MBA 640 Exam 2 Spring 2, 2017 Name____________________________________ When answering the questions, the work that you submit for grading must be your work. Any plagiarism will result in a grade of...

MBA 640 Exam 2
Spring 2, 2017 Name____________________________________
When answering the questions, the work that you submit for grading must be your work. Any plagiarism will result in a grade of zero for the exam. If you have questions, please consult with the instructor. The evaluation of the work, especially the qualitative questions depends on the organization of the material and the depth of the answers. The quantitative questions should show the computations/process not just an answer.
1. In the context of this course, you will be asked to address the issues/questions below for Williams-Sonoma, Inc. (WSM), www.williams-sonomainc.com When addressing the issues/questions, be sure to do so in the context of this course and Williams-Sonoma. You have been appointed as the special assistant to the Chief Executive Officer, Laura Alber, who has asked you to address the following five situations:
(2 pts) a) A fellow MBA alum from Lynn University, who now works in Admission at Lynn University would like to give each MBA student a benefit, which is programmed into the Lynn University ID card. This benefit would allow the student to buy a stainless-steel essential pan for $125. Normally the pan sells for $160 and its full cost is $130. Discuss if this would be feasible, i.e. Williams-Sonoma is able to do this transaction without it being a donation.
(2 pts) b) Williams-Sonoma currently buys many of its items from a manufacturer in China. A representative from a company in Malaysia is offering to sell them for 15% less than cost from the manufacturer in China. Discuss the issues that you would consider in deciding whether to accept this offer.
(10 pts) c) Ms. Alber wishes to develop an incentive plan for the store managers.
Before the plan is implemented, she wishes you to make sure that budgeting
for the stores is done correctly. She has asked you to submit a document, which
discusses the key points that you have learned in MBA 640. Be as thorough as possible.
(2 pts) d) Williams-Sonoma has only used absorption costing. Ms. Alber has asked you
to explain the merits of using variable costing under certain circumstances.
(2pts) e) Ms. Alber has asked you to explain how target costing/pricing would be used
in Williams-Sonoma’s pricing policies.
(15 pts) 2. The following information is available for 2017 for Baxter Corporation:
Revenue (100,000 units) $725,000
Manufacturing costs:
Materials 42,000
Variable overhead cash costs 35,500
Fixed overhead cash costs 81,900
Depreciation 249,750
Marketing and administrative costs:
Marketing variable cash costs 105,600
Marketing depreciation 37,400
Administrative fixed cash 127,300
Administrative depreciation 18,800
Total costs $698,250
Operating income $26,750
All depreciation charges are fixed costs and are expected to remain the same for 2018. Sales volume is expected to increase by 18 percent, but prices are expected to fall by 5 percent. Material costs are expected to decrease by 8 percent. Variable manufacturing overhead cash costs are expected to decrease by 2 percent per unit. Fixed manufacturing overhead cash costs are expected to increase by 5 percent.
Variable marketing cash costs change with volume. Administrative cash costs are expected to increase by 10 percent. Inventories are kept at zero.
Required:

1. Prepare a budgeted income statement for 2018.
2. Explain how Kaizen budgeting could be used by Baxter. No computations are necessary for this part.

(10 pts) 3. Dallas Inc. prepared a budget last period that called for sales of 15,000 units at a
price of $20 each. The costs per unit were estimated to amount to $10 variable and $4
fixed.
During the period, actual production and sales were 14,000 units. The actual selling
price was $22 per unit. Variable costs were $9 per unit. Fixed costs actually incurred
were $65,000.
Required:

1. Prepare operating statements for the actual output, as well as a static budget and a flexible budget.
2. Explain what is indicated when comparing the operating statements.

(15 pts) 4. Guy’s Grills, Inc. makes a single product - a handmade specialty barbeque grill that sells for $500. Data for last year’s operations follow:
Units in beginning inventory 0
Units produced 40,000
Units sold 30,000
Variable costs per unit:
Direct materials $ 100
Direct labor 150
Variable manufacturing overhead 80
Variable selling and administrative 20
Total variable cost per unit $ 350
Fixed costs:
Fixed manufacturing overhead $1,000,000
Fixed selling and administrative 500,000
Total fixed costs $1,500,000
Required:

1. Compute the unit product cost for one barbeque grill for absorption costing, variable costing, and throughput costing.
2. Prepare an income statement for the year using the absorption costing approach.
3. Prepare an income statement for the year using the variable costing approach.
4. Explain the difference in operating income for the absorption and variable costing approaches.

