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(1) hand write your solutions on this document(2) make a printed copy of your hand-written solutions in your choice of format: plain paper or pdf
Lastly, support calculations in a excel workbook or hand written
1
Student Name
ACC374 Fall 2012
Section
2
34.
(6 points) (Ignore income taxes in this problem.) Rogers Company is studying a
project that would have a ten-year life and would require a $660,000 investment in
equipment that has no salvage value. The project would provide net operating income
each year as follows for the life of the project
(Chapter 14):
Sales…………………………………… $500,000
Less cash variable expenses…………… 200,000
Contribution margin…………………… 300,000
Less fixed expenses………………….. :
Fixed cash expenses…………………… $200,000
Depreciation expenses………………… 80,000 280,000
Net operating income…………………. $20,000
The company’s required rate of return is 8%. What is the payback period for this
project?
Show calculations. Round to two decimal places.
2
Use the following to answer question 35:
(10 points) (Ignore income taxes in this problem.) Murdock Company has a chance
to make and sell a new plastic five-gallon container. The company estimates that the
net cash flows (sales less cash operating expenses.) arising from manufacture and sale
of the new container would be as follows (numbers in parentheses indicate an
outflow) (Chapter 14):
Years 1-10 $ 85,000 Per year
Year 11 $(20,000)
Year 12 $95,000
Murdock would need to purchase production equipment costing $200,000 now to use
in the manufacture of the new containers. This equipment would have a 12-year life
and a $20,000 salvage value (the $20,000 salvage value is not included in the
$95,000). Murdock Company’s required rate of return is 12%.
35. Requirement A: Should Murdock make the new 5 gallon container?
35. Requirement B: Why or why not?
35. Requirement C: Calculate the net present value of all cash flows associated with
this investment (rounded to the nearest thousand dollars) (Support your answer with
an “investment time line” see example on page 17):
3
36. (10 points) Match the following statement with the applicable ratios listed below
(Chapter 16):
_____ A measure of liquidity that shows the net current assets on hand to continue
business operations
_____ A rough measure of how many times a company’s inventory has been
turned into cash during the year
_____ Test of short-term debt-paying without having to rely on inventory or
prepaid assets
_____ A broad measure of profitability
_____ An index of whether a stock is relatively cheap or relatively expensive in
relation to current earnings
_____ the measure of the amount of assets being provided by creditors for each
dollar of assets being provided by the stockholders
A) Times interest earned F) Price-earnings ratio
B) Accounts Receivable turnover G) Working Capital
C) Debt-to-equity ratio H) Dividend yield ratio
D) Inventory turnover I) Gross Margin percentage
E) Quick ratio J) Book Value per Share
37. (8 points) (Ignore income taxes in this problem.) Stutz Company purchased a
machine with an estimated useful life of seven years. The machine will generate
cash inflows of $8,000 each year over the next seven years.
Calculate the purchase price if the machine has no salvage value at the end of seven
years, if Stutz’s discount rate is 12%, and if the net present value of this investment
is $15,000. (Support your answer with an “investment time line” on page 17)
(Chapter 14):
4
Use the following to answer questions 38-40:
(24 points) Hatch Hardwood Floors installs oak and other hardwood floors in home and
businesses. The company uses an activity-based costing system for its overhead costs. The
company has provided the following data concerning its annual overhead costs and its activity
based costing system (Chapter 8):
Overhead Costs:
Production overhead…………….$500,000
Office expense…………………..$ 40,000
Total……………………………..$540,000
Distribution of resource consumption:
. Activity Cost Pools .
Installing
Floors
Job
Support
Other Total
Production
Overhead…….……………..
45% 35% 20% 100%
Office
Expense………………………….
10% 60% 30% 100%
The “Other activity cost pool consists of the costs of idle capacity and other costs.
