Acct 5000Chapter 21 Handout

4. For 2018, a manufacturing company created the static budget shown below based on production of

5,000 products. The company expects that production may differ by an increase or decrease of 1,000

products. Prepare a flexible budget for the possible changes in production levels.

Variable cost:

Direct labor

Direct materials

Total variable cost

Fixed cost:

Utilities

Salaries

Depreciation

Total fixed cost

Total department costs

$20,000

35,000

$55,000

$7,500

9,000

3,100

$19,600

$74,600

10. In 2018, Cards by Shannon generated the sales shown. The company expects sales to increase by 2%

for each product in the following year if the prices remain the same. Determine the budgeted revenue

for 2019.

Product A

Product B

Product C

Units Sales

2,000

5,000

1,500

Selling Price per Unit

$10

12

8

11. Cards by Shannon’s production department (information in Exercise 10) produces enough finished

goods to cover each year’s sales, plus 5% of the upcoming year’s sales. If the company followed these

production guidelines in 2018 and 2019, determine the total units to be produced in 2019. The company

expects unit sales to increase by 10% in 2020. Round answers to the nearest whole unit.

12. Products A, B, and C of Cards by Shannon (information in Exercises 10 and 11) require one direct

material, card stock, which costs the company $0.10 per sheet. The amounts used per unit are shown

below. The purchasing manager of the company prefers to have 2,000 sheets of the direct materials on

hand in ending inventory, which is followed in 2018 and 2019. Prepare the direct material purchases

budget to determine the units of direct materials to purchase and the total dollar amount to be

purchased. Round units to the nearest whole unit and dollars to the nearest cent.

Product A

Product B

Product C

Direct Materials Used

per Unit

1.5 sheets

3.0 sheets

0.5 sheet

13. The products of Cards by Shannon (information in Exercises 10–12) are produced in two

departments, Production and Finishing. Use the information shown below, which gives the direct labor

hour per unit in each department, to prepare the direct labor cost budget, assuming that employees are

paid an hourly wage of $9. Round the number of hours to one decimal place and dollars to the nearest

cent.

Product A

Product B

Product C

Production

0.50

0.75

0.40

Finishing

0.25

0.25

0.20

14. Cards by Shannon (information in Exercises 10–13) also expects to incur the following costs for 2019:

indirect factory wages, $2,500; utilities, $8,000; depreciation, $7,500; and indirect materials, $500.

Prepare a factory overhead cost budget for the company.

15. Use the information determined in Exercises 10–14 to prepare the cost of goods sold budget for

Cards by Shannon for 2019. The company expects the beginning and ending inventories shown.

Beginning Inventory

Ending Inventory

Direct materials (card stock)

$ 200

$ 200

Work in process

8,850

20,000

Finished goods

10,200

25,200

16. Cards by Shannon (information in Exercises 10–15) also plans to incur the following expenses during

2019: advertising expense, $700; sales salaries expense, $2,000; office depreciation expense, $900; and

office supplies expense, $250. Prepare the selling and administrative expenses budget for the company.

17. Prepare a budgeted income statement for Cards by Shannon using the information determined in

Exercises 10–16 for the 2019 calendar year-end. Assume the company expects to earn rental revenue of

$4,000 for the year and a 30% tax rate. Round dollars to the nearest cent

Acct 5000

Chapter 24 Handout

8. Mike’s Camping Supply is considering the purchase of new equipment for $750,000. The equipment

will allow the company to generate additional cash revenues of $180,000 each year. The company will

incur total expenses of $64,000 from the machine each year, including $7,000 related to depreciation.

Calculate the cash payback period, rounding answer to two decimal places.

10. Use the table shown below to calculate the present value of $40,000 received five years from now.

Assume a 10% interest rate.

Present Value of $1 at Compound Interest

Year

1

2

3

4

5

6

7

8

9

10

10%

0.909

0.826

0.751

0.683

0.621

0.564

0.513

0.467

0.424

0.386

12%

0.893

0.797

0.721

0.636

0.567

0.507

0.452

0.404

0.361

0.322

15%

0.870

0.756

0.658

0.572

0.497

0.432

0.376

0.327

0.284

0.247

11. Use the table shown in Exercise 10 to calculate the present value of $22,000 received 10 years from

now, assuming an interest rate of 15%.

15. Mike’s Camping Supply is considering the purchase of a new piece of equipment, which will cost

$140,000. The equipment will generate additional cash revenues of $50,000 for the first two years,

$85,000 in the third year, and $80,000 in its last year. The equipment, which the company plans to sell

at the end of the fourth year, will also have a $10,000 salvage value. Use the present value table in

Exercise 10 to determine the net present value of the investment. Should the company invest in the new

piece of equipment if it requires a 15% rate of return?

17. Bass Corporation requires a 10% rate of return for all investments. Management is considering a

project that will initially cost $75,000. The company expects to generate $12,000 of revenue in the first

year, $25,000 in the second year, and $20,000 for the last two years of the project. Use the table in

Exercise 10 to calculate the net present value of the project and determine if the company should make

the investment.

18. Calculate the present value index of Project 1 (information in Exercise 17) for Bass Corporation,

rounding answer to two decimal places. If Project 2 has a present value index of 1.15, in which project

should the company invest?

23. Using the table in Exercise 10, calculate the net present value for each project shown below at the

end of six years and determine which would be the better decision for Mike’s Camping Supply. Assume

that Project 1 can be sold for $15,000 at the end of the sixth year.

Cost

Minimum desired rate of return

Expected useful life

Yearly cash flows to be received:

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Project 1

$160,000

12%

7 years

$ 40,000

44,000

41,000

42,000

45,000

63,000

Project

Cost

$150,000

Minimum desired rate of return

12%

Expected useful life

6 years

Yearly cash flows to be received:

Year 1

$ 40,000

Year 2

42,000

Year 3

46,000

Year 4

41,000

Year 5

45,000

Year 6

47,500