ARBA MINCH UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
MBA PROGRAM
ACCOUNTING FOR MANAGERS- ASSIGNMENT MATERIALS

1. Akiya Company manufactures and sells a specialized cordless telephone for high electromagnetic
radiation environments. The company’s contribution format income statement for the most recent
year is given below:

Total Per Unit Percent of Sales

Sales (20,000 units) . . . . . . . . . . . $1,200,000 $60 100%
Variable expenses . . . . . . . . . . . . 900,000 45 ?%
Contribution margin . . . . . . . . . . . 300,000 $15 ?%
Fixed expenses . . . . . . . . . . . . . . 240,000
Net operating income . . . . . . . . . . $ 60,000
Management is anxious to increase the company’s profit and has asked for an analysis of a
number of items.
Required:
A. Compute the company’s CM ratio and variable expense ratio.
B. Compute the company’s break-even point in both units and sales dollars.
C. Assume that sales increase by $400,000 next year. If cost behavior patterns remain unchanged,
by how much will the company’s net operating income increase? Use the CM ratio to compute
your answer.
D. Refer to the original data. Assume that next year management wants the company to earn a
profit of at least $90,000. How many units will have to be sold to meet this target profit?
E. Refer to the original data. Compute the company’s margin of safety in both dollar and
percentage form.

2. Royal Company manufactures 20,000 units of part R-3 each year for use on its production line. At
this level of activity, the cost per unit for part R-3 is:
Direct materials . . . . . . . . . . . . . . . . . . . . $ 4.80
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . 7.00
Variable manufacturing overhead . . . . . . . 3.20
Fixed manufacturing overhead . . . . . . . . . 10.00
Total cost per part . . . . . . . . . . . . . . . . . . . $25.00
An outside supplier has offered to sell 20,000 units of part R-3 each year to Royal Company for
$23.50 per part. If Royal Company accepts this offer, the facilities now being used to
manufacture part R-3 could be rented to another company at an annual rental of $150,000.
However, Royal Company has determined that $6 of the fixed manufacturing overhead being
applied to part R-3 would continue even if part R-3 were purchased from the outside supplier.

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 Required:
Prepare computations showing how much profits will increase or decrease if the outside
supplier’s offer is accepted.

3. Solex Company manufactures three products from a common input in a joint processing operation.
Joint processing costs up to the split-off point total $100,000 per year. The company allocates these
costs to the joint products on the basis of their total sales value at the split-off point. These sales
values are as follows: product X, $50,000; product Y, $90,000; and product Z, $60,000.

Each product may be sold at the split-off point or processed further. Additional processing
requires no special facilities. The additional processing costs and the sales value after further
processing for each product (on an annual basis) are shown below:
Additional Sales Value after
Product Processing Costs Further Processing
X......... $35,000 $80,000
Y . . . . . . . . . $40,000 $150,000
Z . . . . . . . . . $12,000 $75,000

Required:
Which product or products should be sold at the split-off point, and which product or products
should be processed further? Show computations.

4. Sport Luggage Inc. makes high-end hard-sided luggage for sports equipment. Data concerning three
of the company’s most popular models appear below.

Required:
A. The total time available on the plastic injection-molding machine is the constraint in the production
process. Which product would be the most profitable use of this constraint? Which product would
be the least profitable use of this constraint?
B. A severe shortage of plastic pellets has required the company to cut back its production so much
that the plastic injection-molding machine is no longer the bottleneck. Instead, the constraint is the
total available pounds of plastic pellets. Which product would be the most profit-able use of this
constraint? Which product would be the least profitable use of this constraint?
C. Which product has the largest unit contribution margin? Why wouldn’t this product be the most
profitable use of the constrained resource in either case?

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5. Vision Company, an office supplies specialty store, prepares its master budget on a quarterly
basis. The following data have been assembled to assist in the preparation of the master
budget for the first quarter of a current year.
a As of December 31 (end of the prior quarter), the company’s general ledger showed the
following account balances:
Debit Credit
Cash $ 48,000
Accounts Receivable 224,000
Inventory 60,000
Buildings and Equipment (net) 370,000
Accounts Payable 93,000
Capital Stock 500,000
Retained Earnings 109,000
Totals 702,000 702,000

b Actual sales for December and budgeted sales for the next four months are as follows:

December $ 280,000
January 400,000
February 600,000
March 300,000
April 200,000

c Sales are 20% for cash and 80% on credit. All payments on credit sales are collected I the
month following sale. The accounts receivable at December 31 are a result of December
credit sales.
d The company’s gross profit rate is 40% of sales.
e Monthly expenses are budgeted as follows: salaries and wages, $ 27,000 per month;
advertising, $ 70,000 per month; shipping, 5% of sales; depreciation, $ 140,000 per month;
other expenses, 3% of sales.
f At the end of each month, inventory is to be on hand equal to 25% of the following month’s
sales needs, stated at cost.
g One-half of a month’s inventory purchases is paid for in the month of purchase; the other half
is paid for in the following month.

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h During February, the company will purchase a new copy machine for $ 1,700 cash. During
March, other Equipment will be purchased for cash at a cost of $ 84,500.
i During January, the company will declare and pay $ 45,000 in cash dividends.
j The company must maintain a minimum cash balance of $ 30,000. An open line of credit is
available at a local bank for any borrowing that may be needed during the quarter. All
borrowing is done at the beginning of a month, and all repayments are made at the end of a
month. Borrowings and repayments of a principal must be in multiples of $ 1,000. Interest is
paid only at the time of payment of principal. The annual interest rate is 12%.
Required:
Prepare a master budget for the quarter comprised of:
1. Sales budget (Supplement your sales budget with a schedule of expected cash
collections)
2. Inventory purchases budget (along with schedule of cash payments for inventories)
3. Operating Expenses budget (along with a schedule of cash payments for operating
expenses)
4. Cash Budget
5. Budgeted Income Statement for the quarter
6. Budgeted Balance Sheet

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