ACCT 505 WEEK 6 QUIZ-2

ACCT 505 WEEK 6 QUIZ-2 Grade Details - All Questions 1. Question : (TCO D) A company that has a profit can increase its return on investment by Student Answer: increasing sales revenue and operating expenses by the same dollar amount. increasing average operating assets and operating expenses by the same dollar amount. increasing sales revenue and operating expenses by the same percentage. decreasing average operating assets and sales by the same percentage. Instructor Explanation: Chapter 12 Points Received: 5 of 5 Comments: 2. Question : (TCO D) Given the following data, what would ROI be? Sales $50,000 Net operating income $5,000 Contribution margin $20,000 Average operating assets $25,000 Stockholder's equity $15,000 Student Answer: 10% 20% 16.7% 80% Instructor Explanation: See Chapter 12. ROI = Net operating income / Average operating assets = $5,000 / $25,000 = 20.0% Points Received: 5 of 5 Comments: 3. Question : (TCO D) Given the following data: What is the return on investment (ROI)? Sales $150.000 Net operating income $15,000 Contribution margin $30,000 Average operating assets $50,000 Stockholder's equity $100,000 Student Answer: 10% 15% 60% 30% Instructor Explanation: ROI = Net operating income / Average operating assets = $15,000 / $50,000 = 30.0% Points Received: 5 of 5 Comments: 1. Question : (TCO D) Financial data for Beaker Company for last year appear below. Beaker Company Statement of Financial Position BeginningEnding Balance Balance Assets Cash $50,000 $70,000 Accounts receivable 20,000 25,000 Inventory 30,000 35,000 Plant and Equipment (net) 120,000 110,000 Investment in Cedar Company 80,000 100,000 Land (undeveloped) 170,000 170,000 Total Assets $470,000 510,000 Liabilities and Owners' Equity Accounts payable $70,000 $90,000 Long-term debt 250,000 250,000Owner's equity 150,000 170,000 Total liabilities and owner's equity $470,000 $510,000 Beaker Company Income Statement Sales $414,000 Less Operating Expenses 351,900 Net Operating Income 62,100 Less Interest and Taxes Interest Expense $30,000 Tax Expense 10,000 40,000 Net Income $22,000 The company paid dividends of $2,100 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company. Required: i. Compute the company's margin, turnover, and return on investment for last year. ii. The board of directors of Beaker Company has set a minimum required return of 20%. What was the company's residual income last year? Student Answer: Average operating assets = ($220,000+$240,000)/2 = $230,000 Margin = $62,100/$414,000 = 15% Turnover = $414,000/$230,000 = 1.8 ROI = 15%*1.8 = 27% Residual income last year: $62,100-$46,000 = $16,100 Instructor Explanation: Operating assets do not include investments in other companies or in undeveloped land. Average operating assets = ($220,000 + $240,000) / 2 = $230,000 Margin = Net operating income / Sales = $62,100 / $414,000 = 15% Turnover = Sales / Average operating assets = $414,000 / $230,000 = 1.8 ROI = Margin x Turnover = 15% x 1.8 = 27% Points Received: 15 of 15 Comments: 2. Question : (TCO D) Eber Wares is a division of a major corporation. The following data are for the latest year of operations. Sales $30,000,000 Net Operating income $1,170,000 Average operating assets $8,000,000 The company's minimum required rate of return 18% Required: i. What is the division's margin? ii. What is the division's turnover? iii. What is the division's ROI? iv. What is the division's residual income? Student Answer: i. Division's Margin: $1,170,000/$30,000,000 = 3.9% ii. Division's Turnover: $30,000,000/$8,000,000 = 3.75% iii. Division's ROI: $1,170,000/$8,000,000 = 14.6% iv. Division's Residual Income: $1,170,000 - 18%*$8,000,000 = ($270,000) Instructor Explanation: i. Margin = Net operating income / Sales = $1,170,000 / $30,000,000 = 3.9% ii. Turnover = Sales / Average operating assets = $30,000,000 / $8,000,000 = 3.8 iii. ROI = Net operating income / Average operating assets = $1,170,000 / $8,000,000 = 14.6% iv. Residual income = Net operating income - Minimum required rate of return