Order ID 6463784949 Type Essay Writer Level Masters Style APA/MLA/Harvard/Chicago Sources/References 6 Number of Pages 5-10 Pages Description/Paper Instructions Part A: Capital Budgeting Decisions
Using the net present value and the internal rate of return methods, is this a good investment?
Year Cash Flows PVF Present Value of Cash Flows X Y X * Y 0 ($240,000) 1 ($240,000) 1 $50,000 0.90909 $45,455 2 $50,000 0.82645 $41,322 3 $50,000 0.75131 $37,566 4 $50,000 0.68301 $34,151 5 $50,000 0.62092 $31,046 6 $50,000 0.56447 $28,224 7 $50,000 0.51316 $25,658 8 $50,000 0.46651 $23,325 IRR 13% NPV = $26,746
NPV is positive and the company can proceed with the investment. Also, IRR is 13% and it is safe to accept the project.
Part B: Master Budget
1a)
Sales Budget: April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Selling price per unit $10 $10 $10 $10 Total Sales $650,000 $1,000,000 $500,000 $2,150,000
1b)
Schedule of expected cash collections: April May June Quarter February sales $26,000 $26,000 March sales $280,000 $40,000 $320,000 April sales $130,000 $455,000 $65,000 $650,000 May sales $200,000 $700,000 $900,000 June sales $100,000 $100,000 Total cash collections $436,000 $695,000 $865,000 $1,996,000
1c)
Budgeted merchandise purchases: April May June Quarter Budgeted unit sales 65,000 100,000 50,000 215,000 Add: Desired ending inventory 40,000 20,000 12,000 12,000 Total needs 105,000 120,000 62,000 227,000 Less: Beginning merchandise inventory 26,000 40,000 20,000 26000 Required purchases 79,000 80,000 42,000 201,000 Unit Cost $ 4 4 4 4 Required Purchase 316,000 320,000 168,000 804,000
1d)
Expected cash payments for merchandise purchases: April May June Quarter Accounts payable $100,000 $100,000 April purchases $158,000 $158,000 $316,000 May purchases $160,000 $160,000 $320,000 June purchases $84,000 $84,000 Total cash payments $258,000 $318,000 $244,000 $820,000
2.
Earrings Unlimited Cash Budget For the Three Months Ending June 30 April May June Quarter Beginning cash balance $ $74,000 $50,000 $50,000 $74,000 Add collections from customers $436,000 $695,000 $865,000 $1,996,000 Total cash available $510,000 $745,000 $915,000 $2,070,000 Less cash disbursements: Merchandise purchases $258,000 $318,000 $244,000 $820,000 Advertising $200,000 $200,000 $200,000 $600,000 Rent $18,000 $18,000 $18,000 $54,000 Salaries $106,000 $106,000 $106,000 $318,000 Commissions $26,000 $40,000 $20,000 $86,000 Utilities $7,000 $7,000 $7,000 $21,000 Equipment purchases $0 $16,000 $40,000 $56,000 Dividends paid $15,000 $0 $0 $15,000 Total cash disbursements $630,000 $705,000 $635,000 $1,970,000 Excess (deficiency) of cash available over disbursements ($120,000) $40,000 $280,000 $100,000 Financing: Borrowings $170,000 $10,000 $0 $180,000 Repayments $0 $0 ($180,000) ($180,000) Interest $0 $0 ($5,300) ($5,300) Total financing $170,000 $10,000 ($185,300) ($5,300) Ending cash balance $ $50,000 $50,000 $94,700 $94,700
3)
Earrings Unlimited Budgeted Income Statement For Quarter Ending June 30 Sales Revenue Net Sales Revenue $2,150,000 Less: Cost of Goods Sold $860,000 Gross Margin $1,290,000 Less: Selling and Administrative Expenses Advertising $600,000 Insurance $9,000 Depreciation Expenses $42,000 Rent $54,000 Utilities Expenses $21,000 Sales Commission $86,000 Salaries $318,000 Total Operating Expenses $1,130,000 Net Operating Income $160,000 Interest Expenses $5,300 Net Income $154,700
4)
Earrings Unlimited Budgeted Balance Sheet For the Quarter Ended June 30 Assets Current Assets Cash $94,700 Accounts Receivable $500,000 Inventory $48,000 Prepaid Insurance $12,000 Total Current Assets $654,700 Property & Equipment $1,006,000 Less: Accumulated Depreciation $42,000 $964,000 Total Assets $1,618,700 Liabilities & Shareholder’s Equity Current Liabilities Account Payable $84,000 Note Payable $0 Dividends Payable $15,000 Current Liabilities $99,000 Total Liabilities $99,000 Stockholder’s Equity Common Stock $800,000 Retain Earnings $719,700 $1,519,700 Liabilities & Shareholder’s Equity $1,618,700
