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ACC 1110 Introductory Managerial Accounting Practice Final Exam Page 1 of 24 QUESTION ONE Cleano Products Limited distributes cleaning supplies. The company’s controller has prepared budgeted financial statements for each month of the first quarter before he fell ill. You have been asked to prepare budgeted financial statements for the month of April in his absence. The following information has been assembled to assist you. The company’s general ledger showed the following balances as at March 31, 2005: Cash $29,000 Accounts receivable 369,000 Inventory 420,000 Net furniture and fixtures 168,000 Accounts payable 475,000 Share capital 200,000 Retained earnings Recent and budgeted sales: 311,000 January $250,000 February 300,000 March 350,000 April 700,000 May 400,000 June 400,000 Credit sales are 90 percent of total sales. Eighty percent of credit sales are collected in the month following the sale and 20 percent in the second month following the sale. The average gross profit on sales is 40 percent. The policy is to acquire enough inventory each month to equal the following month’s projected sales. All purchases of inventory are paid for in the month following the purchase. Commissions are 20 percent of sales. All other expenses, excluding amortization, are estimated to be $60,000 per month. Amortization is $2,500 monthly. All expenses are paid in the month incurred. In April, the company is planning to pay $55,000 for equipment purchased in February. ACC 1110 Introductory Managerial Accounting Practice Final Exam Page 2 of 24 QUESTION ONE CONTINUED: Assume that a minimum cash balance of $25,000 is to be maintained. Also assume that all borrowings are effective at the beginning of the month and all repayments are made at the end of the month of repayment. Interest is paid only at the time principal is repaid. The interest rate is 6 percent. All loans and repayments must be made in multiples of one thousand dollars. Required: 1. Compute April cash collections from sales. Show all your calculations. 2. Prepare the cash budget for the month of April. Show all your calculations. 3. Prepare, in good form, a budgeted income statement for April. Show all your calculations. 4. Prepare, in good form, a budgeted balance sheet for April 30, 2005. Show all your calculations. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 3 of 24 QUESTION TWO Matrix Limited has decided to introduce a new product. The selling price of the new product is $40. Advertising and promotion costs are estimated to be $400,000. The sales staff will be paid a commission of $3 for each unit sold. The company will have to purchase a stamping machine to manufacture the new product. There are two models the company can choose from. The model chosen will not affect the quality of the product. The estimated unit manufacturing costs for the two models, assuming a production level of 250,000 units, are as follows: Model A Model B Direct materials $4.00 $4.50 Direct labour 6.50 8.00 Variable manufacturing overhead 3.50 5.00 Fixed manufacturing overhead 9.80 5.46 Required: 1. Determine the annual unit sales volume at which the company should consider purchasing Model A instead of Model B. Show all your calculations. 2. Calculate the estimated break-even point in annual unit sales of the new product if the company purchases Model B. Show all your calculations. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 4 of 24 QUESTION THREE ( 9 minutes) The management of Rainfree Limited must decide whether to continue manufacturing a part or to buy it from an outside supplier. The part is the mechanized arm of an umbrella the company manufactures. An analysis of the accounting records and production data revealed the following for the past year: 1. The company produced 35,000 mechanical arms. 2. Each mechanical arm requires 10 minutes to produce. Three people in the Machining Department work full time producing the mechanical arms. Each person is paid $12.00 per hour. 3. The cost of materials used in each mechanical arm is $2.00. 4. Manufacturing costs directly related to the production of the mechanical arm are: supervision wages, $7,500; quality control, $1,500; amortization, $1,800; property taxes and insurance, $1,000 (allocated on the basis of factory space). 5. An outside firm is offering to sell the mechanical arm to Rainfree for $4 per unit. Freight charges will be $0.40 per unit, and a part-time receiving clerk at $8,500 per year will be required. 