EX 9-10 Bunyon Lumber Company incurs a cost of $490 per hundred board feet in processing certain "rough-cut" lumber, which it sells for $635 per hundred board feet. An alternative is to produce a "finished cut" at a total processing cost of $565 per hundred board feet, which can be sold for $840 per hundred board feet.
What is the amount of (a) the differential revenue, (b) differential cost, and (c) differential income for processing rough-cut lumber into finished cut?
Click here for the solution: Bunyon Lumber Company incurs a cost of $490 per hundred board feet in processing certain "rough-cut" lumber
Showing posts with label board. Show all posts
Showing posts with label board. Show all posts
Sunday, September 27, 2015
Friday, September 25, 2015
Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors
Complete Problem 6.6 on p. 232 (Ch. 6). Submit your answers to questions (a) and (b).
6.6. Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors regarding a planned plant expansion that will cost $10 million. At issue is whether the expansion should be financed with debt (a long-term note at First National Bank of Uvalde with an interest rate of 15%) or through the issuance of common stock (200,000 shares at $50 per share).
Uvalde Manufacturing currently has a capital structure of:
Debt (12% interest) 40,000,000
Equity 50,000,000
The firm's most recent income statement is presented next:
Sales $100,000,000
Cost of goods sold 65,000,000
Gross profit 35,000,000
Operating expenses 20,000,000
Operating profit 15,000,000
Interest expense 4,800,000
Earnings before tax 10,200,000
Income tax expense (40%) 4,080,000
Net income $ 6,120,000
Earnings per share (800,000 shares) $ 7.65
Laurel Street is aware that financing the expansion with debt will increase risk but could also benefit shareholders through financial leverage. Estimates are that the plant expansion will increase operating profit by 20%.The tax rate is expected to stay at 40%. Assume a 100% dividend payout ratio.
Required
a. Calculate the debt ratio, time interest earned, earnings per share, and the financial leverage index under each alternative, assuming the expected increase in operating profit is realized.
b. Discuss the factors the board should consider in making a decision.
Click here for the solution: Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors
6.6. Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors regarding a planned plant expansion that will cost $10 million. At issue is whether the expansion should be financed with debt (a long-term note at First National Bank of Uvalde with an interest rate of 15%) or through the issuance of common stock (200,000 shares at $50 per share).
Uvalde Manufacturing currently has a capital structure of:
Debt (12% interest) 40,000,000
Equity 50,000,000
The firm's most recent income statement is presented next:
Sales $100,000,000
Cost of goods sold 65,000,000
Gross profit 35,000,000
Operating expenses 20,000,000
Operating profit 15,000,000
Interest expense 4,800,000
Earnings before tax 10,200,000
Income tax expense (40%) 4,080,000
Net income $ 6,120,000
Earnings per share (800,000 shares) $ 7.65
Laurel Street is aware that financing the expansion with debt will increase risk but could also benefit shareholders through financial leverage. Estimates are that the plant expansion will increase operating profit by 20%.The tax rate is expected to stay at 40%. Assume a 100% dividend payout ratio.
Required
a. Calculate the debt ratio, time interest earned, earnings per share, and the financial leverage index under each alternative, assuming the expected increase in operating profit is realized.
b. Discuss the factors the board should consider in making a decision.
Click here for the solution: Laurel Street, president of Uvalde Manufacturing Inc. is preparing a proposal to present to her board of directors
Sunday, September 20, 2015
The board of trustees of a local church is concerned about the internal accounting controls pertaining
The board of trustees of a local church is concerned about the internal
accounting controls pertaining to the offering collections made at
weekly services. They ask you to serve on a three-person audit team with
the internal auditor of the university and a CPA who has just joined
the church. At a meeting of the audit team and the board of trustees you
learn the following.
1. The church’s board of trustees has delegated responsibility for the financial management and audit of the financial records to the finance committee. This group prepares the annual budget and approves major disbursements but is not involved in collections or recordkeeping. No audit has been made in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years. The church does not carry any fidelity insurance.
2. The collection at the weekly service is taken by a team of ushers who volunteer to serve for 1 month. The ushers take the collection plates to a basement office at the rear of the church. They hand their plates to the head usher and return to the church service. After all plates have been turned in, the head usher counts the cash received. The head usher then places the cash in the church safe along with a notation of the amount counted. The head usher volunteers to serve for 3 months.
3. The next morning the financial secretary opens the safe and recounts the collection. The secretary withholds $150 – $200 in cash, depending on the cash expenditures expected for the week, and deposits the remainder of the collections in the bank. To facilitate the deposit, church members who contribute by check are asked to make their checks payable to “Cash.”
4. Each month the financial secretary reconciles the bank statement and submits a copy of the reconciliation to the board of trustees. The reconciliations have rarely contained any bank errors and have never shown any errors per books.
Instructions
(a) Indicate the weaknesses in internal accounting control in the handling of collections.
(b) List the improvements in internal control procedures that you plan to make at the next meeting of the audit team for (1) the ushers, (2) the head usher, (3) the financial secretary, and (4) the finance committee.
(c) What church policies should be changed to improve internal control?
Click here for the solution: The board of trustees of a local church is concerned about the internal accounting controls pertaining
1. The church’s board of trustees has delegated responsibility for the financial management and audit of the financial records to the finance committee. This group prepares the annual budget and approves major disbursements but is not involved in collections or recordkeeping. No audit has been made in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years. The church does not carry any fidelity insurance.
2. The collection at the weekly service is taken by a team of ushers who volunteer to serve for 1 month. The ushers take the collection plates to a basement office at the rear of the church. They hand their plates to the head usher and return to the church service. After all plates have been turned in, the head usher counts the cash received. The head usher then places the cash in the church safe along with a notation of the amount counted. The head usher volunteers to serve for 3 months.
3. The next morning the financial secretary opens the safe and recounts the collection. The secretary withholds $150 – $200 in cash, depending on the cash expenditures expected for the week, and deposits the remainder of the collections in the bank. To facilitate the deposit, church members who contribute by check are asked to make their checks payable to “Cash.”
4. Each month the financial secretary reconciles the bank statement and submits a copy of the reconciliation to the board of trustees. The reconciliations have rarely contained any bank errors and have never shown any errors per books.
Instructions
(a) Indicate the weaknesses in internal accounting control in the handling of collections.
(b) List the improvements in internal control procedures that you plan to make at the next meeting of the audit team for (1) the ushers, (2) the head usher, (3) the financial secretary, and (4) the finance committee.
(c) What church policies should be changed to improve internal control?
Click here for the solution: The board of trustees of a local church is concerned about the internal accounting controls pertaining
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