(10 pts) 5. Watson Company manufactures and sells a single product called a JPeg. Operating at capacity the company can produce and sell 30,000 JPegs per year. Costs associated with this level of production and sales are given below:
Unit Total
Direct materials $15 $450,000
Direct labor XXXXXXXXXX,000
Variable manufacturing overhead 3 90,000
Fixed manufacturing overhead XXXXXXXXXX,000
Variable selling expense XXXXXXXXXX,000
Fixed selling expense XXXXXXXXXX,000
Total cost $45 $1,350,000
The JPegs normally sell for $50 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Rets per year.
Required:

1. Assume that due to a recession, Watson Company expects to sell only 25,000 JPegs through regular channels next year. A large retail chain has offered to purchase 5,000 Jpegs, if Watson is willing to accept a 20% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Watson Company would have to purchase a special machine to engrave the retail chain’s name on the 5,000 units. This machine would cost $10,000. Watson Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.

1. Refer to the original data. Assume again that the Watson Company expects to sell only 25,000 JPegs through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 JPegs. The Army would pay a fixed fee of $2.00 per JPeg and would reimburse Watson Company for all costs of production (variable and fixed) associated with the units. Because the Army would pick up the JPegs with its own trucks, there would be no variable selling expenses associated with this order. If Watson Company accepts the order, by how much will profits increase or decrease for the year?

(16 pts) 6. Great news! Not only did our salespeople do a good job in meeting the sales budget this year, but our production people did a good job in controlling costs as well, “said the president of Stanley Company. “Our $12,260 overall manufacturing cost variance is only one-half of one percent of the standard $2,160,000 standard cost of products sold during the year. That is well within the 3 % parameter set by management for acceptable variances. It looks like everyone will be in line for a bonus this year.”
The company produces and sells a single product. A standard cost card for the product follows:
Standard Cost Card - Per Unit of Product
Direct materials, 2 feet at $9.00 ……………… $18.00
Direct labor, 1.5 hours at $15 ………………… 22.50
Variable overhead, 1.5 hours at $3.00 ………… 4.50
Fixed overhead, 1.5 hours at $6 ……………… 9.00
Standard cost per unit………………… $ 54.00
The following additional information is available for the year just completed:
The company manufactured 45,000 units of product during the year.
A total of 95,000 feet of material was purchased during the year at a cost of $9.20 per foot. 88,000 feet of this material was used to manufacture the 45,000 units. There were no beginning inventory for the year.
The company worked 69,000 direct labor-hours during the year at a cost of $16.50 per hour.
Overhead is applied to products based on direct labor-hours. Data relating to manufacturing overhead costs follows:
Denominator activity level (direct labor-hours) … 60,000
Budget fixed overhead costs
(from the overhead flexible budget) ………………$360,000
Actual variable overhead costs incurred ………….. 175,000
Actual fixed overhead costs incurred …………….. 340,000
Required:

1. Compute the direct materials price and quantity variances for the year.
2. Compute the direct labor price and quantity variances for the year.
3. Compute the variable overhead price and quantity variances for the year.
4. Compute the fixed overhead spending and production volume variances for the year.
5. Total the variances you have computed, and compare the net with the $12,260 mentioned by the president. Do you agree that bonuses should be given to everyone for good cost control during the year? Explain.

(8 pts) 7. For many years, Unger Company has produced a small electrical part that it uses in the production of its standard line of diesel tractors. The company’s unit product cost for the part, based on a production level of 70,000 parts per year, is as follows:
Per Part Total
Direct materials $6.00
Direct labor 4.00
Variable manufacturing overhead 1.00
Fixed manufacturing overhead, traceable 4.00 $280,000
Fixed manufacturing overhead, common
(allocated on the basis of labor-hours) 5.00 $350,000
Unit product cost $20.00
An outside supplier has offered to supply the electrical parts to the Unger Company for only $14.00 per part. One-half of the traceable fixed manufacturing cost is supervisory salaries and other costs that can be eliminated if the parts are purchased. The other half of the traceable fixed manufacturing costs consists of depreciation of special equipment that has no resale value. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle.
Required:

1. Prepare computations showing how much profits would increase or decrease because of purchasing the parts from the outside supplier rather than making them inside the company.
2. Explain why you would or would not accept the offer.

(8 pts) 8. Chapman Corp. currently sells radios for $2,000. It has costs of $1,500. Chapman desires a 15% return on its total investment of $10,000,000. Chapman's sales are currently 5,000 radios per year.
Required:

1. Can Chapman achieve its desired profit?

A competitor is bringing a new radio to market that will sell for $1,800. Management believes it must lower the price to $1,600 to compete in the market for radios. Marketing believes that the new price will cause sales to increase by 10%, even with a new competitor in the market.
Required:

1. Can Chapman achieve its desired profit following the lead of its competitor and assuming that marketing is correct?
2. What are the major influences on Chapman’s price for radios?