# ACC374 managerial accounting

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acc374_-_fa12_-_sec_2_-__final_ver_a_-_problems.pdf

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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.

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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):

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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

_____ 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):

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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):

Office expense…………………..\$ 40,000

Total……………………………..\$540,000

Distribution of resource consumption:

. Activity Cost Pools .

Installing

Floors

Job

Support

Other Total

Production

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

Office

expense

Total

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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:

Floors

Job

Support

Activity Description

Amount of Activity

Activity Rate

Ofice Expenses Installing

Floors

Job

Support

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:

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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

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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

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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

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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)