Garden Sales, Inc. sells garden supplies.

Management is planning its cash needs for the second

quarter. The company usually has to borrow money during May. The following information has
been assembled to assist in preparing a cash budget for the quarter: (a) Budgeted monthly
absorption costing income statement for Apri

Via Gelato is a popular neighborhood gelato shop. The company has provided the following data
concerning its operations: While gelato is sold by the cone or cup, the shop measures its activity
in terms of the total number of liters of gelato sold. For example, wages should be $5,600 plus
$1.40 per liter of gelato so

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What is a spending variance and what does it mean?

Tours operates day tours of coastal glaciers in Alaska on its tour boat the Blue Glacier.
Management has identified two cost drivers—the number of cruises and the number of
passengers—that it uses in its budgeting and performance reports. The company publishes a
schedule of day cruises that it may supplement with s

Hillyard Company, an office supplies specialty store, prepares its master budget on a quarterly
basis. The following data have been assembled to assist in preparing the master budget for the
first quarter: (a) As of December 31 (the end of the prior quarter), the company’s general
ledger showed the following account

Harrison Company makes two products and uses a traditional costing system in which a single
plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two
products for the upcoming year follow: These products are customized to some degree for
specific customers. Required: 1. The compa

Minden Company is a wholesale distributor of premium European chocolates. The

company’s balance sheet as of April 30 is given below: The company is in the process of
preparing budget data for May. A number of budget items have already been prepared, as stated
below: (a) Sales are budgeted at $200,000 for May. Of the

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Why are separate price and quantity variances computed?

Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical
and dental clinics, The firm has two offices—one in Chicago and one in Minneapolis. The firm
classifies the direct costs of consulting jobs as variable costs. A contribution format segmented
income statement for the company

Why is it difficult to interpret a difference between how much expense was budgeted and how
much was actually spent?
What effect, if any, would you expect poor-quality materials to have on direct labor variances?

AirQual Test Corporation provides on-site air quality testing services. The company has
provided the following data concerning its operations: The company uses the number of jobs as
its measure of activity. For example, mobile lab operating expenses should be $2,900 plus $35
per job, and the actual mobile lab operat

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You have just been hired by FAB Corporation, the manufacturer of a revolutionary new garage
door opening device. The president has asked that you review the company’s costing system
and “do what you can to help us get better control of our manufacturing overhead costs:”
You find that the company has never used a

Refer to the data in Exercise 12-13. Assume that Minneapolis’ sales by major market are:
The company would like to initiate an intensive advertising campaign in one of the two market
segments during the next month. The campaign would cost $5,000. Marketing studies indicate
that such a campaign would increase sale

The auto repair shop of Quality Motor Company uses standards to control the labor time and
labor cost in the shop. The standard labor cost for a motor tune-up is given below: The record
showing the time spent in the shop last week on motor tune-ups has been misplaced. However,
the shop supervisor recalls that 50 tune-

Refer to the data in Exercise 11—8. Assume that instead of producing 4,000 units during the
month, the company produced only 3,000 units, using 14,750 pounds of material. (The rest of the
material purchased remained in raw materials inventory.) Required: Compute the direct materials
price and quantity variances for t

TufStuff, Inc., sells a wide range of drums, bins, boxes, and other containers that are used in the
chemical industry. One of the company’s products is a heavy-duty corrosion-resistant metal
drum, called the WVD drum, used to store toxic wastes. Production is constrained by the
capacity of an automated welding machin

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Romeros: What’s the story on Clayton? It didn’t have a loss the previous year did it?
Littlebear: No, the Clayton facility has had a nice profit every year since it was opened six years
ago, but Clayton lost a big contract this year. Romeros: Why? Littlebear: One of our national
competitors entered the local mar

Cummins, the newly hired controller at Merced Home Products, Inc., was disturbed by what she
had discovered about the standard costs at the Home Security Division. In looking over the past
several years of quarterly income statements at the Home Security Division, she noticed that the
first-quarter profits were always

If a company has a manufacturing cycle efficiency (MCE) of less than 1, what does it mean?
How would you interpret an MCE of 0.40?

Martin Company manufactures a powerful cleaning solvent. The main ingredient in the solvent is
a raw material called Echol. Information concerning the purchase and use of Echol follows:
Purchase of Echol. Echol is purchased in 15-gallon containers at a cost of $115 per container. A
discount of 2% is offered by the supp

Juniper Design Ltd. of Manchester, England, is a company specializing in providing design

services to residential developers. Last year the company had net operating income of
£600,000 on sales of £3,000,000. The company’s average operating assets for the year
were £2,800,000 and its minimum required rate of retur

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What is meant by the term decentralization?

Highland Company produces a lightweight backpack that is popular with college students.
Standard variable costs relating to a single backpack are given below: Overhead is applied to
production on the basis of direct labor-hours. During March, 1,000 backpacks were
manufactured and sold. Selected information relating to

Ariel Tax Services prepares tax returns for individual and corporate clients. As the company has
gradually expanded to 10 offices, the founder Max Jacobs has begun to feel as though he is
losing control of operations. In response to this concern, he has decided to implement a
performance measurement system that will he

Provide the missing data in the following table for a distributor of martial artsproducts:

A number of costs are listed below that may be relevant in decisions faced by the management of
Svahn, AB, a Swedish manufacturer of sailing yachts: Required: Copy the information above
onto your answer sheet and place an X in the appropriate column to indicate whether each item is
relevant or not relevant in the foll

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Pecs Alley is a regional chain of health clubs. The managers of the clubs, who have authority to
make investments as needed, are evaluated based largely on return on investment (ROT). The
Springfield Club reported the following results for the past year: Required: The following
questions are to be considered indepe
There is often more than one way to improve a performance measure. Unfortunately, some of the
actions taken by managers to make their performance look better may actually harm the
organization. For example, suppose the marketing department is held responsible only for
increasing the performance measure “total revenue

Selected information relating to Yost Company’s operations for the most recent year is given
below: The company applies overhead cost to products on the basis of standard machine-hours.
Required: 1. What were the standard machine-hours allowed for the actual production? 2. What
was the fixed portion of the predeter

“Variable costs and differential costs mean the same thing.” Do you agree? Explain.

Diversified Products, Inc., has recently acquired a small publishing company that Diversified
Products intends to operate as one of its investment centers. The newly acquired company has
three books that it offers for sale—a cookbook, a travel guide, and a handy speller. Each book
sells for $10. The publishing compan

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Companhia Bradesco, S.A., of Brazil, an industrial supply store chain, has two divisions. The
company’s contribution format income statement segmented by divisions for last year is
given below (the currency in Brazil is the real, denoted here by R): Top management doesn’t
understand why the Glass Division has su

Logistics Solutions provides order fulfillment services for dot.com merchants. The company
maintains warehouses that stock items carried by its dot.com clients. When a client receives an
order from a customer, the order is forwarded to Logistics Solutions, which pulls the item from
storage, packs it, and ships it to th

Bandar Industries Berhad of Malaysia manufactures sporting equipment. One of the

company’s products, a football helmet for the North American market, requires a special
plastic. During the quarter ending June 30, the company manufactured 35,000 helmets, using
22,500 kilograms of plastic. The plastic cost the company

Wonderful Not only did our salespeople do a good job in meeting the sales budget this year, but
our production people did a good job in controlling costs as well, said Kim Clark, president of
Martell Company. “Our $18,300 overall manufacturing cost variance is only 1.2% of the
$1,536,000 standard cost of products mad

Why aren’t common costs allocated to segments under the contribution approach?