The amount of activity for the year is as follows:
Activity Cost Pool Annual Activity
Installing floors…………………………8,000 squares
Job support………………………………160 jobs
Other…………………………..………Not applicable
Required :
38. Prepare the first-stage allocation of overhead costs to the activity pools by filling in the table
below:
Installing
Floors
Job
Support
Other Total
Production
overhead
Office
expense
Total
5
39. Compute the activity rates (ie, cost per unit of activity) for the Installing Floors and Job
Support activity cost pools by filling in the table below:
Production overhead Installing
Floors
Job
Support
Total Overhead Costs
Activity Description
Amount of Activity
Activity Rate
Ofice Expenses Installing
Floors
Job
Support
Total Overhead Costs
Activity Description
Amount of Activity
Activity Rate
Installing
Floors
Job
Support
Total Activity Rate
40. Compute the overhead cost, according to the activity- based costing system, of a job that
involves installing 850 squares. Show all computations:
6
41. (24 points) Bedrosian Incorporated has a short-term line of credit from the Belmont National
Bank that is due to be renewed on February 1. The bank has requested the company’s current
Income Statement and Comparative Statements of Financial Position that appear below
(Chapter 16).
The company’s accounting staff has gathered the following industry averages for the ratios
from various sources.
Industry Averages
Return on total assets 6.4%
Return on common shareholders’ equity………….. 12.5%
Current ratio……………………………………….. 1.86:1
Acid-test (quick) ratio……………………………… 0.85:1
Days Sales in Receivables…………………………
Inventory Turnover…………………………………
Debt-to-equity ratio………………………………..
25 Days
15 Times
1.23:1
Times interest earned ratio………………………… 7.78:1
Dividend payout ratio……………………………… 39.6%
Bedrosian Incorporated
Income Statement
Year Ended December 31
(in thousands)
Revenue:
Sales…………………………………………………………. $60,000
Other………………………………………………………… 4,500
Total revenue…………………………………………………… 64,500
Expenses:
Cost of goods sold…………………………………………… 40,500
Selling and administrative…………………………………… 11,625
Depreciation and amortization……………………………… 1,875
Interest………………………………………………………. 1,500
Total expenses………………………………………………….. 55,500
Income before income taxes……………………………………. 9,000
Income taxes……………………………………………………. 3,600
Net income……………………………………………………… 5,400
Less: Dividends to common shareholders ($3.86 per share)…. 2,550
Net income added to retained earnings………………………… 2,850
Retained earnings, beginning of year…………………………… 8,550
Retained earnings, end of year…………………………………. $11,400
Earnings per share……………………………………………… $8.18
7
Bedrosian Incorporated
Statement of Financial Position
As of December 31
(in thousands)
This Year Last Year
Assets
Current assets:
Cash and marketable securities…………. $ 1,950 $ 1,575
Accounts receivable, net………………….. 3,600 3,750
Inventories………………………………… 4,875 4,650
Prepaid items……………………………… 375 225
Total current assets…………………………… 10,800 10,200
Noncurrent assets:
Investments, at cost……………………….. 7,950 7,950
Deposits…………………………………… 750 600
Property, plant, and equipment…………… 21,000 19,500
Total assets…………………………………… $40,500 $38,250
Liabilities and Shareholders’ Equity
Current liabilities:
Short-term loans…………………………… $ 1,650 $ 1,800
Accounts payable…………………………. 5,400 5,325
Salaries and wages payable………………. 1,950 2,025
Total current liabilities……………………….. 9,000 9,150
Long-term debt………………………………. 12,000 12,825
Total liabilities……………………………….. 21,000 21,975
Shareholders’ equity:
Common stock, at par…………………….. 3,300 3,150
Paid-in capital in excess of par…………… 4,800 4,575
Total paid-in capital………………………. 8,100 7,725
Retained earnings…………………………. 11,400 8,550
Total shareholders’ equity…………………… 19,500 16,275
Total liabilities and shareholder’s equity……. $40,500 $38,250
8
Required:
A. Would you recommend renewing the Line of Credit for Bedrosian? Support
your recommendation with an analysis of at least 4 ratios (show calculations).
Z
9
Example of an investment time line.
Investment of $100,000 that returns $20,000 a year for five years
20,000 20,000 20,000 20,000 20,000
(100,000)
