AFM482 Lecture Notes - Lecture 6: Variable Cost, Transfer Pricing, Cud

369 views4 pages

fuchsiaalligator904

25 Oct 2014

School

University of Waterloo

Department

Accounting & Financial Management

Course

AFM482

Professor

...

For unlimited access to Class Notes, a Class+ subscription is required.

Document Summary

1)using the data in the transaction , compute the profitability of this one transaction to the new, used, parts and service departments. Assume a sales commission of for the trade in on a selling price of . 2)how should the transfer pricing system operate for each department? (market price, full retail. The transfer pricing system should be operated at full retail . This cud hurt the dealership by making its deals less attractive for new car customers. If the used car is sold at auction for ,000 after the trade-in value was set at ,800, the company should note a loss of ,800. However, if the new car salesman only gives ,500 of value to the new customer based on the blue book value, then the loss reflected on the income statement and balance sheet should only be .

Related Questions

BOR CPAs, Inc. is a closely held corporation owned by threestockholders who used the initials of their last names to form thecorporationâs name: Cyrus Bailey, John Ogden, and Samuel Rogers.The firmâs Certified Public Accountants (CPAs) perform audits ofboth public companies and privately owned companies. BORâs CPAsalso provide tax services to both individuals and businesses.

The corporation is divided into two profit centers: the AuditDivision and the Tax Division. Each division is composed of twocost centers. The Audit Division is composed of two cost-centerdepartments: Public Company Audits and Private Company Audits. TheTax Division is composed of two cost-center departments also:Individual Tax and Business Tax.

BOR, a decentralized organization, is interested in evaluatingthe performance of the two divisions. The stockholders areresponsible for deciding on investment in the two divisions. CyrusBailey is in charge of the performance evaluation, and turns to youfor assistance. Mr. Bailey is only interested in evaluatingoperations at the profit center (division) level, and not at thecost center (department) level.

Mr. Bailey is considering temporarily using some of the stafffrom the Tax Division to assist the Audit Division during theupcoming busy audit season, and would like to evaluate the effectof this on net income. The Tax Division is estimated to have 800hours of excess capacity.

The unit for determining sales revenue in both divisions is the"engagement", which means the total agreed-upon work for a givenclient in either audit or tax for a given year. The company chargeson average a fee of $75,000 per audit engagement, and $15,750 pertax engagement.

The company has its own Payroll Office, which provides payrollservices to both divisions and will allocate its total expenses tothe two divisions as service department charges.

The following chart shows some basic data for the company:

Hourly market rate for staff (theprice the company would have to pay from an outside contractor forstaff services)	$110.00
Average hourly cost rate for staff(the average price the company pays to its staff)	$50.00
Number of paychecks issued by AuditDivision	110
Number of paychecks issued by TaxDivision	340
Total expense for PayrollOffice	$29,250
Amount of assets invested in AuditDivision by BOR CPAs, Inc.	$10,000,000
Amount of assets invested in TaxDivision by BOR CPAs, Inc.	$4,000,000

Given that Mr. Bailey is evaluating BOR CPAs, Inc., which is aninvestment center, what transfer pricing option(s) would he mostprefer that the divisions use? Check all that apply.

No transfer between divisions

Market transfer price of $110.00 per hour

Variable standard cost transfer price of $50.00 per hour

Negotiated transfer price of $80.00 per hour

2. Which transfer pricing option(s) would the manager of theAudit Division prefer? Check all that apply.

Variable standard cost transfer price of $50.00 per hour

Market transfer price of $110.00 per hour

No transfer between divisions

Negotiated transfer price of $80.00 per hour

3. Which transfer pricing option(s) would the manager of the TaxDivision prefer? Check all that apply.

Market transfer price of $110.00 per hour

Negotiated transfer price of $80.00 per hour

No transfer between divisions

Variable standard cost transfer price of $50.00 per hour

4. Given the preferences of the managers of the Audit and TaxDivisions, and also considering the preferences of BOR CPAs, Inc.,what might be the decision that provides the best outcome for alllevels and entities within the company?

The company should use the market transfer price, since itâsimportant for the divisions to operate under real marketconditions.

If the divisional managers cannot come to an agreement, itâsbest to forgo any transfers between divisions in order to reduceconflict within the company.

Use the negotiated transfer price, so that each entity is betteroff than it would be without any transfers between divisions.

The company should use the variable standard cost transferprice, because it would be unfair for the Tax Division to make aprofit in dealing with the Audit Division, since theyâre in thesame company.

