Recent Question/Assignment

ACC5502 – Accounting and Financial Management
Assignment Two - Based on Modules 7-10
Due Date: 28 May, 2014. Weighting: 20%
Question 1 25 marks
Based on modules 7 & 8 – Budgeting and CVP
The standard costs per month to produce Red Fox Manufacturing’s product (that is one unit) are as follows:
Direct Material 3kgs @ $4 $12
Direct Labour 2 hrs @ $7 $14
Variable Indirect Costs $3 per unit $ 3
Fixed Indirect Costs $199,769 (Includes $90,000 of depreciation)
In addition, selling and administration costs, all fixed, are $300,000 per month. The beginning balances for inventories for October, and the desired ending balances, are given in the schedule below.
Beginning Balance Ending Balance
Raw Materials 20,000kgs 28,000 kgs
Work-in-process 0 0
Finished goods 17,000 units 14,000 units
The list price of the firm’s product is $49 per unit. However, customers generally pay for 60% of their purchases in the month of sale and take a 2% discount. The remaining 40% of gross sales is paid in the month following sale. The firm pays for all its own purchases and expenses on delivery of goods or services. Sales in September were $1.3 million. For October, the firm is planning on sufficient sales to earn $100,000 before taxes. The quarterly dividend of $130,000 is payable in October.
Required
Prepare a Cash Budget for October. The cash balance on October 1 is $62,000.

Question 2 (25 marks)
Based on module 8 – CVP Analysis
Part A
My Glory Productions has just finished production of Troubles Ahead, the latest action film directed by Fleur Dunne and starring Rodney Kid and Tess Bow. The total production cost to My Glory was $5 million. All the production personnel and actors for Troubles Ahead received a fixed salary (included in the $5 million) and will have no “residual” (equity interest) in the revenues or operating income from the movie. Media Productions will handle the marketing of Troubles Ahead. Media agrees to invest a minimum $3 million to market the movie and will be paid 20% of the revenues My Glory itself receives from the box-office receipts. My Glory receives 62.5% of the total box-office receipts (out of which comes the 20% payment to Media Productions).
Required

1. What is the breakeven point to My Glory for Troubles Ahead expressed in terms of (a) revenues received by My Glory, and (b) total box-office receipts?
2. Assume in its first year of release, the box-office receipts for Troubles Ahead total $300 million. What is the operating profit to My Glory from the movie in its first year?

Part B
My Glory is negotiating for Troubles Ahead 2, a sequel to its mega-blockbuster success Troubles Ahead. This negotiation is proving more difficult than for the original movie. The budgeted production cost (excluding payments to the director Fleur Dunne and the stars Rodney Kid and Tess Bow) for Troubles Ahead 2 is $21 million. The agent negotiating for Fleur Dunne, Rodney Kid, and Tess Bow proposes either of two contracts:
Contract A: Fixed-salary component of $15 million for Fleur Dunne, Rodney Kid, and Tess Bow (combined) with no residual interest in the revenues from Troubles Ahead 2.
Contract B: Fixed-salary component of $3 million for Fleur Dunne, Rodney Kid, and Tess Bow (combined) plus a residual of 15% of the revenues My Glory receives from Troubles Ahead 2.
Media Productions will market Troubles Ahead 2. It agrees to invest a minimum of $10 million. Because of its major role in the success of Troubles Ahead, Media Productions will now be paid 25% of the revenues My Glory receives from the total box-office receipts from Troubles Ahead 2. My Glory receives 62.5% of these total box-office receipts (out of which comes the 25% payment to Media Productions).

Required

1. For contracts A and B, what is the breakeven point for My Glory expressed in terms of
a. revenues received by that company
b. total box-office receipts for Troubles Ahead 2?

Explain the difference between the breakeven points for contracts A and B.

1. Assume in its first year of release Troubles Ahead 2 achieves the same $300 million in box-office receipts as was the case for Troubles Ahead. What is the operating profit to My Glory from Troubles Ahead 2 if it accepts contract B? Comment on the difference in operating income between the two films.

