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ASMS 3510 W 2010 mid-term 1 solutions.doc

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Administrative Studies
Course Code
ADMS 3510
Yong Troy

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SOLUTIONS YORK UNIVERSITY Atkinson School of Administrative Studies ADMS3510 3.0 Mid Term Exam 1, Winter 2010 th Sunday February 7 – 10:00 am – 12 noon (2 hours) Instructions • This is a closed book examination and no collaboration is allowed. • There are 4 equally weighted questions: attempt them all. • Put your name, student number and section at the top of the page. • Answer each question on the examination paper, (and on the back of a page if necessary). • You may write with a pencil or pen. • Two hours are allowed to complete the exam. • If you leave early, please respect your fellow students by leaving quietly. • Place photo identification on your desk during the examination to facilitate verification. Good luck. Question 1: Shela Corp. sells a product for $18 per unit. The product has the following costs: Direct material: $ 1 Direct labour: 2 Overhead (80% fixed): 7 Total: $10 Shela has received a special order for 1,000 units. The order would require Shela to pay an additional cost of $1 per unit for special packaging. Required: a. If Shela sells all current production domestically and has no spare capacity, what would be the minimum sales price that the company would consider for this special order? (10 marks) If all current production is sold domestically and there is no spare capacity then any special order sale would eliminate a domestic sale: in addition they would have to incur the special packaging costs: Required price: $18 + $1 = $19 Or: DM: $ 1 DL: 2 Variable Overhead: 1.40 4.40 Normal contribution margin: ($18-$5.40): $13.60 Special packaging: 1.00 Total: $19.00 b. Assume that Shela has sufficient idle capacity to produce the 1,000 units. If Shela wants to increase its operating profit by $6,600, what would it charge as a per-unit selling price? (10 marks) Variable cost: Direct material: $ 1.00 Direct labour: 2.00 Overhead (80% fixed): 20% * $7: 1.40 Special packaging: 1.00 $ 5.40 Required profit: $6,600/1,000: $ 6.60 Target selling price: $12.00 c: What are the qualitative arguments against offering a “special” price for this order? (5 marks) i) one-time special orders are only valid where the situation is a “one-off” and the market is separated from the regular market. “One-off”s tend to become repeat orders, and markets are seldom so rigidly separated that they cannot influence the regular market. A special order price is a short- term decision, while most pricing decisions have a longer time horizon. Question 2: Josh Newman Company annually uses 12,800 units of Part KL4. Annual carrying cost per unit is $3 and ordering cost for each order is $9. The firm uses an order quantity of 800 units. The company has no safety stock. Required: a) How much could the company save in combined ordering and carrying costs annually if it correctly calculated and used EOQ? (round off the EOQ to the nearest whole number). (15 marks) EOQ = √{(2 x 12,800 units x $9) / $3} = 277 Costs using 800 unit order quantity: Average inventory (800 units/2) x Carrying cost ($3) = $1,200 Number of orders (12,800 units/800 units) x Ordering cost ($9) 16 orders x $9 = $ 144 Total cost: $1,344 Costs using the EOQ (277 units) quantity: Average inventory (277 units /2) x Carrying cost ($3) = $ 415.5 Number of orders (12,800 units/277 units) x Ordering cost ($9) 46.2 * $9 = $ 415.88 Total cost: $ 831.35 EOQ Savings ($1,344 - $831.35): $ 512.65 b) In making decisions about safety stock which is more important: variability of lead time or variability of demand? (5 marks) Either could be the more important: whichever has the higher level of variability. c) List three advantages of using a Just-In-Time inventory system. (5 marks) i) reduced cost of carrying inventory (because it’s not there); ii) reduced cost of ordering inventory (through routinized/automated ordering); iii) increased focus on product quality; iv) the likelihood that long-term contracts lead to the reduction or elimination of material price variances etc. Question 3: Dorethene Co. has a just-in-time inventory system and uses backflush accounting. Standard production cost for one unit of product is $12 for raw material and $23 for conversion. Required: a. Prepare the journal entries for the following transactions during August 2009, with narratives: i) Purchased $45,000 of raw material at the standard cost. ii) Incurred $85,000 of conversion costs. iii) Completed 3,745 units of production. iv) Sold 3,738 units on account for $68 each. (15 marks) Debit Credit Raw materials & wip inventory: $ 45,000 Accounts payable: $ 45,000 Purchase of inventory: August 2009 Conversion cost control: $ 85,000 Accounts payable, payroll etc: $ 85,000 Incurred conversion costs in August 2009 Finished goods inventory: $131,075 Raw materials & wip inventory: $ 44,940 Conversion cost control:
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