x Average operating assets = $1,170,000 - 18% x $8,000,000 = -$270,000 Points Received: 15 of 15 Comments: 3. Question : (TCO D) The management of Drummer Corporation is considering dropping product D84L. Data from the company's accounting system appear below. Sales $800,000 Variable Expenses $440,000 Fixed Manufacturing Expenses $248,000 Fixed Selling and Administrative Expenses $184,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $201,000 of the fixed manufacturing expenses and $156,000 of the fixed selling and administrative expenses are avoidable if product D84L is discontinued. Required: What would be the effect on the company's overall net operating income if product D84L were dropped? Should the product be dropped? Show your work! Student Answer: Sales $800,000 Less: Variable Expenses $440,000 Less: Fixed Manufacturing Expenses $248,000 Less: Fixed Selling & Administration Expenses $184,000 Net Operating Income ($72,000) Sales $0 Less: Variable Expenses $0 Less: Fixed Manufacturing Expenses $47,000 Less: Fixed Selling & Administration Expenses $28,000 Net Operating Income ($75,000) Net operating income would go down by $3,000 if the product were dropped. It should not be dropped. Instructor Explanation: Net operating income would decline by $3,000 if product D84L were dropped. Therefore, the product should not be dropped. Points Received: 15 of 15 Comments: 4. Question : (TCO D) Part F77 is used in one of Wilcutt Corporation's products. The company's Accounting Department reports the following costs of producing the 7,000 units of the part that are needed every year. Per Unit Direct Materials $7.00 Direct Labor $6.00 Variable Overhead $5.60 Supervisor's Salary $4.70 Depreciation of Special Equipment $1.50 Allocated General Overhead $5.40 An outside supplier has offered to make the part and sell it to the company for $28.30 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only $9,000 of these allocated general overhead costs would be avoided. Required: i. Prepare a report that shows the effect on the company's total net operating income of buying part F77 from the supplier rather than continuing to make it inside the company. ii. Which alternative should the company choose? Student Answer: Make Buy Direct Materials 49,000 Direct Labor 42,000 Variable Overhead 39,200 Supervisor's Salary 32,900 Allocated General Overhead 37,800 28,800 Cost to purchase the part 198,100 Total Costs $200,900 $226,900 The company should choose to make the parts. Instructor Explanation: i. ii. The total cost of the make alternative is lower by $26,000. Thus, net operating income would decline by $26,000 if the offer from the supplier were accepted. Therefore, the company should continue to make the part itself. Points Received: 13 of 15 Comments: 5. Question : (TCO D) A customer has asked Clougherty Corporation to supply 4,000 units of product M97, with some modifications, for $40.10 each. The normal selling price of this product is $48.00 each. The normal unit product cost of product M97 is computed as follows. Direct Materials $18.50 Direct Labor $1.20 Variable manufacturing overhead $8.40 Fixed manufacturing overhead $3.90 Unit product cost $32.00 Direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like some modifications made to product M97 that would increase the variable costs by $5.70 per unit and that would require a one-time investment of $31,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. Required: Determine the effect on the company's total net operating income of accepting the special order. Show your work! Student Answer: Incremental Revenue (4,000 units * $40.10 per unit) = $160,400 Direct Materials (4,000 units * $18.50 per unit) = $74,000 Direct Labor (4,000 units * $1.20 per unit) = $4,800 Variable manufacturing overhead (4,000 units * $8.40 per unit) = $33,600 Modifications made (4,000 units * $5.70 per unit) = $22,800 Special molds = $31,000 TOTAL incremental costs = $166,200 Incremental net operating income = ($5,800) Instructor Explanation: . Points Received: 15 of 15 Comments