6. If the mechanical arm is purchased, the excess space will be used to store Rainfree’s finished products. Currently, Rainfree rents storage space at approximately $0.80 per unit per year. Approximately 4,500 units per year are stored in the rented space. Required: Should Rainfree make or buy the mechanical arm Support your answer with calculations. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 5 of 24 QUESTION FOUR (11 minutes) Selected financial information for Moby Industries Limited is presented below: 2003 2004 Total assets $160,000 $180,000 Current liabilities 14,000 16,000 Net income 12,000 15,000 Interest expense 8,000 10,000 Sales 240,000 360,000 Tax rate 40% 40% Required: 1. Compute the return on investment for 2004. Show all your calculations. 2. Comment on the change in cost control performance from 2003 to 2004. Show all your calculations. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 6 of 24 QUESTION FIVE Aspertech Limited has the following budgeted income statement for the month of June, 2005: Sales (80,000 units) $4,000,000 Cost of goods sold: Direct materials $600,000 Direct labour 800,000 Variable overhead 400,000 Fixed overhead 1,200,000 Total cost of goods sold 3,000,000 Gross profit margin 1,000,000 Selling & administrative costs: Sales commissions (2% of sales) 80,000 Delivery costs (1% of sales) 40,000 Sales salaries 240,000 Administrative salaries 200,000 Office utilities 50,000 Office amortization 90,000 Total selling & administrative 700,000 Operating income $300,000 The factory has a maximum capacity of 100,000 units. Capacity can be increased at a cost of $120,000 per increment of 4,000 units. The company received an order from a new customer to purchase the product at a price of $35. The customer will pick up the order from Aspertech’s factory. Required: 1. Compute the effect on operating income if the new customer wishes to order 16,000 units. Show all your calculations. 2. Assume that the new customer order is for 28,000 units. Aspertech’s sales manager promised the new customer that the order will be filled. Aspertech can choose to fill the order with or without expanding its production capacity. Identify the most profitable method of filling the special order. Show all your calculations. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 7 of 24 QUESTION SIX. These questions are of medium to high difficulty. They are meant for practice and are not necessarily representative of what you would find on the final exam. They are for practice only. 1. Lyons Company consists of two divisions: A and B. Lyons Company reported a contribution margin of $50,000 for Division A, and had a contribution margin ratio of 30% in Division B, when sales in Division B were $200,000. Operating income for the company was $25,000 and traceable fixed expenses were $40,000. What were Lyons Company’s common fixed expenses A. $40,000. B. 45,000. C. $70,000. D. $85,000. 2. More Company has two divisions: L and M. During July, the contribution margin in Division L was $60,000. The contribution margin ratio in Division M was 40%, and its sales were $250,000. Division M’s segment margin was $60,000. The common fixed expenses were $50,000, and the company operating income was $20,000. What was the segment margin for Division L A. $0. B. 10,000. C. 50,000. D. 60,000. Use this information for Questions 3-6 Eagan Company’s quality cost report is to be based on the following data: ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 8 of 24 3. What will be the total prevention cost appearing on the quality cost report A. $102,000. B. 112,000. C. $130,000. D. $167,000. 4. What will be the total appraisal cost appearing on the quality cost report A. $75,000. B. $92,000. C. $102,000. D. $112,000. 5. What will be the total internal failure cost appearing on the quality cost report A. $64,000. B.$113,000. C. $121,000. D. $124,000. 6. What will be the total external failure cost appearing on the quality cost report A. $124,000. B. $132,000. C. $245,000. D. $524,000. Use this information for questions 7-10 The Axle Division of LaBate Company makes and sells only one product. Annual data on the Axle Division’s single product follow: ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 9 of 24 7. If Axle sells 15,000 units per year, what would be the residual income A. $10,000. B. $30,000. C. $50,000. D. $100,000. 8. If Axle sells 16,000 units per year, what would be the return on investment A. 12%. B. 15%. C. 16%. D. 18%. 