Question 3 (25 marks)
Based on module 9 – Costing in an entity
The Peaches Company has always allocated all overhead costs to products based upon the number of units produced. Over the years overhead costs have grown enormously and the firm’s profits have been falling. During this same time the firm has substantially broadened the lines of products it produces.
During the past year overhead amounted to $1 million. A study reveals that $325,000 of this is primarily depreciation on buildings and equipment, heat, light, and similar common costs. The remaining $675,000 is primarily for salaries for people who manage the flow of production – production schedulers, expeditors, equipment setup workers, and others needed to modify production lines whenever a department switches from manufacturing one type of product to another, The following historical records have been developed for these production expeditors.
Year Total Units Number of Number of Expeditors’
Produced Product Lines Expeditors Salaries
2004 2,400,000 78 4 $80,000
2005 2,600,000 114 6 126,000
2006 2,750,000 165 9 193,500
2007 2,550,000 240 12 294,000
2008 2,700,000 355 18 468,000
2009 2,500,000 490 25 675,000
Last year’s production and the direct costs incurred for a small sample of the firm’s products are summarised below:
Product
J-275 R-895 T-28A Y-477
Number of units 200,000 1,000 14,000 90,000
Material costs $235,000 $590 $2,800 $50,000
Labour Costs $65,000 $80 $1,100 $10,000
Required
a. Develop the cost of each product in the sample using the firm’s current allocation base.
b. Develop two allocation bases, one spreading common costs over units produced and a second spreading production expediting costs over product lines. Determine the cost of each product in the sample using these new rates.

Question 4 (25 marks)
Based on module 10 – Performance measurement
Part A
The Toy Electronics Division (TED) of Neighbour Industries manufactures electronic go-carts and other toys. TED is considering building a new plant in 2014. The investment will cost $2.5 million. The expected revenues and costs for the new plant in 2014 are
Revenues $2,400,000
Variable costs 800,000
Fixed costs 1,120,000
Operating income $ 480,000

TED’s ROI in 2007 is 24%, and its return on sales (ROS) is 19%. ROI is defined as operating income divided by total assets. The bonus of Kelly Mark, the division manager of TED, is based on division ROI.
Required :
• Explain why Kelly Mark would be reluctant to build the new plant. Show your computations.
• Suppose Neighbour Industries uses RI to determine Kelly’s bonus. Suppose further that the required rate of return on investment is 15%. Will Kelly be more willing to build the new plant? Explain and show computations.
Part B
The management of Neighbour Industries is considering the following alternative compensation arrangements for Kelly Mark, the division manager of TED:
• Make Kelly’s compensation a fixed salary without any bonus. Neighbour Industries’ management believes that one advantage of this arrangement is that Kelly will be less inclined to reject future investments just because of their impact on ROI or RI.
• Make all of Kelly’s compensation depend on the division’s RI. The benefit of this arrangement is that it creates incentives for Kelly to aggressively seek and accept all proposals that increase TED’s RI.
• Evaluate Kelly’s performance using benchmarking by comparing TED’s RI against the RI achieved by managers of other companies that also manufacture and sell go-carts and have comparable levels of investment. Neighbour Industries’ management believes that the advantage of bench-marking is that it focuses attention on Kelly’s performance relative to peers, rather than on the division’s absolute performance.
Required :
• Assume Kelly is risk adverse and does not like bearing risk. Using concepts of performance evaluation, evaluate the three proposals that Neighbour Industries’ management is considering. Indicate the positive and negative features of each proposal.
• What compensation arrangement would you recommend? Explain briefly.

Marking Criteria
Marks
Available
Question One
Preparation of cash budget
Cash receipts 11
Cash Payments 12
Beg & End 2
25

Question Two
Application of CVP
Part A (1) 4
Part A (2) 5
Part B (1) 10
Part B (2) 6
25

Question Three
Use of costing principles
Part A 9
Part B 16
25

Question Four
Discuss and apply performance measurement
Part A (1) 4
Part A (2) 4
Part B (1) 12
Part B (2) 5
25

Total 100

(Sources withheld: Questions for this assignment are taken from other sources. Details of this source have been withheld for assessment purposes. This material is reproduced under the provisions of the Section 200 (1) (b) of the Copyright Amendment Act 1980.)

General Requirements:
• Be as concise and efficient in your writing as possible. The questions involve numbers and calculations and therefore the format of presentation will mainly determine your pages required. Please try to present this in a neat and easy to follow format.
• Place references for all questions at the end of the assignment not at the end of each question.
• You can use dot points or tables to help present your answer if you wish.
• Assignment extensions will be granted if needed due to medical, work or personal reasons. Generally extensions will be granted for one week. If an extension of more than two weeks is required then a different assignment will be given. This is because I cannot post back marked assignments and solutions until all assignments have been received. It is unfair on other students to delay the return of their marked assignments unduly.
• You should note that the assignment is based on modules 7-10.
• Assignments can be submitted through the EASE system (link located on the top right hand side of study desk). File types allowed include doc, docx and pdf. Only one file will be accepted. If more than one file is uploaded, only first file listed will be marked.

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