VALENCIANO, Kristeen Alexis O.

MBA Management Accounting

Problem 19-2: Vt. Sugar Enterprises

Given: Units produced Unit selling price Total process costs: After split-off Joint costs Syrup 20,000 $15.00 $12,000 Sugar 1,000 $2.00 $280 Total 21,000 $12,280 $100,000

a. Calculate the cost of the syrup if the sugar is considered a by-product and the gross margin from its sale is considered to be a reduction of syrup costs. Products Sales Value $300,000 $2,000 Costs beyond split-off 12,000 280 Difference Joint costs allocation $99,406 $594

Syrup Sugar

288,000 1,720 $289,720

Calculation:
288,0 00 289,7 20 100,0 00 99,40 6

1,720 289,7 20

100,0 00

594

Joint costs Costs beyond split-off Unit Cost

Syrup 99,406/20,000 = 12,000/20,000 =

$4.97 $0.6 $5.57

Sugar 594/1,000 = 280/1,000 =

$0.59 $0.28 $0.87

a. Answer: The cost of syrup is $4.70/unit if the sugar is considered a by-product and

the gross margin from its sale is considered to be a reduction of syrup costs. b. Calculate product costs assuming this company decided to make and sell as much maple sugar as possible after filling all syrup orders (i.e., it regarded syrup and sugar as joint products). Use the sales value method.

Products

Sales Value $300,000 $2,000

Costs beyond split-off 12,000 280

Difference

Joint costs allocation $99,406 $594

Syrup Sugar

288,000 1,720 $289,720

Calculation:
288,000 289,720 1,720 289,7 20 x 100,000 = 99,406

100,0 00

594

Joint costs Costs beyond split-off Production Cost TOTAL PRODUCTION COST

Syrup Production 99,406 12,000 $111,406

Sugar Production 594 280 $874

$112,280

Valenciano, Kristeen Alexis MBA Management Accounting

Problem 26-1: Dover Rubber Company

Situation: Dover Rubber Company had been offered a contract to supply 500,000 premium automobile tires to a large automobile manufacturer at a price of $41.65 per tire. Dovers full cost of producing the tire is $51.80. The normal sales price for the tire is $73.50 to both distributors and some selected retailers. Variable costs per tire amount to $34.30; however, in order to meet the needs of the auto manufacturer, Dover will have to cut its sales to regular customers by 100,000 tires annually. The automaker has clearly indicated that it will enter into the agreement only if Dover will agree to supply all 500,000 of the tires requested. Required: Should Dover accept the offer? Answer: Dover Rubber Company should first consider the effects that will be brought about by the acceptance of this new agreement. Firstly and most important would be the reduction of providing or sales to its regular customers, secondly is will they be able to meet the 500,000 tires needed taking into consideration the number of people in the production section, third would be the expenses that should be kept in mind with this new agreement. Thirdly, would this be an annual type of business or just for the current year? And lastly, how much profit would they be earning with what their new client is demanding? Reduction is possible in their number of sales annually if they could equally divide the amount to all their clients or if they could find a client that would agree to reducing their number of orders. It is significant because the profit of their company mostly comes from selling their products in bulk. So if they would be reducing production or sales of 100,000 tires and they would be putting their business relationship with another big client in danger, they should rather opt for keeping the old client rather than maybe earning big this year with the coming of the new client but losing old clients that has been bringing in numerous sales. With regards to the number of current production employees, the company should first evaluate if they can accommodate such number of orders for the whole year with their current number of employees and machines. Because if they are outnumbered, it would be very difficult for them to meet their goals and it might cause complications not just with the new client but also with their old

clients. If they think expansion is a good option, they should also consider that if they would spend for expansion, would their profit for this certain proposal be enough for it since the price that the new client provided is way lower that their usual pricing. The length of the contract should also be considered since if in case the client would be agreeing to 5 years of tie-up with the company however the company would need to cut down 100,000 from its usual sales, maybe the company can evaluate their regular clients accounts and perhaps cease their supply to clients that has delinquent accounts, lowest number of order, etc. Sample computation: Situation A: Number of tires sold 100,000 500,000 100,000 500,000 Price $73.50 Annual income $7,350,000.00

Usual Sales year New Client Cut (100,000) Total Situation B:

$41.65

$20,825,000.00

Usual Sales year New Client Cut (100,000) Total

Number of tires sold 200,000 500,000 200,000 600,000

Price $73.50

Annual income $14,700,000

$41.65

$24,990,000

Moreover, the company should take on the project if their performance in the previous year is lesser than 500,000 tires per year.

Valenciano, Kristeen Alexis MBA Management Accounting

Problem 27-1
Situation: A company owned a plot of land that appeared in its fixed assets at its acquisition cost in 1910, which was $10,000. The land was not used. In 2009, the local boys club asked the company to donate the land as the site for a new recreation building. The donation would be a tax deduction of $110,000, which was the current appraised value. The companys tax rate was 40 percent. Some argued that the company would be better off to donate the land than to keep it or sell it for $110,000. Assume that, other than the land, the companys taxable income as well as its accounting income before taxes was $10,000,000. Required: How would the companys after-tax cash inflow be affected if (a) it donated the land or (b) it sold the land for $110,000? How would its net income be affected? Answer:
Basically, donating the land and receiving $110,000 tax deduction, and selling it for $110,000 is just the same. But, it will differ after application of taxes. Please see computation below.

Income before taxes Tax (40%) Tax deduction Tax after deduction Net Income Difference

Donate $10,000,000 $4,000,000 $110,000 $3,890,000 $6,110,000 $44,000

Sell $10,110,000 $4,044,000 N/A $4,044,000 $6,066,000

The net income of the company will be higher by $44,000 if they decide to donate the plot of land to the local boys club.