)
3. If the additional $13,500 is spent for advertising in 2009, what is the required 2009
revenue for 2009s net income to equal 2008s net income? How many units must be
sold to meet the target net income? Show all your computations. (4 marks)
4. At a sales level of 22,000 units, what maximum amount can be spent on advertising if a
2009 net income of $72,000 is desired? Show all your computations. (4 marks)
QUESTION Twelve solution (13 marks)
Part 1 (2 marks)
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Operating income:
Income tax expense @ 40%
Net income

20,000 x (30.00 24.60) =

108,000 1 mark
43,200 1 mark
64,800

Part 2 (3 marks)
2 marks
175,500 . = $390,000
30.00 16.50
30.00
1 mark
Total fixed costs:

(8.10 x 20,000) + 13,500 =

175,500

Part 3 (4 marks)
1 mark cfd

1 mark cfd

175,500 + 64,800
(1 40%) = 630,000
45%
1 mark
OR (175,500+108,000)/(30-16.5) = 21,000 units (1 mark)
Part 4 (4 marks)
Total contribution margin: 22,000 x 13.50 cfd =
Less:
Fixed expenses excluding advertising: 20,000 x 8.10 =
Operating income to achieve net income of 72,000:
72,000 (1 - 40%) =
Maximum amount of advertising

297,000 1 mark
162,000 1 mark
120,000 2 marks
15,000

Question Thirteen: (15 marks) (20 minutes)

A list of accounts for a manufacturing company for an accounting period is given below:
Sales

$39,000
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Cost of Goods Sold

Purchases of direct materials
Direct labour
Finished goods inventory, beginning
Work in process, beginning
Work in process, ending
Gross Margin
Finished goods inventory, ending
Accounts payable, beginning
Accounts payable, ending
Advertising expense
Direct materials inventory, beginning
Direct materials inventory, ending
Indirect labour
Sales commissions (10%)
Indirect materials used
Utilities expense, factory
Amortization on office equipment
Amortization on factory equipment
Over-applied manufacturing overhead

?
11,000
5,000
5,000
800
3,000
11,700
?
4,000
2,800
1,500
1,000
3,000
2,000
3,900
3,000
2,000
2,000
6,000
3,000

Any over or under applied overhead is closed out to cost of goods sold.
Required:
a)
Calculate the components of cost of goods manufactured. (11 marks)
b)
Calculate adjusted cost of goods sold. (1 mark)
c)
Calculate finished goods inventory, ending. (3 marks)
Question thirteen solution:
a)
Direct materials inventory, beginning
Add: Purchases
Direct materials available for use
Less: direct materials inventory, ending
Direct materials used in production
Direct labour
Manufacturing overhead:
Indirect labour
Indirect materials
Utilities

1,000
11,000
12,000
3,000
9,000
5,000
2,000
3,000
2,000
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Amortization
Over-applied overhead
Total manufacturing overhead applied
Total manufacturing costs
Add: WIP, beginning
Less: WIP, ending
COGM

6,000
3,000
16,000
30,000
800
(3,000)
27,800

b)
COGS = Sales GM
COGS = 39,000-11,700
COGS = 27,300
Normal COGS = 27,300 3,000 = 24,300
c)
FG, ending = FG, beginning + COGM normal COGS
FG, ending = 5,000 + 27,800 (27,300-3000)
FG, ending = 8,500

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