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The contribution format income statement for Huerra Company for last year is given below: The
company had average operating assets of $2,000,000 during the year. Required: 1. Compute the
company’s return on investment (ROT) for the period using the ROT formula stated in terms
of margin and turnover. For each of

“If a product line is generating a loss, then it should be discontinued.” Do you agree?
Explain.

Selected sales and operating data for three divisions of different structural engineering firms are
given as follows: Required: 1. Compute the return on investment (ROT) for each division using
the formula stated in terms of margin and turnoven. 2. Compute the residual income for each
division. 3. Assume that eac

Privack Corporation has a standard cost system in which it applies overhead to products based on
the standard direct labor-hours allowed for the actual output of the period. Data concerning the
most recent year appear below: Required: 1. Compute the predetermined overhead rate for the
year. 2. Determine the amount of

From a decision-making point of view, should joint costs be allocated among joint products?

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Danson Company is a chemical manufacturer that supplies various products to industrial users.
The company plans to introduce a new chemical solution, called Nysap, for which it needs to
develop a standard product cost. The following information is available on the production of
Nysap: (a) Nysap is made by combining a

The Midwest Consulting Group (MCG) helps companies build balanced scorecards. As part of
its marketing efforts, MCG conducts an annual balanced scorecard workshop for prospective
clients. As MCG’s newest employee, your boss has asked you to participate in this year’s
work-shop by explaining to attendees how a compa

What is a segment of an organization? Give several examples of segments.

Effects of Changes in Sales, Expenses, and Assets on ROl CommercialServiees.com Corporation

provides business-to-business services on the Internet. Data concerning the most recent year
appear below: Required: Consider each question below independently. Carry out all
computations to two decimal places. 1. Compute th

Dawson Toys, Ltd., produces a toy called the Maze. The company has recently established a
standard cost system to help control costs and has established the following standards for the
Maze toy: Direct materials: 6 microns per toy at $0.50 per micron Direct labor: 1.3 hours per toy
at $8 per hour During July,

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What is a statistical control chart, and how is it used?

Prentice Company is considering dropping one of its product lines. What costs of the product
line would be relevant to this decision? Irrelevant?

Airlines sometimes offer reduced rates during certain times of the week to members of a
businessperson’s family if they accompany him or her on trips. How does the concept of
relevant costs enter into the decision by the airline to offer reduced rates of this type?

Tasman Products, Ltd., of Australia has a Maintenance Department that services the equipment
in the company’s Forming Department and Assembly Department. The cost of this servicing
is charged to the operating departments on the basis of machine-hours. Cost and other data
relating to the Maintenance Department and to

Royal Lawncare Company produces and sells two packaged products, Weedban and Greengrow.
Revenue and cost information relating to the products follow: Common fixed expenses in the
company total $33,000 annually. Last year the company produced and sold 15,000 units of
Weedban and 28,000 units of Greengrow. Required: P

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How is it possible for a cost that is traceable to a segment to become a common cost if the
segment is divided into further segments?

Financial data for Joel de Paris, Inc., for last year follow: The company paid dividends of
$15,000 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an
investment in the stock of another company. Required: 1. Compute the company’s margin,
turnover, and return on investment (RO

The Walton Toy Company manufactures a line of dolls and a doll dress sewing kit. Demand for
the dolls is increasing, and management requests assistance from you in determining an
economical sales and production mix for the coming year. The company has provided the
following data: The following additional information i

What benefits result from decentralization?

Wesco Incorporated’s only product is a combination fertilizer/weedkiller called

GrowNWeed. GrowNWeed is sold nationwide to retail nurseries and garden stores. Zwinger
Nursery plans to sell a similar fertilizer/weedkiller compound through its regional nursery chain
under its own private label. Zwinger does not have ma

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Developing Standard Costs ColdKing Company is a small producer of fruit-flavored frozen

desserts. For many years, Cold- King’s products have had strong regional sales oa the basis
of brand recognition; however, other companies have begun marketing similar products in the
area, and price competition has become increas
Genola Fashions began production of a new product on June 1. The company uses a standard
cost system and has established the following standards for one unit of the new product: During
June, the following activity was recorded regarding the new product: (a) Purchasing acquired
10,000 yards of material at a cost of $1

Miller Toy Company manufactures a plastic swimming pool at its Westwood Plant. The plant
has been experiencing problems as shown by its June contribution format income statement
below: Contains direct materials, direct labor, and variable manufacturing over head. Janet Dunn,
who has just been appointed general man

Sharp Company manufactures a product for which the following standards have been set: During
March, the company purchased direct materials at a cost of $55,650, all of which were used in
the production of 3,200 units of product In addition, 4,900 hours of direct labor time were
worked on the product during the month.

Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and
Yokohama. Selected data on the two divisions follow (in millions of yen, denoted by):
Required: 1. For each division, compute the return on investment (ROl) in terms of margin and
turnover. Where necessary, carry computations to t

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How does opportunity cost enter into the make or buy decision?

The standard cost card for the single product manufactured by Cutter, Inc., is given below:
Manufacturing overhead is applied to production on the basis of standard direct labor-hours.
During the year, the company worked 37,000 hours and manufactured 9,500 units of product.
Selected data relating to the company’s fi

Tombro Industries is in the process of automating one of its plants and developing a flexible
manufacturing system. The company is finding it necessary to make many changes in operating
procedures. Progress has been slow, particularly in trying to develop new performance measures
for the factory. In an effort to evalua

In what way can the use of ROI as a performance measure for investment centers lead to bad
decisions? How does the residual income approach overcome this problem?

Alyeska Services Company, a division of a major oil company, provides various services to the
operators of the North Slope oil field in Alaska. Data concerning the most recent year appear
below: Required: 1. Compute the margin for Alyeska Services Company. 2. Compute the
turnover for Alyeska Services Company. 3.

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Define the following terms: joint products, joint costs, and split-off point.
Why do the measures used in a balanced scorecard differ from company to company?

Fleming, chief administrator for Valley View Hospital, is concerned about the costs for tests in
the hospital’s lab. Charges for lab tests are consistently higher at Valley View than at other
hospitals and have resulted in many complaints. Also, because of strict regulations on amounts
reimbursed for lab tests, payme

Wingate Company, a wholesale distributor of videotapes, has been experiencing losses for some
time, as shown by its most recent monthly contribution format income statement, which follows:
In an effort to isolate the problem, the president has asked for an income statement segmented by
division. Accordingly, the Ac

Bliny Corporation makes a product with the following standard costs for direct material and
direct labor: During the most recent month, 5,000 units were produced. The costs associated with
the month’s production of this product were as follows: The standard cost variances for
direct material and direct labor are:

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“I know headquarters wants us to add that new product line,” said Dell Havasi, manager of
Billings Company’s Office Products Division. “But I want to see the numbers before I
make any move. Our division’s return on investment (ROI) has led the company for three
years, and I don’t want any letdown:” Billin

Mason Paper Company (MPC) manufactures commodity grade papers for use in computer
printers and photocopiers. MPC has reported net operating losses for the last two years due to
intense price pressure from much larger competitors. The MPC management team—including
Kristen Townsend (CEO), Mike Martinez (vice president

Company manufactures a single product that requires a great deal of hand labor. Overhead cost is
applied on the basis of standard direct labor-hours. Variable manufacturing overhead should be
$2 per standard direct labor-hour and fixed manufacturing overhead should be $480,000 per
year. The company’s product requires

Applying Overhead; Overhead Variances Chilezuk, S.A., of Gdansk, Poland, is a major producer
of classic Polish sausage. The company uses a standard cost system to help control costs.
Manufacturing overhead is applied to production on the basis of standard direct labor-hours.
According to the company’s flexible budget

Operating at a normal level of 30,000 direct labor-hours, Lasser Company produces 10,000 units
of product each period. The direct labor wage rate is $12 per hour. Two and one-half yards of
direct materials go into each unit of product; the material costs $8.60 per yard. Variable
manufacturing overhead should be $1.90 p
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Why can undue emphasis on labor efficiency variances lead to excess work in process
inventories?