Please answer all questions (2-19). Thank you!

Business Description

You will assume the role of an entrepreneur to start a smallcompany. Your company will rent a retail cart inside the Mall ofAmerica to imprint T-shirts with exclusive original designs by afamous artist who has agreed to design these T-shirt pictures foryou each year at a special discount. Your target customers areaffluent teenagers and young adults. Your business is scheduled tolaunch on January 1, 2017.

Cost information:

1 Mall of America charges you $2,750 rent per month, which includesutilities, cleaning, and maintenance.

2 You will order white, cotton T-shirts from a T-shirt wholesaler.Each T-shirt costs $2.00 to purchase (cost includes taxes,shipping, and handling).

3 You agreed to pay the artist a $3,000 annual contract fee fortwelve T-shirt designs. This same term is renewable for the next 3years. Each T-shirt picture will only be used for one year.Therefore, in the second year, 12 new pictures will be designed foranother $3,000 annual contract fee.

4 Equipment that will be required to be acquired at the start ofbusiness includes a computer, printer, and direct to garmentprinter. Total cost will be $25,000. The equipment is expected tolast 5 years without salvage value. Straight-line method ofdepreciation should be used.

5 Production cost per shirt is $5.20 (ink, etc.)

6 Bags for shirts cost $0.10 each.

7 Students are hired as part-time workers. On average it takes onelabor hour to print 10 shirts. Each worker is paid $10 perhour.

8 Sales personnel are required 80 hours per week and are paid $10 perhour.

9 Business insurance is purchased at a cost of $2,000 per year.

10 Advertising costs are expected to be $12,000 per year.

Requirements:

2 What and how much are the variable costs? Present each item in costper T-shirt basis (5 points).

3 What and how much are the fixed costs? Present each item in totalcost per year (5 points).

4 Write out the annual cost formula in Y = a + bX format (5points).

5 Calculate the total amount of cash that will be needed at the startof the business in order to buy all necessary equipment andmachines, purchase sufficient materials and supplies for 1,000shirts, and cover the first three months of fixed expenses. Thisamount will be your initial investment in the business. Note thatthe equipment will be paid in full on the first day of business aswell as the first annual payment to the artist. Other expenses willbe paid on a monthly basis (10 points).

6 Develop a price using a target price (what are similar T-shirtsselling for) (5 points).

7 Develop a price using cost-based pricing and what you would like tosee as a return on your business (i.e. 10%, 15%, 25%) (5points).

8 Calculate contribution margin per T-shirt and contribution marginratio based on the price you decided upon (either the price fromitem 6 or 7 above) (5 points).

9 Based on the price you decided upon, calculate how many T-shirtsneed to be sold in order to break-even. Calculate how much sales indollars are needed to break-even (10 points).

10 Prepare a cost/volume/profit chart (10 points).

11 Based on the estimated sales level of 12,000 T-shirts for the firstyear, prepare the companyâs forecasted functional income statementfor the year ended on 12/31/2017 (10 points).

12 If sales could increase by 10% (to 13,200 T-shirts), by how much indollars would net operating income increase? By what percentagewould net operating income increase? (5 points)

13 Prepare a contribution format income statement assuming a salesincrease of 10%. Compare your new net operating income with youranswer in 11 (10 points).

14 Calculate how many T-shirts need to be sold in order to make a$25,000 target profit for the year (5 points).

15 Based on the assumption that the number of shirts calculated initem 14 are made and sold during the first year of business,calculate the margin of safety and the operating leverage for thebusiness. What do these figures tell you about how risky thebusiness is? (10 points)

16 Prepare a cash budget for the companyâs first year of operationsbased on the sales calculated in item 14. Assume all sales are cashsales and that all costs and expenses are paid in cash. The initialcash balance is the amount calculated in #5. You decide to maintaina minimum cash balance of $10,000 at December 31, 2017 (15points).

17 Calculate the first yearâs estimated return on equity based on thesales calculated in item 14 (note that beginning equity will equalthe initial investment in the business calculated in #5). (5points).

18 After reviewing the budgeted income statement and the estimatedreturn on equity for the first year of operations, considerbusiness strategies that will help to improve profitability.Describe your strategies clearly and justify why you believe thestrategies will work. Provide the variable cost per T-shirt, totalfixed cost, selling price per T-shirt, and contribution margin perT-shirt under your new strategies. Provide the new cost formula.What is the new break even? (15 points).

