MGTB03Final Exam Review Questions

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Financial Accounting
Michael Khan

MGTB03 Final Exam Review Questions Ibrahim Asafi, the general manager of the Coronado Company, is contemplating replacing the existing assembly-line equipment in the Assembly Department with automated assembly equipment. Production output and revenues will be unaffected by the replacement decision. Transactions related to the capital investment are cash transactions that would occur today. Existing Assembly New Automated Equipment Assembly Equipment Original cost $1,100,000 $1,200,000 Useful life 11 years 5 years Current age 6 years 0 years Useful life remaining 5 years 5 years Accumulated amortization $600,000 $0 Book value $500,000 Not acquired yet Current disposal price (in cash) $200,000 Not acquired yet Terminal disposal price (in cash, in 5 years) $0 $0 Average working capital needed $120,000 $70,000 Current annual Assembly Department costs are as follow: Direct materials $600,000 Direct manufacturing labour 400,000 Amortization 100,000 Maintenance and repairs 150,000 Other operating costs 50,000 Supervision (allocated as 10% of direct manufacturing labour costs) 40,000 Allocated rent (based on space used) 40,000 Allocate corporate overhead (based on direct manufacturing labour 120,000 costs) Total $1,500,000 1 Additional Information a. Coronado uses straight-line amortization calculated on the difference between the initial equipment investment and the terminal disposal price of the equipment. b. The new equipment will produce output more swiftly. Therefore, the average working capital investment, if the new equipment is purchased, will decrease. c. Of the total direct materials costs, $120,000 is waste and scrap. The new equipment is expected to reduce scrap costs to $20,000 d. The new equipment is expected to reduce direct manufacturing labour costs by $150,000 each year. e. Maintenance and repairs on the old equipment have been excessive. If the new equipment is acquired, maintenance and repair costs are expected to decrease to $100,000. f. Coronado collects all supervision costs for all manufacturing departments in the plant into one cost pool. These costs are ten allocated to departments on the basis of direct manufacturing labour costs. The Assembly Department has only one supervisor currently. The supervisor will continue in her current position if the new equipment is purchased. g. The new equipment will reduce the space required for assembly operation by 20%, reducing allocated rent by $8,000. The Coronado Company has no alternative uses for this extra space. h. Corporate overhead costs are allocated to each department at 30% of direct manufacturing labour costs of each department. Coronado estimates a required rate of return of 12% for this project. Required: 1. On the basis of the net present value method, should Asafi replace the existing assembly equipment? 2. Suppose that next year is the last year Coronado will offer the attractive bonus plan currently in place. Asafi’s bonus hinges on short-run accrual accounting income for that year. Will Asafi be inclined to replace the Assembly Department equipment? Provide quantitative support for our answer. 2 Chapter 10 The following data apply to questions 1 and 2. Zeta Company budgets on an annual basis. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 2007, through June 30, 2008. July 1, 2007 June 30, 2008 Raw material 1 40,000 10,000 Work in process 8,000 8,000 Finished goods 30,000 5,000 1 Three (3) units of raw material are needed to produce each unit of finished product. 1. If Zeta Company plans to sell 500,000 units during the 2007-2008 fiscal year, the number of units it would have to manufacture (production budget) during the year would be: a. 475,000 b. 480,000 c. 500,000 d. 505,000 2. If 450,000 finished units were to be manufactured during the 2007- 2008 fiscal year by Zeta Company, the units of raw material needed (purchase budget) would be: a. 1,320,000 b. 1,330,000 c. 1,350,000 d. 1.360,000 3 The following data apply to questions 3–4. Information pertaining to Omega Company’s sales revenue forecast is presented in the following table: February March April Cash sales $160,000 $150,000 $120,000 Credit sales 300,000 400,000 280,000 Total sales $460,000 $550,000 $400,000 Omega’s Management estimates that five percent of credit sales are not collectible. Of the credit sales that are collectible, 60 percent are collected in the month of sale and the remainder in the month following the sale. Cost of purchases of inventory each month are 70 percent of the next month's projected total sales. All purchases of inventory are on account; 25 percent are paid in the month of purchase, and the remainder is paid in the month following the purchase. 3. Omega's budgeted total cash receipts in April would be: a) $328,000. b) $431,600. c) $437,000. d) $448,000. 4. Omega’s budgeted total cash payments in March for inventory purchases would be: b) $280,000. b) $306,250. c) $358,750. d) $385,000.
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