Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff

Comprehensive Master Budget
Accounting 2302

Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff. It was November of 20x0, and the group was discussing preparation of the firm’s master budget for 20x1. “I’ve decided to go ahead and purchase the industrial robot we’ve been talking about. We’ll make the acquisition on January 2 of next year, and I expect it will take most of the year to train the personnel and reorganize the production process to take full advantage of the new equipment.”

AND SO ON

Prepare Frame-It Company’s master budget for 20x1 by completing the following schedules and statements.

1. Sales budget:
2. Cash receipts budget:
3. Production budget:
4. Direct-material budget
5. Cash disbursements budget:
6. Summary cash budget:
7. Prepare a budgeted schedule of cost of goods manufactured and sold for the year 20x1. Note: Budgeted and actual MOH will be equal.
8. Prepare Frame-It’s budgeted income statement for 20x1. (Ignore income taxes.)
9. Prepare Frame-It’s budgeted statement of retained earnings for 20x1.
10. Prepare Frame-It’s budgeted balance sheet as of December 31, 20x1.

Click here for the solution: Jeffrey Vaughn, president of Frame-It Company, was just concluding a budget meeting with his senior staff

Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott

E16-30 (Stock-Appreciation Rights) Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2008, on 40,000 SARs. The date of grant is December 31, 2008, and the required employment (service) period is 4 years. President Scott exercises all of the SARs in 2014. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2009; $9 on December 31, 2010; $15 on December 31, 2011; $8 on December 31, 2012; and $18 on December 31, 2013.

(a) Prepare a 5-year (2009–2013) schedule of compensation expense pertaining to the 40,000 SARs granted to President Scott.
(b) Prepare the journal entry for compensation expense in 2009, 2012, and 2013 relative to the 40,000 SARs.

Click here for the solution: Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott

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

The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers

PR 24-5B The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers. Invested assets and condensed income statement data for the past year for each division are as follows:

Network Equipment Division Personal Computing Division
Sales $1,400,000 $1,120,000
Cost of goods sold 845,000 690,000
Operating expenses 345,000 206,000
Invested assets 1,000,000 1,400,000

1. Prepare condensed divisional income statements for the year ended December 31, 2010, assuming that there were no service department charges. Enter all amounts as positive numbers.

2. Using the DuPont formula for rate of return on investment, determine the profit margin, investment turnover, and rate of return on investment for each division. Round investment turnover to one decimal place. Do not enter in the percent sign.

3. If management's minimum acceptable rate of return is 14%, determine the residual income for each division. If required, use the minus sign to indicate a negative.

4. Discuss the evaluation of the two divisions, using the performance measures determined in parts (1), (2), and (3). The input in the box below will not be graded, but may be reviewed and considered by your instructor.

Check: 2. Network Equipment Division ROI, 21%

Click here for the solution: The vice president of operations of Six Layer Computers Inc. is evaluating the performance of two divisions organized as investment centers

David Upton is president of Upton Manufacturing, a producer of Go-Kart tires

Problems 1.9 David Upton is president of Upton Manufacturing, a producer of Go-Kart tires. Upton makes 1,000 tires per day with the following resources:

Labor: 400 hours per day @ $12.50 per hour
Raw material: 20,000 pounds per day @ $1 per pound
Energy: $5,000 per day
Capital: $10,000 per day

a) What is the labor productivity per labor-hour for these tires at Upton Manufacturing?
b) What is the multifactor productivity for these tires at Upton Manufacturing?
c) What is the percent change in multifactor productivity if Upton can reduce the energy bill by $1,000 per day without cutting production or changing any other inputs?


Click here for the solution: David Upton is president of Upton Manufacturing, a producer of Go-Kart tires

Bill Fennema, president of Fennema Construction, has developed the tasks, durations, and predecessor relationships

Problem 3.17 Bill Fennema, president of Fennema Construction, has developed the tasks, durations, and predecessor relationships in the following table for building new motels. Draw the AON network and answer the questions that follow.

Activity Immediate Predecessor Optimistic Most Likely Pessimistic
A - 4 8 10
B A 2 8 24
C A 8 12 16
D A 4 6 10
E B 1 2 3
F E,C 6 8 20
G E,C 2 3 4
H F 2 2 2
I F 6 6 6
J D,G,H 4 6 12
K I,J 2 2 3

a) What is the expected (estimated) time for activity C?
c) Based on the calculation of estimated times, what is the critical path?
d) What is the estimated time of the critical path?


Click here for the solution: Bill Fennema, president of Fennema Construction, has developed the tasks, durations, and predecessor relationships

The president wanted to know the break-even point for each of the company's products

The president wanted to know the break-even point for each of the company's products. Piedmont Fasteners Corporation makes three different clothing fasteners in its manufacturing facility in North Carolina. Data concerning these products appear below:

VELCRO METAL NYLON
Normal annual sales volume 100,000 200,000 400,000
Unit selling price 1.65 1.50 0.80
Variable cost per unit 1.25 0.70 0.25
*Total fixed expenses are $400,000 per year.