9. Suppose the manager of Axle desires a return on investment of 22%. In order to achieve this goal, Axle must sell how many units per year A. 14,500 units. B. 16,750 units. C. 18,250 units. D. 19,500 units. 10. Suppose the manager of Axle desires an annual residual income of $45,000. In order to achieve this, Axle should sell how many units per year A. 14,500 units. B. 16,750 units. C. 18,250 units. D. 19,500 units. Use this information for questions 11-13 The Vega Division of Ace Company makes wheels that can either be sold to outside customers or transferred to the Walsh Division of Ace Company. Last month, the Walsh Division bought all 4,000 of its wheels from the Vega Division for $42 each. The following data are available from last month’s operations for the Vega Division: If the Vega Division sells wheels to the Walsh Division, Vega can avoid $2 per wheel in sales commissions. An outside supplier has offered to supply wheels to the Walsh Division for $41 each. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 10 of 24 11. Suppose that the Vega Division has ample idle capacity so that transfers to the Walsh Division would not cut into its sales to outside customers. What should be the lowest acceptable transfer price from the perspective of the Vega Division A. $28. B. $30. C. $42. D.$45 . 12. What is the maximum price per wheel that Walsh should be willing to pay Vega A. $28. B. $41. C. $42. D. $45. 13. Suppose that Vega can sell 9,000 wheels each month to outside consumers, so transfers to the Walsh Division cut into outside sales. What should be the lowest acceptable transfer price from the perspective of the Vega Division A. $28.00. B. $31.75. C. $41.00. D. $42.00. Use this information for questions 14-18 Cole Laboratories makes and sells a lawn fertilizer called Fastgro. The company has developed standard costs for one bag of Fastgro as follows: The company had no beginning inventories of any kind on January 1. Variable manufacturing overhead is applied to production on the basis of direct labour hours. The results of the company’s operations during January are as follows: ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 11 of 24 14. What was the materials price variance for January A. $1,300 unfavourable. B. $1,640 favourable. C. $1,640 unfavourable. D. $1,700 favourable. 15. What was the materials quantity variance for January A. $300 favourable. B. $300 unfavourable. C. $750 favourable. D. $800 unfavourable. 16. What was the labour rate variance for January A. $475 favourable. B. $475 unfavourable. C. $585 favourable. D. $585 unfavourable. 17. What was the labour efficiency variance for January A. $110 favourable. B. $130 unfavourable. C. $350 unfavourable. D. $475 favourable. 18. What was the total variance for variable overhead for January A. $40 favourable. B. $85 favourable. C. $100 unfavourable. D. $125 favourable. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 12 of 24 19. Mongelli Family Inn is a bed and breakfast establishment in a converted 100-year-old mansion. The Inn’s guests appreciate its gourmet breakfasts and individually decorated rooms. The Inn’s overhead budget for the most recent month appears below: The Inn’s variable overhead costs are driven by the number of guests. Assuming that the activity levels of 90 guests and 99 guests are within the same relevant range and rounding to the nearest dollar, what would be the total budgeted overhead cost for a month if the activity level is 99 guests A. $7,794. B. $61,541. C. $8,513. D. $7,739. 20. Avril Company makes collections on sales according to the following schedule: 30% in the month of sale 60% in the month following sale 8% in the second month following sale The following sales are expected: What should be the budgeted cash collections in March A. $105,000. B. $110,000. C. $110,800. D. $113,000. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 13 of 24 Use this information for questions 21-22 Pardise Company plans the following beginning and ending inventory levels (in units) for July: Two units of raw material are needed to produce each unit of finished product. 21. If Pardise Company plans to sell 480,000 units during July, what would be the number of units it would have to manufacture during July A. 440,000 units. B. 450,000 units. C. 480,000 units. D. 510,000 units. 22. If 500,000 finished units were to be manufactured during July, what would be the units of raw material needed to be purchased A. 900,000 units. B. 1,000,000 units. C. 1,010,000 units. D. 1,020,000 units. 