Q
1
. Why do corporations use variance analysis? Explain how managers compute material variance and labor variance.
Q
2
. Assume that you are preparing a Master Budget for a reputed corporation. Bring out numerical examples on the complete master budget of the corporation.
Answers:
Q
3
. XYZ Company is considering purchasing new equipment costing SAR 250,000. The company’s management has estimated that the equipment will generate cash flows as follows (SAR):
Year
Net Cash Flow
PV @10%
1
90,000
0.9091
2
75,000
0.826
4
3
85,000
0.7513
475,000
0.6830
The company’s required rate of return is 10%. Calculate the net present value and give reasons on whether the project should be accepted or rejected.
Answer:
Q4a. Assume a company manufactures cars and currently uses only 50% of its manufacturing facility 20,000 cars). The company could utilize more of its facility by producing its own tires. It currently purchases tires at SAR 30 per set of four. If the company would incur SAR12 per set for direct materials, SAR10 for direct labor, and SAR 6 for overhead (variable) to produce the tires.
Required: Compute why the company should, make or buy the tires, in any scenario give your decision why?
Answer:
Q4b. The cost to produce one unit of the product is:
Material SAR 13.00
Labor 8.00
Variable cost 7.00
Fixed expenses 18.00
Total fixed expenses: $ 500,000
The company has received a special order for 20,000 units for a price of SAR 36 per unit from a foreign customer.
Required: Advice the manufacturer on whether the order should be accepted.
Answer:
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