How will relating product contribution margins to the amount of the constrained resource they
consume help a company maximize its profits?

A family friend has asked your help in analyzing the operations of three anonymous companies
operating in the same service sector industry. Supply the missing data in the tablebelow;

Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of
seat covers that can be adjusted to fit nearly any small car. The company has a standard cost
system in use for all of its products. According to the standards that have been set for the seat
covers, the factory should work 2

What is the difference between delivery cycle time and throughput time? What four elements
make up throughput time? Into what two classes can these four elements be placed?

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Selected operating data for two divisions of Outback Brewing, Ltd., of Australia are given below
(the currency is the Australian dollar, denoted here as $): Required: 1. Compute the rate of
return for each division using the return on investment (ROT) formula stated in terms of margin
and turnover. 2. Which divis

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various
recreational vehicles. The company has a number of plants around the world, including the
Denver Cover Plant, which makes seat covers. Ted Vosilo is the plant manager of the Denver
Cover Plant but also serves as the regional productio

Selected operating information on three different companies for a recent year is given below:
Required: For each company, state whether the company would have a favorable or unfavorable
volume variance andwhy.

You have recently accepted a position with Vitex, Inc., the manufacturer of a popular consumer
product. During your first week on the job, the vice president has been favorably impressed with
your work. She has been so impressed, in fact, that yesterday she called you into her office and
asked you to attend the executi

Norwall Company’s variable manufacturing overhead should be $3.00 per standard machine-
hour and its fixed manufacturing overhead should be $300,000 per period. The following
information is available for a recent period: (a) The denominator activity of 60,000 machine-
hours is used to compute the predetermined overhea
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Measures of Internal Business Process Performance DataSpan, Inc., automated its plant at the
start of the current year and installed a flexible manufacturing system. The company is also
evaluating its suppliers and moving toward Lean Production. Many adjustment problems have
been encountered, including problems relatin

The Scottie Sweater Company produces sweaters under the “Scottie” label. The company
buys raw wool and processes it into wool yarn from which the sweaters are woven. One spindle
of wool yam is required to produce one sweater. The costs and revenues associated with the
sweaters are given below: Originally, all of t

What costs are assigned to a segment under the contribution approach?

SkyChefs, Inc., prepares in-flight meals for a number of major airlines. One of the
company’s products is grilled salmon in dill sauce with baby new potatoes and spring
vegetables. During the most recent week, the company prepared 4,000 of these meals using 960
direct labor-hours. The company paid these direct labor

Give at least four examples of possible constraints.

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Primara Corporation has a standard cost system in which it applies overhead to products based
on the standard direct labor-hours allowed for the actual output of the period. Data concerning
the most recent year appear below: Required: 1. Compute the fixed portion of the predetermined
overhead rate for the year. 2. C

Lost Peak ski resort was for many years a small, family-owned resort serving day skiers from
nearby towns. Lost Peak was recently acquired by Western Resorts, a major ski resort operator.
The new owners have plans to upgrade the resort into a destination resort for vacationers. As part
of this plan, the new owners woul

Distinguish between a cost center, a profit center, and an investment center.

Victoria Chocolates, Ltd., makes premium handcrafted chocolate confections in London. The
owner of the company is setting up a standard cost system and has collected the following data
for one of the company’s products, the Empire Truffle. This product is made with the finest
white chocolate and various fillings. The

Trueform Products, Inc., produces a broad line of sports equipment and uses a standard cost
system for control purposes. Last .year the company produced 8,000 varsity footballs. The
standard costs associated with this football, along with the actual costs incurred last year, are
given below (per football): The preside
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Why does the balanced scorecard include financial performance measures as well as measures of
how well internal business processes are doing?

Company uses a standard cost system and sets predetermined overhead rates on the basis of
direct labor-hours. The following data are taken from the company’s budget for the current
year: The standard cost card for the company’s only product is given below: During the year,
the company produced 6,000 units of pr

Vulcan Company’s contribution format income statement for June is given below:
Management is disappointed with the company’s performance and is wondering what can be
done to improve profits. By examining sales and cost records, you have determined the
following: (a) The company is divided into two sales territ

Sharp Motor Company has two operating divisions—an Auto Division and a Truck Division.
The company has a cafeteria that serves the employees of both divisions. The costs of operating
the cafeteria are budgeted at $40,000 per month plus $3 per meal served. The company pays all
the cost of the meals. The fixed costs of

If variable manufacturing overhead is applied to production on the basis of direct labor- hours
and the direct labor efficiency variance is unfavorable, will the variable overhead efficiency
variance be favorable or unfavorable, or could it be either? Explain.

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Define the following terms: incremental cost, opportunity cost, and sunk cost.

Morton Company’s variable manufacturing overhead should be $4.50 per standard direct
labor-hour and fixed manufacturing should be $270,000 per year. The company manufactures a
single product that requires two direct labor-hours to complete. The direct labor wage rate is $15
per hour. Four feet of raw material are req

Distinguish between a traceable cost and a common cost. Give several examples of each.

Erie Company manufactures a small CD player called the Jogging Mate. The company uses
standards to control its costs. The labor standards that have been set for one Jogging Mate CD
player are as follows: During August, 5,750 hours of direct labor time were needed to make
20,000 units of the Jogging Mate. The direct la

Management of Mittel Rhein AG of Koln, Germany, would like to reduce the amount of time
between when a customer places an order and when the order is shipped. For the first quarter of
operations during the current year the following data were reported: Inspection
time ..................................................
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Huron Company produces a commercial cleaning compound known as Zoom. The direct
materials and direct labor standards for one unit of Zoom are given below: During the most
recent month, the following activity was recorded: (a) Twenty thousand pounds of material were
purchased at a cost of $2.35 per pound. (b) All of th

Cost-Volume-Profit Analysis and Return on Investment (ROl) posters.com is a small Internet

retailer of high-quality posters. The company has $1,000,000 in operating assets and fixed
expenses of $150,000 per year. With this level of operating assets and fixed expenses, the
company can support sales of up to $3,000,000 p

Labs, Inc., produces various chemical compounds for industrial use. One compound, called
Fludex, is prepared using an elaborate distilling process. The company has developed standard
costs for one unit of Fludex, as follows: During November, the following activity was recorded
relative to production of Fludex: (a) Ma

Comparative data on three companies in the same service industry are given below: Required: 1.
What advantages are there to breaking down the ROT computation into two separate elements,
margin and turnover? 2. Fill in the missing information above, and-comment on the relative
performance of the three companies in

Debt ratio: 50% Quick ratio: 0.80X Total assets turnover: 1.5C Days sales outstanding: 36.5 days
a Gross profit margin on sales: (Sales _ Cost of goods sold)/Sales _ 25% Inventory turnover
ratio: 5X A calculation is based on a 365-day year.

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Certain liability and net worth items generally increase spontaneously with increases in sales. Put
a check (=) by those items that typically increase spontaneously:

Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The
firm’s fixed costs, F, are $2 million; 50 earth stations are produced and sold each year;
profits total $500,000; and the firm’s assets (all equity financed) are $5 million. The firm
estimates that it can change its producti

Gamma Medicals stock trades at $90 a share. The company is contemplating a 3-for-2 stock
split. Assuming that the stock split will have no effect on the total market value of its equity,
what will be the company’s stock price following the stock split?