19 After your thorough analyses of costs, sales, and profitability ofyour T-shirt business throughout this project, what is your overallimpression of the future potential of the business? Provide a shortassessment (10 points).

jadewombat71

Business Description

Cost information:

Mall of America charges you $2,750 rent per month, whichincludes utilities, cleaning, and maintenance.

You will order white, cotton T-shirts from a T-shirt wholesaler.Each T-shirt costs $2.00 to purchase (cost includes taxes,shipping, and handling).

You agreed to pay the artist a $3,000 annual contract fee fortwelve T-shirt designs. This same term is renewable for the next 3years. Each T-shirt picture will only be used for one year.Therefore, in the second year, 12 new pictures will be designed foranother $3,000 annual contract fee.

Equipment that will be required to be acquired at the start ofbusiness includes a computer, printer, and direct to garmentprinter. Total cost will be $25,000. The equipment is expected tolast 5 years without salvage value. Straight-line method ofdepreciation should be used.

Production cost per shirt is $5.20 (ink, etc.)

Bags for shirts cost $0.10 each.

Students are hired as part-time workers. On average it takes onelabor hour to print 10 shirts. Each worker is paid $10 perhour.

Sales personnel are required 80 hours per week and are paid $10per hour.

Business insurance is purchased at a cost of $2,000 peryear.

Advertising costs are expected to be $12,000 per year.

Requirements:

1. Name your company (5 points)

2. What and how much are the variable costs? Present each itemin cost per T-shirt basis (5 points).

3. What and how much are the fixed costs? Present each item intotal cost per year (5 points).

4. Write out the annual cost formula in Y = a + bX format (5points).

5. Calculate the total amount of cash that will be needed at thestart of the business in order to buy all necessary equipment andmachines, purchase sufficient materials and supplies for 1,000shirts, and cover the first three months of fixed expenses. Thisamount will be your initial investment in the business. Note thatthe equipment will be paid in full on the first day of business aswell as the first annual payment to the artist. Other expenses willbe paid on a monthly basis (10 points).

6. Develop a price using a target price (what are similarT-shirts selling for) (5 points).

7. Develop a price using cost-based pricing and what you wouldlike to see as a return on your business (i.e. 10%, 15%, 25%) (5points).

8. Calculate contribution margin per T-shirt and contributionmargin ratio based on the price you decided upon (either the pricefrom item 6 or 7 above) (5 points).

9. Based on the price you decided upon, calculate how manyT-shirts need to be sold in order to break-even. Calculate how muchsales in dollars are needed to break-even (10 points).

10. Prepare a cost/volume/profit chart (10 points).

11. Based on the estimated sales level of 12,000 T-shirts forthe first year, prepare the companyâs forecasted functional incomestatement for the year ended on 12/31/2017 (10 points).

12. If sales could increase by 10% (to 13,200 T-shirts), by howmuch in dollars would net operating income increase? By whatpercentage would net operating income increase? (5 points)

13. Prepare a contribution format income statement assuming asales increase of 10%. Compare your new net operating income withyour answer in 11 (10 points).

14. Calculate how many T-shirts need to be sold in order to makea $25,000 target profit for the year (5 points).

15. Based on the assumption that the number of shirts calculatedin item 14 are made and sold during the first year of business,calculate the margin of safety and the operating leverage for thebusiness. What do these figures tell you about how risky thebusiness is? (10 points)

16. Prepare a cash budget for the companyâs first year ofoperations based on the sales calculated in item 14. Assume allsales are cash sales and that all costs and expenses are paid incash. The initial cash balance is the amount calculated in #5. Youdecide to maintain a minimum cash balance of $10,000 at December31, 2017 (15 points).

17. Calculate the first yearâs estimated return on equity basedon the sales calculated in item 14 (note that beginning equity willequal the initial investment in the business calculated in #5). (5points).

18. After reviewing the budgeted income statement and theestimated return on equity for the first year of operations,consider business strategies that will help to improveprofitability. Describe your strategies clearly and justify why youbelieve the strategies will work. Provide the variable cost perT-shirt, total fixed cost, selling price per T-shirt, andcontribution margin per T-shirt under your new strategies. Providethe new cost formula. What is the new break even? (15 points).

19. After your thorough analyses of costs, sales, andprofitability of your T-shirt business throughout this project,what is your overall impression of the future potential of thebusiness? Provide a short assessment (10 points).

*** 1-5 completed below***

Variable Costs:

Purchase cost per T-shirt

Total variable cost perT-shirt

$8.30