23. Wagner Company sells Product A for $21 per unit. Wagner’s unit product cost based on the full capacity of 200,000 units is as follows: A special order offering to buy 20,000 units has been received from a foreign distributor. The only selling costs that would be incurred on this order would be $3 per unit for shipping. Wagner has sufficient idle capacity to manufacture the additional units. Two-thirds of the manufacturing overhead is fixed and would not be affected by this order. Assume that direct labour is an avoidable cost in this decision. In negotiating a price for the special order, what should be the minimum acceptable selling price per unit A. $14. B. $15. C. $16. D. $18. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 14 of 24 24. A study has been conducted to determine if Product A should be dropped. Total sales of the product are $200,000 per year; total variable expenses are $140,000 per year. Total fixed expenses charged to the product are $90,000 per year. The company estimates that $40,000 of these fixed expenses will continue even if the product is dropped. These data indicate that if Product A is dropped, the company’s overall operating income per year would change by how much A. A decrease of $10,000. B. An increase of $20,000. C. A decrease of $20,000. D. An increase of $30,000. 25. The following standard costs pertain to a component part manufactured by Ashby Company: The company can purchase the part from an outside supplier for $25 per unit. The manufacturing overhead is 60% fixed, and this fixed portion would not be affected by this decision. Assume that direct labour is an avoidable cost in this decision. What would be the relevant amount of the standard cost per unit in a decision of whether to make the part internally or buy it from the external supplier A. $2. B. $15. C. $19. D. $27. 26. Consider the following production and cost data for two products, L and C: The company can only perform 65,000 machine setups each period due to limited skilled labour, and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period A. $845,000. B. $910,000. C. $975,000. D. $1,820,000. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 15 of 24 27. WP Company produces products X, Y, and Z from a single raw material input in a joint production process. Budgeted data for the next month is as follows: The cost of the joint raw material input is $149,000. Which of the products should be processed beyond the split-off point A. Option A B. Option B C. Option C D. Option D ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 16 of 24 Question One Solution: 1. Compute April cash collections from sales. Show all your calculations. April cash sales $700,000 x 10% = $70,000 March credit sales $350,000 x 90% x 80% = 252,000 February credit sales $300,000 x 90% x 20% = 54,000 $376,000 2. Prepare the cash budget for the month of April. Show all your calculations. Opening cash balance $ 29,000 Cash receipts from sales 376,000 Total cash available 405,000 Cash disbursements: Inventory purchases $700,000 x 60% = 420,000 Commissions $700,000 x 20% = 140,000 Other expenses 60,000 Equipment 55,000 Total cash disbursements 675,000 Deficiency of cash (270,000) Borrowings 295,000 Ending cash balance $ 25,000 ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 17 of 24 Question One Solution Continued.. 3. Prepare, in good form, a budgeted income statement for April. Show all your calculations. Cleano Products Limited Income Statement For the month ending April 30, 2005 Sales $700,000 Cost of goods sold $700,000 x 60% = 420,000 Gross profit 280,000 Selling & administrative expenses: Commissions $700,000 x 20% = 140,000 Other expenses 60,000 Amortization expense 2,500 Interest expense $295,000 x 6% x 1/12 = 1,475 Total selling & administrative expenses 203,975 Net income $76,025 ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 18 of 24 Question One Solution Continued… 4. Prepare, in good form, a budgeted balance sheet for April 30, 2005. Show all your calculations. Cleano Products Limited Balance Sheet As at April 30, 2005 Cash $25,000 Accounts receivable ($700,000 x 90%) + ($350,000 x 90% x 20%) = 693,000 Inventory $400,000 x 60% = 240,000 Net furniture & fixtures $168,000 – $2,500 = 165,500 $1,123,500 Accounts payable $400,000 x 60% = $240,000 Interest payable $295,000 x 6% x 1/12 = 1,475 Loan payable 295,000 536,475 Share capital 200,000 Retained earnings $311,000 + $76,025 = 387,025 587,025 $1,123,500 ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 19 of 24 Question Two Solution 1. Determine the annual unit sales volume at which the company should consider purchasing Model A instead of Model B. Show all your calculations. [# units x ($4.00 + $6.50 + $3.50)] + ($9.80 x 250,000) =[# units x ($4.50 + $8.00 +$5.00) + ($5.46 x 250,000) (# units x $14) + $2,450,000 = (# units x $17.50) + $1,365,000 # units = $1,085,000 / $3.50 # units = 310,000 Model A should be purchased if sales are greater than 310,000 units. 