2024 – All your answers MUST be typed Question 1 Nancy Henderson has just been appointed manager of Palmroy s glass
Managerial Accounting – 2024
All your answers MUST be typed.
Question 1:
Nancy Henderson has just been appointed manager of Palmroy’s glass products division. She has two years to make the division profitable. If the division is still showing a loss after two years, it will be eliminated, and Nancy will be reassigned as an assistant divisional manager in another division. The divisional income statement for the most recent year is given below:
Sales $5,350,000
Less variable expenses 4,750,000
Contribution margin 600,000
Less direct fixed expenses 750,000
Segment margin (150,000)
Less common fixed expenses (allocated) 200,000
Divisional profit (loss) $(350,000)
Upon arriving at the division, Nancy requested the following data on the division’s three products:
|
|
Product A |
Product B |
Product C |
|
Sales (units) Unit selling price Unit variable cost Direct fixed costs |
10,000 $150 $100 $100,000 |
20,000 $140 $110 $500,000 |
15,000 $70 $103.33 $150,000 |
She also gathered data on a proposed new product (Product D). If this product is added, it would displace one of the current products. The quantity that could be produced and sold would equal the quantity sold of the product it displaces. Because of the specialized production equipment, it is not possible for the new product to displace part of the production of a second product. The information on Product D is as follows:
Unit selling price $70
Unit variable cost $30
Direct fixed cost $640,000
Required:
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Prepare a segmented income statement (in good form) for Palmroy’s current production. (Note: Be sure to include a column for the firm.)
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Determine the products that Nancy should produce for the coming year. (To make good use of the equipment, they want to produce three products.) Prepare a segmented income statement that proves your combination is the best for the division.
Question 2:
Kashmir Products is a division of Oberlin Textiles, Inc. During the coming year, it expects to earn a net operating income of $290,000 based on sales of $3.45 million; without any new investments, the division will have average net operating assets of $3 million. The division is considering a capital investment project—adding knitting machines to produce socks—that requires an additional investment of $600,000 and increases net operating income by $57,500 (sales would increase by $575,000). If made, the investment would increase beginning net operating assets by $600,000 and ending net operating assets by $400,000. Assume that the minimum rate of return required by the company is 7 percent.
Required:
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Compute the ROI for the division without the investment.
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Compute the margin and turnover ratios without the investment. Show that the product of the margin and turnover ratios equals the ROI computed in Requirement 1.
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Compute the ROI for the division with the new investment. Do you think the divisional manager will approve the investment? Explain. (Note: Be sure to use average operating assets in your calculation.)
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Compute the margin and turnover ratios for the division with the new investment. Compare these with the old ratios.
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Assume that a JIT purchasing and manufacturing system has been installed, reducing average operating assets by $800,000. Compute the ROI again, both with and without accepting the proposed investment in the knitting machine. Now do you think the divisional manager will accept the new investment in the knitting machine? Should he accept it? Explain you answer.
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Assume that the JIT purchasing and manufacturing system has been installed, reducing average operating assets by $800,000. Now assume that the divisional manager is evaluated with residual income. Compute the residual income with and without the investment in the knitting machine under this new scenario. Now do you think the divisional manager will accept the new investment in the knitting machine? Should he accept it? Explain you answer.
Question 3:
Topper Company produces a variety of glass products. One division makes windshields for compact automobiles. The division’s projected income statement for the coming year is as follows:
Sales (148,000 units @ $50) $ 7,400,000
Less: Variable expenses 2,960,000
Contribution margin 4,440,000
Less: Fixed expenses 3,200,000
Net income $ 1,240,000
Required:
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Compute the contribution margin per unit and calculate the break-even point in units.
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Compute the contribution margin ratio and calculate the break-even point in $ sales.
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The divisional manager has decided to increase the advertising budget by $100,000 and cut the selling price to $45. These actions will increase sales revenues by $1 million. Will the division be better off?
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Refer to the original data. Suppose sales revenues exceed the estimated amount on the income statement by $540,000. Without preparing a new income statement, calculate how much net income would increase.
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Refer to the original data. How many units must be sold to earn an after-tax profit of $1.254 million? Assume a tax rate of 34 percent. (Note: to change after-tax profit to before-tax profit, divide before-tax profit by 1-tax rate.)
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Compute the safety margin based on the original projected income statement. Calculate it as a dollar amount and as a percentage of sales.
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Compute the operating leverage based on the original projected income statement. If sales revenues are 20 percent greater than expected, what would be the percentage increase in profits?
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