Explain how the segment margin differs from the contribution margin.

Petersen Company has a capital budget of $1.2 million. The company wants to maintain a target
capital structure which is 60 percent debt and 40 percent equity. The company forecasts that its
net income this year will be $600,000. If the company follows a residual distribution model and
pays all distributions as dividen

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EMC Corporation has never paid a dividend. Its current free cash flow is $400,000 and is
expected to grow at a constant rate of 5 percent. The weighted average cost of capital is WACC
_ 12%. Calculate EMC’s value of operations.

At year-end 2004, total assets for Bertin Inc. were $1.2 million and accounts payable were
$375,000. Sales, which in 2004 were $2.5 million, are expected to increase by 25 percent in
2005. Total assets and accounts payable are proportional to sales and that relationship will be
maintained. Bertin typically uses no curr

What are some actions an entrenched management might take that would harm shareholders?

What would be the additional funds needed if the company’s year-end 2004 assets had been
$4 million? Assume that all other numbers are the same. Why is this AFN different from the one
you found in Problem 14-1? Is the company’s “capital intensity” the same or different?

The Karns Oil Company is deciding whether to drill for oil on a tract of land that the company
owns. The company estimates that the project would cost $8 million today. Karns estimates that
once drilled, the oil will generate positive net cash flows of $4 million a year at the end of each
of the next 4 years. While th

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Baker Brothers has a DSO of 40 days. The company’s average daily sales are $20,000. What
is the level of its accounts receivable? Assume there are 365 days in a year.

Define each of the following terms: a. Lessee; lessor b. Operating lease; financial lease; sale and
leaseback; combination lease; synthetic lease; SPE c. “Off-balance sheet” financing;
capitalizing d. FASB Statement 13 e. Guideline lease f. Residual value g. Lessee’s analysis;
lessor’s analysis h. Net advantage

Reynolds Construction needs a piece of equipment that costs $200. Reynolds either can lease the
equipment or borrow $200 from a local bank and buy the equipment. If the equipment is leased,
the lease would not have to be capitalized. Reynolds’ balance sheet prior to the acquisition of
the equipment is as follows: a

Utah Enterprises is considering buying a vacant lot that sells for $1.2 million. If the property is
purchased, the company’s plan is to spend another $5 million today (t =0) to build a hotel on
the property. The after-tax cash flows from the hotel will depend critically on whether the state
imposes a tourism tax in t
The Petry Company has $1,312,500 in current assets and $525,000 in current liabilities. Its initial
inventory level is $375,000, and it will raise funds as additional notes payable and use them to
increase inventory. How much can Petry’s short-term debt (notes payable) increase without
pushing its current ratio below

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In 2004 the Keenan Company paid dividends totaling $3,600,000 on net income of $10.8
million. 2004 was a normal year, and for the past 10 years, earnings have grown at a constant
rate of 10 percent. However, in 2005, earnings are expected to jump to $14.4 million, and the
firm expects to have profitable investment oppo

Axel Telecommunications has a target capital structure that consists of 70 percent debt and 30
percent equity. The company anticipates that its capital budget for the upcoming year will be
$3,000,000. If Axel reports net income of $2,000,000 and it follows a residual distribution model
with all distributions as dividen

How might (a) Seasonal factors and (b) Different growth rates distort a comparative ratio
analysis? Give some examples. How might these problems be alleviated?

Brooks Enterprises has never paid a dividend. Free cash flow is projected to be $80,000 and
$100,000 for the next 2 years, respectively, and after the second year it is expected to grow at a
constant rate of 8 percent. The company’s weighted average cost of capital is WACC = 12%.
a. What is the terminal, or horizon,

Define each of the following terms: a. Operating plan; financial plan; sales forecast b. Pro forma
financial statement; percent of sales method c. Spontaneously generated funds d. Additional
funds needed (AFN); AFN formula; capital intensity ratio e. Lumpy assets

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Suppose a firm makes the following policy changes. If the change means that external, non-
spontaneous financial requirements (AFN) will increase, indicate this by a (=); indicate a
decrease by a (=); and indicate indeterminate or no effect by a (0) think in terms of the
immediate, short-run effect on funds requirements

Data for Barry Computer Company and its industry averages follow. a. Calculate the indicated
ratios for Barry. b. Construct the extended Du Pont equation for both Barry and the industry. c.
Outline Barry’s strengths and weaknesses as revealed by your analysis. d. Suppose Barry had
doubled its sales as well as its inv

Why EBIT is generally considered to be independent of financial leverage? Why might EBIT
actually be influenced by financial leverage at high debt levels?
In our Anderson Company example, we assumed that the lease could not be cancelled. What
effect would a cancellation clause have on the lessee’s analysis On the lessor’s analysis?

What is the difference between a stock dividend and a stock split? As a stockholder, would you
prefer to see your company declares a 100 percent stock dividend or a 2-for-1 split? Assume that
either action is feasible.

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Use the AFN formula to forecast Carter’s additional funds needed for the coming year.

One alleged advantage of leasing voiced in the past is that it kept liabilities off the balance sheet,
thus making it possible for a firm to obtain more leverage than it otherwise could have. This
raised the question of whether or not both the lease obligation and the asset involved should be
capitalized and shown on t

Is it true that the “flatter,” or more nearly horizontal, the demand curve for a particular
firm’s stock, and the less important investors regard the signaling effect of the offering, the
more important the role of investment bankers when the company sells a new issue of stock?

The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed
a good growth trend. Now Edelman is planning to go public with an issue of common stock, and
it faces the problem of setting an appropriate price on the stock. The company and its investment
bankers believe that the proper proced

The H. R. Pickett Corporation has $500,000 of debt outstanding, and it pays an interest rate of 10
percent annually: Pickett’s annual sales are $2 million, its average tax rate is 30 percent, and
its net profit margin on sales is 5 percent. If the company does not maintain a TIE ratio of at least
5 times, its bank wi

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What factors should a company consider when it decides whether to invest in a project today or
to wait until more information becomes available?

Current and projected free cash flows for Radell Global Operations are shown below. Growth is
expected to be constant after 2006. The weighted average cost of capital is 11 percent. What is
the horizon, or continuing, value?

How do you think each of the following items would affect a company’s ability to attract
new capital and the flotation costs involved in doing so? a. A decision of a privately held
company to go public. b. The increasing institutionalization of the “buy side” of the stock
and bond markets. c. The trend toward “
Define each of the following terms: a. Going public; new issue market; initial public offering
(IPO) b. Public offering; private placement c. Venture capitalists; road show; spread d. Securities
and Exchange Commission (SEC); registration statement; shelf registration; margin requirement;
insiders e. Prospectus; “red

“One type of leverage affects both EBIT and EPS. The other type affects only EPS.”
Explain this statement.

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Would you be more likely to find that lessees are in high or low income tax brackets as
compared with lessors?

Upton Computers makes bulk purchases of small computers, stocks them in conveniently located
warehouses, and ships them to its chain of retail stores. Upton’s balance sheet as of
December 31, 2004, is shown here (millions of dollars): Sales for 2004 were $350 million, while
net income for the year was $10.5 million

The SEC attempts to protect investors who are purchasing newly issued securities by making
sure that the information put out by a company and its investment bankers is correct and is not
misleading. However, the SEC does not provide an opinion about the real value of the securities;
hence, an investor might pay too muc

A company has capital of $200,000,000. It has an expected ROIC of 9 percent, forecasted

constant growth of 5 percent, and a WACC of 10 percent. What is its value of operations? What
is its MVA? (Hint: Use Equation 15-4.)