2. Calculate the estimated break-even point in annual unit sales of the new product if the company purchases Model B. Show all your calculations. $1,365,000 + $400,000 $40 – ($4.50 + $8.00 + $5.00 +$3.00) = $1,765,000 $19.50 = 90,513 Rounded from 90,512.82 ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 20 of 24 Question Three Solution: Cost to make Cost to buy DLC per unit: 2.00$ DMC per unit 2.00 4.40$ Prime cost per unit 4.00$ times: Quantity needed 35,000.00 35,000.00 Total prime costs 140,000.00$ 154,000.00$ Other relevant costs: Supervision wages 7,500.00 Quality control 1,500.00 Storage costs 3,600.00 Total relevant costs 152,600.00$ Receiving clerk wages per year 8,500.00$ 162,500.00$ It is cheaper to make internally, so the external offer should be rejected. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 21 of 24 Question Four Solution 1. Compute the return on investment for 2004. Show all your calculations. $15,000 / (1 – 40%) + $10,000 [($160,000 + $180,000) /2] = $35,000 $170,000 = 20.588% 2. Comment on the change in cost control performance from 2003 to 2004. Show all your calculations. 2003 2004 12,000 (1 – 40%) + 8,000 240,000 15,000 (1 – 40%) + 10,000 360,000 = 28,000 240,000 = 35,000 360,000 = 11.66% = 9.72% Cost control worsened in 2004. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 22 of 24 Question Five Solution 1. Compute the effect on operating income if the new customer wishes to order 16,000 units. Show all your calculations. Selling price $35.00 Variable costs: Direct materials 7.50 Direct labour 10.00 Overhead 5.00 Commissions .70 23.20 11.80 X 16,000 Increase in profit $188,800 2. Assume that the new customer order is for 28,000 units. Aspertech’s sales manager promised the new customer that the order will be filled. Aspertech can choose to fill the order with or without expanding its production capacity. Identify the most profitable method of filling the special order. Show all your calculations. Regular orders 80,000 Special order 28,000 Total demand 108,000 Capacity 100,000 Shortfall 8,000 Expand production facility: Contribution margin 28,000 x $11.80 = $11.80 X 28,000 330,400 Expansion cost 2 x $120,000 = 240,000 Increase in profit $90,400 ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 23 of 24 Question Five Solution Continued No expansion: Contribution margin 28,000 x $11.80 = $330,400 Lost CM on 8,000 regular order units: Selling price $50.00 Direct materials 7.50 Direct labour 10.00 Overhead 5.00 Commissions 1.00 Delivery .50 X 8,000 = 208,000 Increase in profit $122,400 The company should not expand production facilities. It should reject 8,000 units of regular sales. ACC 1110 Introductory Managerial Accounting Sample Final Exam Page 24 of 24 Question Six Solution 1 – 5. B B D D B 6 – 10. B A C C B 11 – 15. A B B D D 16 – 20. D A D A D 21 – 25. B C A A B 26 – 27. C A 1. 50,000 + 200,000*.30 – 40,000 – 25,000 2. Total SM = 20,000 + 50,000 = 70,000. L’s SM = 70,000 – 60,000 3. 75,000 + 92,000 4. 37,000 + 65,000 + 10,000 5. 86,000 + 27,000 6. 94,000 + 38,000 7. [15,000*(50 – 30) – 200,000] – 750,000 * .12 8. (16,000 * (50 – 30) – 200,000)/750,000 9. (200,000 + 750,000*.22)/(50 – 30) 10. Op. Income = 45,000 + 750,000*.12 = $135,000. #units = (200,000 + 135,000)/(50 – 30) 11. 30 – 2 12. Outside supplier price of $41 13. {(30 – 2) + [4,000 – (12,000 – 9,000)]*(45 – 30)}/4,000 14. 85,000*8/20 – 32,300 15. (4,000*20 – (85,000 – 3,000))*8/20 16. DL rate = 1.10/.1 = $11/hr. 390*11 – 4,875 = 585 Unf. 17. (4,000 *.1 – 390) * 11 18. 4,000*.4 – 1,475 19. (234 + 315)/90 = $6.10. Total = 99*6.10 + 220 + 4,290 + 2,680 20. (100,000*.08 + 120,000*.60 + 110,000*.30 21. 480,000 + 50,000 – 80,000 22. 500,000*2 + 50,000 – 40,000 23. 4 + 5 + 6*(1 – 2/3) + 3 24. Lost CM = 200,000 – 140,000 = (60,000). Add avoidable costs (90,000 – 40,000). Decreased Operating Income of 10,000 25. 2 + 5 + 20*(1 -.60) 26. CM/setup for L, C = 130/10, 120/8. 65,000/8 = 8,125 units of C at $120 27. X, Y, Z = 29 – 19 – 7 = 3, 29 – 21 – 7.50 = 0.50, 30 – 24 – 7 = – 1