All three products are sold in highly competitive markets, so the company is unable to raise its prices without losing unacceptable numbers of customers. The company has an extremely effective lean production system, so there are no beginning or ending work in process or finished goods inventories.

Required:
1. What is the company’s over-all break-even point in total sales dollars?
2. Of the total fixed costs of $400,000, $20,000 could be avoided if the Velcro product were dropped, $80,000 if the Metal product were dropped, and $60,000 if the Nylon product were dropped. The remaining fixed costs of $240,000 consist of common fixed costs such as administrative salaries and rent on the factory building that could be avoided only by going out of business entirely.
a. What is the break-even point in units for each product?
b. If the company sells exactly the break-even quantity of each product, what will be the overall profit of the company? Explain this result.


Click here for the solution: The president wanted to know the break-even point for each of the company's products

You are the president and chief executive officer of a family owned manufacturing firm with assets of $45 million

You are the president and chief executive officer of a family owned manufacturing firm with assets of $45 million. The company articles of incorporation and state law place no restrictions on the sale stock to outsiders. An unexpected opportunity to expand arises that will require an additional investment of $ 14 million. A commitment must be made quickly if this opportunity is to be taken. Existing stockholders are not in a position to provide the additional investment. You wish to maintain family control of the firm regardless of which form of financing you might undertake. As a first step, you decide to contact an investment banking firm.

a) What considerations might be important in the selection of an investment banking firm?
b) A member of your board has asked if you have considered competitive bids for the distribution of your securities compared to a negotiated contract with a particular firm. What factors are involved in this decision?
c) Assuming that you have decided upon a negotiated contract, what are the first questions that you would ask of the firm chosen to represent you?
d) As the investment banker, what would be your first actions before offering advice?
e) Assuming the investment banking firm is willing to distribute your securities, describe the alternative plans that might be included in a contract with the banking firm.
f) How does the investment banking firm establish a selling strategy?
g) How might the investment banking firm protect itself against a drop in the price of the security during the selling process?
h) What follow-up services will be provided by the banking firm following a successful distribution of the securities?
i) Three years later, as an individual investor, you decide to add your own holding of the security but only at a price that you consider appropriate. What form of order might you place with your broker?

Click here for the solution: You are the president and chief executive officer of a family owned manufacturing firm with assets of $45 million

The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90- day loan

Problem 9-21 The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90- day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used:

a. April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will be collected during May. The remainder will be uncollectible.

b. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% represents bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:

April May June
Sales (all on account) $300,000 $400,000 $250,000
Merchandise Purchases $210,000 $160,000 $130,000
Payroll $20,000 $20,000 $18,000
Lease Payments $22,000 $22,000 $22,000
Advertising $60,000 $60,000 $50,000
Equipment Purchases --- --- $65,000 (nothing in the first 2 months)
Depreciation $15,000 $15,000 $15,000


c. Merchandise purchases are paid in full during the month following purchase. Accounts payable for merchandise purchases during March, which will be paid during April, total $140,000

d. In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total $1,200.

Requirement 1:
Prepare a schedule of expected cash collections for April, May, and June, and for the three months in total. (Deficiencies should be preceded by a minus sign when appropriate. Enter all other amounts as positive values. Leave no cells blank - be certain to enter "0" wherever required. Omit the $ sign in your response.)

Requirement 2:
Prepare a cash budget, by month and in total, for the three-month period. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required. Omit the $ sign in your response.)

Requirement 3:
If the company needs a minimum cash balance of $20,000 to start each month, can the loan be repaid as planned?

Click here for the solution: The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90- day loan

Portia Carter is the president of a company that owns six multiplex movie theaters

Portia Carter is the president of a company that owns six multiplex movie theaters. Carter has delegated decision-making authority to the theater managers for all decisions except those relating to capital expenditures and film selection. The theater managers' compensation depends on the profitability of their theaters. Max Burgman, the manager of the Park Theater, had the following master budget and actual results for the month.

Master Actual
Budget Results
Tickets sold 120,000 110,000
Revenue--tickets $ 840,000 $ 880,000
Revenue--concessions 480,000 330,000
Total revenue $1,320,000 $1,210,000
Controllable variable costs
Concessions 120,000 99,000
Direct labor 420,000 330,000
Variable overhead 540,000 550,000
Contribution margin $ 240,000 $ 231,000
Controllable fixed costs
Rent 55,000 55,000
Other administrative expenses 45,000 50,000
Theater operating income $ 140,000 $ 126,000

1. Assuming that the theaters are profit centers, prepare a performance report for the Park Theater using the chart below. Include a flexible budget. Determine the variances between actual results, the flexible budget, and the master budget.