Hart Lumber is considering the purchase of a paper company. Purchasing the company would
require an initial investment of $300 million. Hart estimates that the paper company would
provide net cash flows of $40 million at the end of each of the next 20 years. The cost of capital
for the paper company is 13 percent. a. S

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Over the past year, M. D. Ryngaert & Co. has realized an increase in its current ratio and a drop
in its total assets turnover ratio. However, the company’s sales, quick ratio, and fixed assets
turnover ratio have remained constant. What explains these changes?

Define each of the following terms: a. Real options; managerial options; strategic options;
embedded option b. Investment timing option; growth option; abandonment option; flexibility
option c. Decision trees

Firms with relatively high non-financial fixed costs are said to have a high degree of what?
Suppose there were no IRS restrictions on what constituted a valid lease. Explain, in a manner
that a legislator might understand, why some restrictions should be imposed. Illustrate your
answer with numbers.

Here are the estimated ROE distributions for Firms A, B, and C: a. Calculate the expected value
and standard deviation for Firm C’s ROE. ROEA = 10.0%, =σA = 5.5%; ROEB = 12.0%, =
σB = 7.7%. b. Discuss the relative riskiness of the three firms’ returns. (Assume that these
distributions are expected to remain c

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After a 5-for-1 stock split, the Strasburg Company paid a dividend of $0.75 per new share, which
represents a 9 percent increase over last year’s pre-split dividend. What was last year’s
dividend per share?

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the
hotel would require an initial investment of $20 million. Kim expects that the hotel will produce
positive cash flows of $3 million a year at the end of each of the next 20 years. The project’s
cost of capital is 13 percent. a

Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares
selling for $50 per share and $50 million of 10 percent perpetual bonds now selling at par. The
company’s EBIT is $13.24 million, and its tax rate is 15 percent. Pettit can change its capital
structure by either increasin

You are given the following forecasted information for the year 2008: Sales = $300,000,000;
Operating profitability (OP) = 6%; Capital requirements (CR) = 43%; Growth (g) = 5%; and the
weighted average cost of capital (WACC) = 9.8%. If these values remain constant, what is the
horizon value (that is, the 2008 value of

Return to the assumption that the company had $3 million in assets at the end of 2004, but now
assume that the company pays no dividends. Under these assumptions, what would be the
additional funds needed for the coming year? Why is this AFN different from the one you found
in Problem 14-1?

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Jan Volk, financial manager of Green Sea Transport (GST), has been asked by her boss to review
GST’s outstanding debt issues for possible bond refunding. Five years ago, GST issued
$40,000,000 of 11 percent, 25-year debt. The issue, with semiannual coupons, is currently
callable at a premium of 11 percent, or $110 fo

Indicate whether the following statements are true or false. If the statement is false, explain why.
a. If a firm repurchases its stock in the open market, the shareholders who tender the stock are
subject to capital gains taxes. b. If you own 100 shares in a company’s stock and the
company’s stock splits 2-for-1,

Distinguish between operating leases and financial leases. Would you be more likely to find an
operating lease employed for a fleet of trucks or for a manufacturing plant?

How is it possible for an employee stock option to be valuable even if the firm’s stock price
fails to meet shareholders’ expectations?

The Beranek Company, whose stock price is now $25, needs to raise $20 million in common
stock. Underwriters have informed the firm’s management that they must price the new issue
to the public at $22 per share because of signaling effects. The underwriters’ compensation
will be 5 percent of the issue price, so Bera

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Assume that Reynolds’ tax rate is 40 percent and the equipment’s depreciation would be
$100 per year. If the company leased the asset on a 2-year lease, the payment would be $110 at
the beginning of each year. If Reynolds borrowed and bought, the bank would charge 10 percent
interest on the loan. Should Reynolds le

Buena Terra Corporation is reviewing its capital budget for the upcoming year. It has paid a
$3.00 dividend per share (DPS) for the past several years, and its shareholders expect the
dividend to remain constant for the next several years. The company’s target capital structure
is 60 percent equity and 40 percent deb

Financial ratio analysis is conducted by four groups of analysts: managers, equity investors,
long-term creditors, and short-term creditors. What is the primary emphasis of each of these
groups in evaluating ratios?

Doublewide Dealers has an ROA of 10 percent, a 2 percent profit margin, and a return on equity
equal to 15 percent. What is the company’s total assets turnover? What is the firm’s
equity multiplier?

Mullet Technologies is considering whether or not to refund a $75 million, 12 percent coupon
30-year bond issue that was sold 5 years ago. It is amortizing $5 million of flotation costs on the
12 percent bonds over the issue’s 30-year life. Mullet’s investment bankers have
indicated that the company could sell a ne

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Use the following income statements and balance sheets to calculate Garnet Inc.’s free cash
flow for 2005.
Elliott Athletics is trying to determine its optimal capital structure, which now consists of only
debt and common equity. The firm does not currently use preferred stock in its capital structure,
and it does not plan to do so in the future. To estimate how much its debt would cost at different
debt levels, the company

The Corrigan Corporation’s forecasted 2005 financial statements follow, along with some
industry average ratios. a. Calculate Corrigan’s 2005 forecasted ratios, compare them with
the industry average data, and comment briefly on Corrigan’s projected strengths and
weaknesses. b. What do you think would happen to C

Define each of the following terms: a. Assets-in-place; growth options; non-operating assets b.
Net operating working capital; operating capital; NOPAT; free cash flow c. Value of operations;
horizon value; corporate valuation model d. Value-based management; value drivers; ROIC e.
Managerial entrenchment; non-pecuniar

Rework Problem 12-1 using the Black-Scholes model to estimate the value of the option. (Hint:
Assume the variance of the project’s rate of return is 6.87 percent and the risk-free rate is 8
percent.)

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Ace Industries has current assets equal to $3 million. The company’s current ratio is 1.5, and
its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s
level of inventories?

The balance sheets of Roop Industries are shown below. The 12/31/2004 value of operations is
$651 million and there are 10 million shares of common equity. What is the price per share?

The Booth Company’s sales are forecasted to increase from $1,000 in 2004 to $2,000 in
2005. Here is the December 31, 2004, balance sheet: Booth’s fixed assets were used to only
50 percent of capacity during 2004, but its current assets were at their proper levels. All assets
except fixed assets increase at the sa

Bartley Barstools has an equity multiplier of 2.4. The company’s assets are financed with
some combination of long-term debt and common equity. What is the company’s debt ratio?

The balance sheets of Hutter Amalgamated are shown below. If the 12/31/2004 value of
operations is $756 million, what is the 12/31/2004 value of equity?

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Explain how it is possible for sales growth to decrease the value of a profitable company.

The beta coefficient for Stock C is bC = 0.4, whereas that for Stock D is bD = _0.5. (Stock
D’s beta is negative, indicating that its rate of return rises whenever returns on most other
stocks fall. There are very few negative beta stocks, although collection agency stocks are
sometimes cited as an example.) a. If t

Explain how to use the corporate valuation model to find the price per share of common equity.

Define each of the following terms: a. Capital structure; business risk; financial risk b. Operating
leverage; financial leverage, breakeven point c. Reserve borrowing capacity

Profit margins and turnover ratios vary from one industry to another. What differences would
you expect to find between a grocery chain such as Safeway and a steel company? Think
particularly about the turnover ratios, the profit margin, and the Du Pont equation.

