Morris & Brown, Ltd
For the Three Months Ended September 30
July August September
Sales in units 4000 4500 5000
Sales revenue A$400,000 A$450,000 A$500,000
Cost of good sold 240,000 270,000 300,000
Gross margin 160,000 180,000 200,000
Selling and administrative expenses:
Advertising expense 21,000 21,000 21,000
Shipping expense 34,000 36,000 38,000
Salaries& commission 78,000 84,000 90,000
Insurance expense 6,000 6,000 6,000
Depreciate expense 15,000 15,000 15,000
Total selling& admin expens 154,000 162,000 170,000
Net operation income A$ 6000 A$ 18,000 A$30,000
(Note: Morrisey & Brown, Ltd. Australian- formatted income statement has been recast in the format common in the United States. The Australian dollar is denoted here by A$.)
Identify each of the company s expenses (including cost of good sold) as either variable, fixed, or mixed.
Using the high- low method, separate each mixed expense into variable and fixed elements. State the cost formula for each mixed expense.
Redo the company s income statement at the 5,000-unit level of activity using the contribution format.
Menlo Company distributes a single product. The company s sales and expenses for last month follow:
Total Per Unit
Net Operating income
What is the month break-even point in units sold and in sales dollars?
Without resorting to computations, what is the total contribution margin at the break-even point?
How many units would have to be sold each month to earn a target profit of $90,000? Use the formula method. Verify your answer by preparing contribution format income statement at the target sales level.
Silver Company makes a product that is very popular as a Mother s Day gift. Thus, peak sales occur in May of each year, as shown in the company s sales budget for the second quarter given below:
Budget sales (all on account)
From past experience, the company has learned that 20% of a month s sales are collected in the month of sale, another 70% are collected in the month following sale, and the remaining 10% are collected in the second following sale. Bad debts are negligible and can be ignored. February sales totaled $230,000, and March sales totaled $260,000.
Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.
Assume that the company will prepare a budgeted balance sheet as of June 30. Compute the accounts receivable as of that date.
Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budget cash flows:
Total cash receipts
Total cash disbursements
The company s beginning cash balance for the upcoming fiscal year will be $20,000. The company requires a minimum cash balance of $10,000, and may borrow any amount needed from a local bank at a quarterly interest rate of 3%. The company may borrow any amount at the beginning of any quarter and may repay its loans, or any part of its loans, at the end of any quarter. Interest payments are due on any principal at the time it is repaid. For simplicity, assume that interest is not compounded.
Prepare the company s cash budget for the upcoming fiscal year.
Vulcan Flyovers offers scenic overflights of Mount St. Helens, the volcano in Washington State that explosively erupted in 1982. Data concerning the company s operations in July appear below:
For the Month Ended July 31
Wages and salaries ($4,000 + $82.00q)
Airport fees ($650 + $38.00q)
Aircraft depreciation ($7.00q)
Office expenses ($190 + $2.00q)
Net operating income
The company measures its activity in terms of flights. Customers can buy individual tickets for overflights or hire an entire plane for an overflight at a discount.
Prepare a flexible budget performance report for July
Which of the variances should be of concern to management? Explain.
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 =Y):
Net operating income
Average operating assets
For each division, compute the return on investment (ROI) in terms of margin and turnover. Where necessary, carry computations to two decimal places.
Assume that the company evaluates performances using residual income and that the minimum required rate of return for any division is 15%. Compute the residual income for each division.
Is Yokohama s greater amount of residual income an indication that it is better managed?
Wingate Company, a wholesale distributer of videotapes, has been experiencing losses for some time, as shown by its most recent monthly contribution format income statement, which follows:
Net operating income (loss)
In an effort to isolate the problem, the president has asked for an income statement segmented by division. Accordingly, the Accounting Department has developed the following information:
East Central West
Variable expenses as a percentage of sales
Traceable fixed expenses
Prepare a contribution format income statement segmented by divisions, as desired by the president.
As a result of a marketing study, the president believes that sales in the West Division could be increased by 20% if monthly advertising in that division were increased by $15,000. Would you recommend the increased advertising? Show computations to support your answer.
Labeau Products, Ltd. Of Perth, Australia, has $35,000 to invest, The company is trying to decide between two alternative uses for the funds as follows:
Invest in Project X
Invest in Project Y
Annual cash inflows
Single cash inflow at the end of 10 years
Life of the project
The company s discount rate is 18%
(ignore income taxes) Which alternative would you recommend that the company accept? Show all computations using the net present value approach. Prepare separate computations for each project.