Part C: Variance Analysis for Decision Making
- a) Direct materials price variance
Material price variance = Actual quantity purchased x (Actual price – Standard price)
= 21,000 x ($17 – $16) = 21,000 Unfav
- b) Direct materials quantity variance
Standard quantity = 22,400 units at 1.5 grams per unit = 33,600
Material quantity variance = Standard price x (Actual quantity – Standard quantity)
= $16 (33,400 – 33,600) = $3,200 Fav
- c) Direct labor rate variance
Labor rate variance = Actual hours x (Actual rate – Standard rate)
= 16,750 x ($8 – $8) = 0
- d) Direct labor efficiency variance
Standard hours = 22,400 units at 0.75 hours per unit = 16,800
Labor efficiency variance = Standard rate x (Actual hour – Standard hours)
= $8 x (16,750 – 16,800) = $400 Fav
- e) Variable overhead spending variance
Actual rate = $48,575 / 16,750 hours = $2.90
Variable overhead rate variance = Actual hours x (Actual rate – Standard rate)
= 16,750 x ($2.90 – $3) = $1,675 Fav
- f) Variable overhead efficiency variance.
Standard hours = 22,400 units at 0.75 hours per unit = 16,800
Variable overhead efficiency variance = Standard rate x (Standard hours – Actual hours)
= $3 x (16,750 – 16,800) = $150 Fav
- g) As a manager, why is variance analysis important?
Variance analysis calculates the differences between outcome and actual results of a production process. Calculating and analyzing variances can help management contain and control costs and improve operational efficiency.
Part D: Evaluation of Decentralized Organizations
a)
Company’s return on investment (ROI) = Net Operating Income / Average Operating Assets
= 380,000 / 2,000,000 = 19%
Residual income = Net Operating Income – Return on Investment x Average Operating Assets
= 380,000 – 18% x 2,000,000 = $20,000
b)
Return on investment = New net operating income / new investment
= 12,950 / 70,000 = 18.5%
Since the ROI of the project is higher than the company’s minimum required rate of return (18%), the project is safe to be accepted.
c)
ROI of new investment = Net Operating Income / Investment
= 12,950 / 70,000 = 18.5%
ROI of overall company if investment taken place = Total net operating income / Total average operating assets
= (380,000 + 12,950) / (2,000,000 + 70,000) = 18.98%
Division manager should not request funds to make this investment as it would return 18.5% which is less than the division current investment of 20%
d)
Residual Income would increase from this investment = Net Operating Income – Return on Investment x Average Operating Assets
= 12,950 – 18% x 70,000 = $350
Division manager can request funds to make this investment as it would scale-up the residual income from 20,000 to $20,350.
Part E: Preparing Statement of Cash Flows
Statement of Cashflow Amount Cash flow from operating activities Net income 108 Add: Depreciation expense 39 Less: Increase in account receivables (13) Less: Increase in inventory (2) Add: Increase in account payable 10 Add: Increase in wage payable 3 Less: Decrease in tax payable (3) Less: Decrease in bond payable (74) Add: Increase in deferred tax 1 Cashflow from operating activities 69 Cashflow from investing activities Purchase of plant and equipment (37) Cashflow from investing activities (37) Cashflow from financing activities Issue of common stock 2 Cash dividend (28) Cashflow from financing activities (26) Total cashflow from operating, investing and financing activities 6 Beginning cashflow 38 Ending cashflow 44