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Why is the following statement true? “Other things being the same, firms with relatively
stable sales are able to carry relatively high debt ratios.”

Assume you are given the following relationships for the Brauer Corporation: Calculate
Brauer’s profit margin and debt ratio.

Beckman Engineering and Associates (BEA) is considering a change in its capital structure.
BEA currently has $20 million in debt carrying a rate of 8 percent, and its stock price is $40 per
share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its
earnings as dividends. EBIT is $14.933

If a firm went from zero debt to successively higher levels of debt, why would you expect its
stock price to first rise, then hit a peak, and then begin to decline?

Garlington Technologies Inc.’s 2004 financial statements are shown below. Garlington
Technologies Inc.: Balance Sheet as of December 31, 2004 Suppose that in 2005 sales increase
by 10 percent over 2004 sales and that 2005 dividends will increase to $112,000. Construct the
pro forma financial statements using the pe

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The financial statements of Lioi Steel Fabricators are shown below, with the actual results for
2004 and the projections for 2005. Free cash flow is expected to grow at a 6 percent rate after
2005. The weighted average cost of capital is 11 percent. a. If operating capital as of 12/31/2004
is $502.2 million, what is th

The Wei Corporation expects next year’s net income to be $15 million. The firm’s debt
ratio is currently 40 percent. Wei has $12 million of profitable investment opportunities, and it
wishes to maintain its existing debt ratio. According to the residual distribution model (assuming
all payments are in the form of d
Why is it sometimes misleading to compare a company’s financial ratios with other firms
that operate in the same industry?

Dozier Corporation is a fast-growing supplier of office products. Analysts project the following
free cash flows (FCFs) during the next 3 years, after which FCF is expected to grow at a constant
7 percent rate. Dozier’s cost of capital is WACC = 13% a. What is Dozier’s terminal, or
horizon, value? (Hint: Find the

Stevens Textile’s 2004 financial statements are shown below. Stevens Textile: Balance Sheet
as of December 31, 2004 (Thousands of Dollars) Suppose 2005 sales are projected to increase
by 15 percent over 2004 sales. Determine the additional funds needed. Assume that the company
was operating at full capacity in 2004

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A. Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a
bank loan for 100 percent of the required amount. Alternatively, a Texas investment banking
firm that represents a group of investors believes that it can arrange for a lease financing plan.
Assume that these facts apply: (

Commercial banks moved heavily into equipment leasing during the early 1970s, acting as
lessors. One major reason for this invasion of the leasing industry was to gain the benefits of
accelerated depreciation and the investment tax credit on leased equipment. During this same
period, commercial banks were investing hea

Before entering a formal agreement, investment bankers carefully investigate the companies
whose securities they underwrite; this is especially true of the issues of firms going public for the
first time. Since the bankers do not themselves plan to hold the securities but intend to sell them
to others as soon as possib

One position expressed in the financial literature is that firms set their dividends as a residual
after using income to support new investment. a. Explain what a residual policy implies
(assuming all distributions as dividends), illustrating your answer with a table showing how
different investment opportunities cou

What term refers to the uncertainty inherent in projections of future ROIC?

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The Kretovich Company had a quick ratio of 1.4, a current ratio of 3.0, an inventory turnover of
6 times, total current assets of $810,000, and cash and marketable securities of $120,000. What
were Kretovich’s annual sales and it’s DSO? Assume a 365-day year.

Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering
of Beadles Inc., the terms were as follows: The out-of-pocket expenses incurred by Security
Brokers in the design and distribution of the issue were $300,000. What profit or loss would
Security Brokers incur if the issue

Northern Pacific Heating and Cooling Inc. has a 6-month backlog of orders for its patented solar
heating system. To meet this demand, management plans to expand production capacity by 40
percent with a $10 million investment in plant and machinery. The firm wants to maintain a 40
percent debt-to-total-assets ratio in i

Rework Problem 12-2 using the Black-Scholes model to estimate the value of the option: The
risk-free rate is 6 percent. (Hint: Assume the variance of the project’s rate of return is 1.11
percent.)

Why do public utility companies usually have capital structures that are different from those of
retail firms?

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The Rivoli Company has no debt outstanding, and its financial position is given by the following
data: The firm is considering selling bonds and simultaneously repurchasing some of its stock. If
it moves to capital structure with 30 percent debt based on market values, its cost of equity, rs,
will increase to 11 perc

The springs AB and BC have stiffness k and unstretched lengths l/2. Determine the horizontal
force F applied to the cord which is attached to the small pulley B so that the displacement of the
pulley from the wall is d. Given: l = 6 m k = 500 N/m d = 1.5 m

The following equation can, under certain assumptions, be used to forecast financial
requirements: Under what conditions does the equation give satisfactory predictions, and when
should it not be used?

The Welch Company is considering three independent projects, each of which requires a $5
million investment. The estimated internal rate of return (IRR) and cost of capital for these
projects are presented below: Note that the projects’ cost of capital varies because the
projects have different levels of risk. The

Peterson Heating & Cooling installs and services commercial heating and cooling systems.
Peterson uses job costing to calculate the cost of its jobs. Overhead is allocated to each job based
on the number of direct labor hours spent on that job. At the beginning of the current year,
Peterson estimated that its overhead

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Durbin Pharmaceuticals manufactures an over-the-counter allergy medication called Breathe.

Durbin is trying to win market share from Sudafed and Tylenol. The company has developed
several different Breathe products tailored to specific markets. For example, the company sells
large commercial containers of 1,000 capsule

Oliver Industries, a small, family-run manufacturer, has adopted an ABC system. The following
manufacturing activities, indirect manufacturing costs, and usage of cost drivers have been
estimated for the year: During May, Jeff and Arabella Oliver machined and assembled Job 557.
Jeff worked a total of 10 hours on the j

In a Wall Street Journal article ("The Price You Pay for Water at the Airport," Scott McCartney,
April 22, 2015), the cost of a bottle of water at various airports was compared to the cost of that
same bottle of water at a convenience store. A 20-ounce bottle of Dasani water typically costs
about $0.99 at a convenience

Suppose Congress enacted new tax law changes that would (1) permit equipment to be
depreciated over a shorter period, (2) lower corporate tax rates, and (3) reinstate the investment
tax credit. Discuss how each of these potential changes would affect the relative volume of
leasing versus conventional debt in the U.S. e

Gracen Pharmacy, part of a large chain of pharmacies, fills a variety of prescriptions for
customers. The complexity of prescriptions filled by Gracen varies widely; pharmacists can
spend between five minutes and six hours on a prescription order. Traditionally, the pharmacy
has allocated its overhead based on the numb

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Newman Industries manufactures a variety of custom products. The company has traditionally
used a plant wide manufacturing overhead rate based on machine hours to allocate
manufacturing overhead to its products. The company estimates that it will incur $1,440,000 in
total manufacturing overhead costs in the upcoming ye

Refer to the Arctic Springs Bottling Department Data Set. 1. Draw a time line. 2. Complete the
first two steps of the process costing procedure for the Bottling Department: summarize the
physical flow of units and then compute the equivalent units of direct materials and conversion
costs. Arctic Springs Bottling Dep

Irvin Associates, a law firm, hires Attorney Amanda Hiller at an annual salary of $207,000. The
law firm expects her to spend 2,300 hours per year performing legal work for clients. Indirect
costs are assigned to clients based on attorney billing hours. Firm attorneys are expected to work
a total of 22,000 direct labor

Refer to the Arctic Springs Filtration Department Data Set. 1. Compute the December
conversion costs in the Filtration Department. 2. If the Filtration Department completely
processed 200,000 liters, what would be the average filtration cost per liter? 3. Now, assume that
the total costs of the filtration process li
Edmonton Pools manufactures swimming pool equipment. Edmonton estimates total
manufacturing overhead costs next year to be $1,400,000. Edmonton also estimates it will use
50,000 direct labor hours and incur $1,000,000 of direct labor cost next year. In addition, the
machines are expected to be run for 40,000 hours. Com

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Whitney Furniture uses departmental overhead rates (rather than a plant wide overhead rate) to
allocate its manufacturing overhead to jobs. The company's two production departments have the
following departmental overhead rates: Cutting Department..................... $9 per machine hour
Finishing Department:........