2. Evaluate Burgman's performance as a manager. 3. Assume that the managers are assigned responsibility for capital expenditures and that the theaters are thus investment centers. Park Theater is expected to generate a desired ROI of at least 6 percent on average invested assets of $2,000,000.
a. Compute the theater’s return on investment and residual income using the chart below.
b. Using the ROI and residual income, evaluate Burgman’s performance as a manager.

Click here for the solution: Portia Carter is the president of a company that owns six multiplex movie theaters

You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas

You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas. In January 2007, your firm’s Canadian subsidiary obtained a six-month loan of 100,000 Canadian dollars from a bank in Houston to finance the acquisition of a titanium mine in Quebec province. The loan will also be repaid in Canadian dollars. At the time of the loan, the spot exchange rate was U.S. $0.8180/Canadian dollar and the Canadian currency was selling at a discount in the forward market. The June 2007 contract (Face value = $100,000 per contract) was quoted at U.S. $0.8120/Canadian dollar.

a. Explain how the Houston bank could lose on this transaction assuming no hedging.
b. If the bank does hedge with the forward contract, what is the maximum amount it can lose

Click here for the solution: You are the vice-president of finance for Exploratory Resources, headquartered in Houston, Texas

(Assessing Roche Publishing Company’s Cash Management Efficiency) Lisa Pinto, vice president of finance at

Assessing Roche Publishing Company’s Cash Management Efficiency

Lisa Pinto, vice president of finance at Roche Publishing Company, a rapidly growing publisher of college texts, is concerned about the firm’s high level of short-term resource investment. She believes that the firm can improve the management of its cash and, as a result, reduce this investment. In this regard, she charged Arlene Bessenoff, the treasurer, with assessing the firm’s cash management efficiency. Arlene decided to begin her investigation by studying the firm’s operating and cash conversion cycles.

AND SO ON

Roche Publishing Company is currently spending $12,000,000 per year on its operating-cycle investment, but it expects that initiating a cash discount will increase its operating-cycle investment to $13,100,000 per year. (Note: The operating-cycle investment per dollar of inventory, receivables, and payables is assumed to be the same.) Arlene’s concern was whether the firm’s cash management was as efficient as it could be. Arlene knew that the company paid 12% annual interest for its resource investment and therefore viewed this value as the firm’s required return. For this reason, she was concerned about the resource investment cost resulting from any inefficiencies in the management of Roche’s cash conversion cycle. (Note: Assume a 365- day year.)

To Do

a. Assuming a constant rate for purchases, production, and sales throughout the year, what are Roche’s existing operating cycle (OC), cash conversion cycle (CCC), and resource investment need?

b. If Roche can optimize operations according to industry standards, what would its operating cycle (OC), cash conversion cycle (CCC), and resource investment

need be under these more efficient conditions?

c. In terms of resource investment requirements, what is the annual cost of Roche’s operational inefficiency?

d. Evaluate whether Roche’s strategy for speeding its collection of accounts receivable would be acceptable. What annual net profit or loss would result from implementation of the cash discount?

e. Use your finding in part d, along with the payables and inventory costs given, to determine the total annual cost the firm would incur to achieve the industry level of operational efficiency.

f. Judging on the basis of your findings in parts c and e, should the firm incur the annual cost to achieve the industry level of operational efficiency? Explain why or why not.

Click here for the solution: (Assessing Roche Publishing Company’s Cash Management Efficiency) Lisa Pinto, vice president of finance at

Sophia Sweeny, the president of Sweeny Enterprises, is considering two investment opportunities

Problem 16-18 Using Net Present Value and Internal Rate of Return to Evaluate Investment Opportunities

Sophia Sweeny, the president of Sweeny Enterprises, is considering two investment opportunities. Because of limited resources, she will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the machine is expected to have a useful life of four years and no salvage value. Project B supports a training program that will improve the skills of employees operating the current equipment. Initial cash expenditures for Project A are $300,000 and for Project B are $120,000. The annual expected cash inflows are $94,641 for Project A and $39,507 for Project B. Both investments are expected to provide cash flow benefits for the next four years. Sweeny Enterprise's cost of capital is 8 percent.

Required
A. Compute the net present value of each project. Which project should be adopted based on the net present value approach?
B. Compute the approximate internal rate of return of each project. Which one should be adopted based on the internal rate of return approach?
C. Compare the net present value approach with the internal rate of return approach. Which method is better in the given circumstances? Why?

Check:
a. NPV of A: $13,463.01
b. Rate of Return of B: 12%

Click here for the solution: Sophia Sweeny, the president of Sweeny Enterprises, is considering two investment opportunities