Thomas Design is an interior design firm. The firm uses a job cost system, in which each client is
a different job. Thomas Design traces direct labor, licensing costs, and travel costs directly to
each job (client). It allocates indirect costs to jobs based on a predetermined indirect cost
allocation rate computed as a

RitePacks manufactures backpacks. Its plant records include the following materials related
transactions: Purchases of canvas (on account) ......................................................... $70,000
Purchases of thread (on account) .......................................................... ... $ 700 Material r

Holiday Industries manufactures a variety of custom products. The company has traditionally
used a plant wide manufacturing overhead rate based on machine hours to allocate
manufacturing overhead to its products. The company estimates that it will incur $970,000 in
total manufacturing overhead costs in the upcoming yea

Samson Tile produces its product in two processing departments: Forming and Finishing. The
following T-account shows the Forming Department's Work in Process Inventory at August 31
prior to completing the five-step process costing procedure: 1. What is the Forming Department's
"Total costs to account for" for the mont

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Refer to the data in Exercise 3-25A. Smith's accountant found an error in the expense records
from the year reported. Depreciation on manufacturing plant and equipment was actually
$364,000, not the $480,000 that had originally been reported. The unadjusted Cost of Goods
Sold balance at year-end was $610,000. In Exerc

Unchil & Doshak is an advertising agency. The firm uses a job cost system in which each client
is a different "job." Unchil & Doshak traces direct labor, software licensing costs, and travel
costs directly to each job (client). The company allocates indirect costs to jobs based on a
predetermined indirect cost allocati
Selle Appliance provides repair services for all makes and models of home appliances. Selle
Appliance charges customers for labor on each job at a rate of $89 per hour. The labor rate is
high enough to cover actual technician wages of $27 per hour, to cover shop overhead (allocated
at a cost of $14 per hour), and to pr

Playtime Industries manufactures custom-designed playground equipment for schools and city
parks. Playtime expected to incur $586,600 of manufacturing overhead cost, 41,900 of direct
labor hours, and $1,592,200 of direct labor cost during the year (the cost of direct labor is $38
per hour). The company allocates manufa

Giant Construction Toys Corp. is using a costs-of-quality approach to evaluate design

engineering efforts for a new toy robot. The company's senior managers expect the engineering
work to reduce appraisal, internal failure, and external failure activities. The predicted reductions
in activities over the two-year life o

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Lawrence Plastics manufactures custom park furniture and signage from recycled plastics
(primarily shredded milk jugs). Many of the company's customers are municipalities that are
required by law to purchase goods that meet certain recycled content guidelines. (Recycled-
content can include post-consumer waste materials

Jernigan Corp. had the following account balances: Receivables.......................................$96,000

Inventory........................................$240,000 Land................................................$720,000
Building..........................................$600,000 Liabilities.................

FirstServer Systems specializes in servers for work-group, e-commerce, and enterprise resource
planning (ERP) applications. The company's original job cost system has two direct cost
categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of
$20 per direct labor hour. A task for

Refer to your answers in E4-36B. In addition to the manufacturing overhead costs, the following
data are budgeted for the company's Standard and Deluxe models for next year: Standard Deluxe
Sales price per wheel ...................................................... $575.00 $735.00 Direct materials per
wheel .......

Radley Products has adopted an ABC costing system. The following manufacturing activities,
indirect manufacturing costs, and cost drivers have been identified: The Job Cost Record for Job
#624 revealed that direct materials requisitioned for the job totaled $1,050. The Job Cost Record
also showed that direct labor for

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Alltime Industries manufactures custom-designed playground equipment for schools and city
parks. Alltime expected to incur $664,000 of manufacturing overhead cost, 41,500 of direct labor
hours, and $1,577,000 of direct labor cost during the year (the cost of direct labor is $38 per
hour). The company allocates manufact

Powell Products manufactures its products in two separate departments: Machining and
Assembly. Total manufacturing overhead costs for the year are budgeted at $1,050,000. Of this
amount, the Machining Department incurs $650,000 (primarily for machine operation and
depreciation) while the Assembly Department incurs $400

Crystale Displays produces screens for use in various smart phones. The company reports the
following information at December 31. Crystale Displays began operations on January 31 earlier
that same year Requirements 1. What is the cost of direct materials used? 2. What is the cost of
indirect materials used? 3. What

The following transactions were incurred by Gregor Fabricators during January, the first month
of its fiscal year. Requirements 1. Record the proper journal entry for each transaction. a.
$205,000 of materials was purchased on account. b. $170,000 of materials was used in
production; of this amount, $152,000 was us

Sinclair Corp. manufactures radiation-shielding glass panels. Suppose Sinclair is considering

spending the following amounts on a new TQM program: Strength-testing one item from each
batch of panels ....................... $63,000 Training employees in
TQM .............................................................

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Nature Made Snacks produces different styles of sweet potato chips (ruffled, flat, thick cut,
gourmet) for different corporate customers. Each style of sweet potato chip requires different
preparation time, different cooking and draining times (depending on desired fat content), and
different packaging (single serving

Hartley Uniforms produces uniforms. The company allocates manufacturing overhead based on
the machine hours each job uses. Hartley Uniforms reports the following cost data for the past
year: Requirements 1. Compute the predetermined manufacturing overhead rate. 2. Calculate the
allocated manufacturing overhead for t

Well-Flow Company had estimated $1,053,000 of manufacturing overhead (MOH) for the year
and 58,500 direct labor (DL) hours, resulting in a predetermined MOH rate of $18 per DL hour.
By the end of that year, the company had actually incurred $1,005,000 of MOH costs and had
used a total of 57,000 DL hours on various jobs

Robert Consulting, a real estate consulting firm, specializes in advising companies on potential
new plant sites. The firm uses a job cost system with a predetermined indirect cost allocation rate
computed as a percentage of expected direct labor costs. At the beginning of the year, managing
partner DeeAnn Robert prep

Gerbig Lighting manufactures a variety of lamps for lighting specialty stores. In September,
Gerbig Lighting received an order from Zucca Decor for 32 mission-style table lamps (Model
5A). The order from Zucca Decor became Job Number 804 at Gerbig Lighting. Materials
requisition #1247 for Job 804 shows that a total of

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Fuller Company uses ABC to account for its chrome wheel manufacturing process. Company
managers have identified four manufacturing activities that incur manufacturing overhead costs:
materials handling, machine setup, insertion of parts, and finishing. The budgeted activity costs
for the upcoming year and their allocat

The following transactions were incurred by Howe Fabricators during January, the first month of
its fiscal year. Requirements 1. Record the proper journal entry for each transaction. a. $215,000
of materials was purchased on account. b. $190,000 of materials was used in production; of this
amount, $164,000 was used

Engine Pro reconditions engines. Its job costing records yield the following information. Engine
Pro uses a perpetual inventory system. Requirements 1. Compute Engine Pro's cost of (a) Work
in Process Inventory at April 30 and May 31, (b) Finished Goods Inventory at April 30 and May
31, and (c) Cost of Goods Sold fo

Sierra Design is an interior design firm. The firm uses a job cost system in which each client is a
different "job." Sierra Design traces direct labor, licensing costs, and travel costs directly to each
job (client). It allocates indirect costs to jobs based on a predetermined indirect cost allocation
rate computed as

On December 26, 2014, Company X leased equipment to Jane at $600 per month for 36 months
beginning January 1, 2015. Jane paid the first and last month's rent at the time the lease was
signed. Jane also paid a $1,500 security deposit. Company X must recognize as income for the
lease: a. $0 in 2014, if Company X is an a

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Adam Industries manufactures wooden backyard playground equipment. Adam estimated

$1,800,000 of manufacturing overhead and $2,000,000 of direct labor cost for the year. After the
year was over, the accounting records indicated that the company had actually incurred
$1,660,000 of manufacturing overhead and $2,650,000 of

Boswell manufactures high-quality speakers. Suppose Boswell is considering spending the

following amounts on a new quality program: Additional 20 minutes of testing for each
speaker ............................... $ 607,000 Negotiating with and training suppliers to obtain higher-
quality Materials and on-time delive

Nestor Recycling recycles newsprint, cardboard, and so forth, into recycled packaging materials.
For the coming year, Nestor Recycling estimates total manufacturing overhead to be $369,260.
The company's managers are not sure if direct labor hours (estimated to be 9,980) or machine
hours (estimated to be 18,463 hours)

ClearDay Displays produces screens for use in various smart phones. The company reports the
following information at December 31. ClearDay Displays began operations on January 31
earlier that same year. Requirements 1. What is the cost of direct materials used? 2. The cost of
indirect materials used? 3. What is the

Anderson & Little is an advertising agency. The firm uses a job cost system in which each client
is a different "job." Anderson & Little traces direct labor, software licensing costs, and travel
costs directly to each job (client). The company allocates indirect costs to jobs based on a
predetermined indirect cost allo

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Elkland Heating & Cooling installs and services commercial heating and cooling systems.
Elkland uses job costing to calculate the cost of its jobs. Overhead is allocated to each job based
on the number of direct labor hours spent on that job. At the beginning of the current year,
Elkland estimated that its overhead for

The following transactions were incurred by Mooney Fabricators during January, the first month
of its fiscal year. Requirements 1. Record the proper journal entry for each transaction. a.
$210,000 of materials were purchased on account. b. $178,000 of materials were used in
production; of this amount, $143,000 was

Robbins Manufacturing produces a variety of plastic containers using an extrusion blow molding
process. The following activities are part of Robbins Manufacturing's operating process: 1.
Patents are obtained for each new type of container mold. 2. Each type of container has its own
unique molds. 3. Routine maintenan

Arnett Corp. manufactures computer desks in its White Bear Lake, Minnesota, plant. The
company uses activity-based costing to allocate all manufacturing conversion costs (direct labor
and manufacturing overhead). Its activities and related data follow: Arnett produced two styles of
desks in March: the Standard desk an

Goodchill Industries manufactures freezers. Here is some information about its "LX17" line of
freezers over the past year: Number of units manufactured and sold .........................................
5,000 units Selling price per unit .............................................................................. $
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Farraway Company uses ABC to account for its chrome wheel manufacturing process. Company
managers have identified four manufacturing activities that incur manufacturing overhead costs:
materials handling, machine setup, insertion of parts, and finishing. The budgeted activity costs
for the upcoming year and their alloc

Refer to the data in Exercise E3-39B. Benson Foundry's accountant found an error in the expense
records from the year reported. Depreciation on manufacturing plant and equipment was actually
$415,000, not the $470,000 it had originally reported. The unadjusted Cost of Goods Sold
balance at year-end was $560,000. Data

Refer to the Arctic Springs Filtration Department Data Set and your answer to S5-14 and S5-15.
Complete Step 5 of the process costing procedure: Assign costs to units completed and to units in
ending inventory. Prepare a schedule that answers the following questions. 1. What is the cost of
the 160,000 liters complete

Hughes Products manufactures its products in two separate departments: Machining and
Assembly. Total manufacturing overhead costs for the year are budgeted at $1,056,000. Of this
amount, the Machining Department incurs $600,000 (primarily for machine operation and
depreciation), while the Assembly Department incurs $45

Raymond Industries uses job costing to calculate the costs of its jobs with direct labor cost as its
manufacturing overhead allocation base. The company manufactures a variety of engines for use
in farm equipment. At the beginning of the current year, Raymond estimated that its overhead for
the coming year would be $37

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Cornwell Products has adopted an ABC costing system. The following manufacturing activities,
indirect manufacturing costs, and cost drivers have been identified: The Job Cost Record for Job
#804 revealed that direct materials requisitioned for the job totaled $1,250. The Job Cost Record
also showed that direct labor f

Gallagher Counter Co. produces quartz countertops in two sequential production departments:
Forming and Polishing. The Polishing Department calculated the following costs per equivalent
unit (square feet) on its May production cost report: ____________________Transferred-in
___________Direct Materials _______Convers

Sayres Consulting, a real estate consulting firm, specializes in advising companies on potential
new plant sites. The firm uses a job costing system with a predetermined indirect cost allocation
rate computed as a percentage of direct labor costs. At the beginning of the year, managing
partner Dana Sayres prepared the
Kushner & Company is an architectural firm specializing in home remodeling for private clients
and new office buildings for corporate clients. Kushner charges customers at a billing rate equal
to 130% of the client's total job cost. A client's total job cost is a combination of (1) professional
time spent on the clien

Dover Pharmacy, part of a large chain of pharmacies, fills a variety of prescriptions for
customers. The complexity of prescriptions filled by Dover varies widely; pharmacists can spend
between five minutes and six hours on a prescription order. Traditionally, the pharmacy has
allocated its overhead based on the number

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Hamilton Lighting manufactures a variety of lamps for lighting specialty stores. In September,
Hamilton Lighting received an order from Rose Decor for 34 mission-style table lamps (Model
5A.) The order from Rose Decor became Job Number 951 at Hamilton Lighting. Materials
requisition #1298 for Job 951 shows that a tota

Several years after reengineering its production process, King Corporation hired a new
controller, Christine Erickson. She developed an ABC system very similar to the one used by
King's chief rival. Part of the reason Erickson developed the ABC system was because King's
profits had been declining, even though the compa

Red Canyon Homes manufactures prefabricated chalets in Colorado. The company uses a
perpetual inventory system and a job cost system in which each chalet is a job. The following
events occurred during May: a. Purchased materials on account, $470,000. b. Incurred total
manufacturing wages of $115,000, which included b

Stonecreek Furniture started and finished Job 310 during November. The company's records
show that the following direct materials were requisitioned for Job 310: Lumber: 45 units at $6
per unit Padding: 14 yards at $21 per yard Upholstery fabric: 32 yards at $27 per yard. Labor
time records show the following emplo

Bentley Glass reports the following labor-related transactions at its plant in Bryan, Ohio. Plant
janitor's wages ....................................................................................... $ 610 Plant supervisor's
wages ................................................................................ $ 90

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Olney Recycling recycles newsprint, cardboard, and so forth, into recycled packaging materials.
For the coming year, Olney estimates total manufacturing overhead to be $370,000. The
company's managers are not sure if direct labor hours (estimated to be 10,000) or machine hours
(estimated to be 14,800 hours) are the bes