Brief Exercise 9 -1 Page 1
Preparing a Flexible Budget (LOI)

An incomplete flexible budget for overhead is given below for AutoPutz, Gmbh, a German company that owns and operates a large automatic carwash facility near Koln. The German currency is the euro, which is denoted by E.

AUTOPUTZ, GMBH
Flexible budget
Cost
Formula __________Activity (Cars)_______
Overhead Costs (per car) 7,000 8,000 9,000

Variable overhead costs:
Cleaning supplies................ ? ?  6,000 ?
Electricity ? ? 4,800 ?
Maintenance ? ? 1,200 ?
_____
Total variable overhead costs .... ? ? ? ?

Fixed overhead costs:
Operator Wages ................ ? 10,000 ?
Depreciation .................... ? 20,000 ?
Rent .............................. ? 8,000 ?
______
Total fixed overhead cost ......... ? ? ?
Total overhead costs ............... ?

Required:
Fill in the missing data in the flexible budget.

The variable cost is calculated as Amount / Activity. We are given the details for 8,000 cars. The variable cost for cleaning supplies is 6,000/8,000=0.75. For Electricity it is 4,800/8,000=0.60 and for Maintenance it is 1,200/8,000=0.15. Since the variable costs will remain fixed on per unit basis, we can find the total variable cost for 7,000 and 9,000 cars by multiplying the unit cost with the activity level.
The fixed costs do not change with activity level and so will remain the same at all output of cars

Cost Formula Activity (cars)
Overhead Costs (per car) 7,000 8,000 9,000
Variable overhead costs:
Cleaning supplies ? 0.75 ? 5,250 ? 6,000 ? 6,750
Electricity 0.60 4,200 4,800 5,400
Maintenance 0.15 1,050 1,200 1,350
Total variable overhead costs ? 1.50 10,500 12,000 13,500

Fixed overhead costs:
Operator wages 10,000 10,000 10,000
Depreciation 20,000 20,000 20,000
Rent...................... 8,000 8,000 8,000
Total fixed overhead costs 38,000 38,000 38,000

Total overhead costs ? 48,500 ? 50,000 ? 51,500

Brief exercise 9-2 Using a Flexible Budget (LOI)
Refer to the data in Brief Exercise 9-1, AutoPutz, Gmbh's owner-manager would like to prepare a budget for August assuming an activity level of 8,200 cars.

The variable costs will be 8,200 X the per unit cost for each of the different costs. The per unit cost was calculated in the above question. The fixed costs will remain the same.

AutoPutz, Gmbh
Static Budget
For the Month Ended August 31

Budgeted number of cars 8,200

Budgeted variable overhead costs:
Cleaning supplies (@ ? 0.75 per car) ? 6,150
Electricity (@ ? 0.60 per car) 4,920
Maintenance (@ ? 0.15 per car) 1,230
Total variable overhead costs 12,300

Budgeted fixed overhead costs:
Operator wages 10,000
Depreciation 20,000
Rent...................... 8,000
Total fixed overhead costs 38,000

Total budgeted overhead costs ? 50,300

Page 2

Brief Exercise 10-2 Effects of Changes in Sales, Expenses, and Assets on ROI (LOI)
Bus.Serve.com Corporation provides business -to-business services on the Internet. Data concerning the most recent year appear below.

Sales ......................................... $8,000,000
Net operating income..................... $ 800,000
Average operating assets................. $3,200,000

Required:
Consider each question below independently. Carry out all computations to two decimal places.

1. Compute the company's return on investment (ROI)

Return on Investment (ROI) = Net Income/Investment
The investment is made in operating assets, so the investment amount is the same as operating assets. We get
ROI = Net Income/Average Operating Assets
ROI = 800,000/3,200,000=25%

2. The entrepreneur who founded the company is convinced that sales will increase next year by 150% and that net operating income would increase as a result by 400%, with no increase in average operating assets. What would be the company's ROI.

The net income will increase by 400%. The increase in net income is 800,000X400%=3,200,000. The new net income will be 800,000+3,200,000=4,000,000. The average operating assets will remain the same at 3,200,000.
ROI = 4,000,000/3,200,000=125%

3. The Chief financial Officer of the company believes a more realistic scenario would be a $2 million increase in sales. Requiring an $800,000 increase in average operating assets, with a resulting $250,000 increase in net operating income. What would be the company's ROI in this scenario?

The new operating income is 800,000+250,000=1,050,000. The new average operating assets are 3,200,000+800,000=4,000,000.
ROI = 1,050,000/4,000,000=26.25%

Brief Exercise 11 - 2 Dropping or Retaining a Segment (LO2)
Boyle's Home Center has two departments, Bath and Kitchen. The most recent income statement for the company follows:
Department
______________________________
Total Bath Kitchen
Sales.............................. $5,000,000 $1,000,000 $4,000,000
Less variable expenses......... 1,900,000 300,000 1,600,000
Contribution margin............ 3,100,000 700,000 2,400,000
Less fixed expenses............ 2,700,000 900,000 1,800,000
Net operating income (loss)... $ 400,000 $ (200,000) $ 600,000
_________________________________
A study indicates that $370,000 of the fixed expenses being charged to the Bath Department are sunk cost or allocated costs that will continue even if the Bath Department is dropped. In addition, the elimination of the Bath Department would result in a 10% decrease in the sales of the Kitchen Department. If the Bath Department is dropped, what will be the effect on the net operating income of the company as a whole?

If the bath department is closed, the sales would be lost but the variable expenses will also not be incurred. The net loss will be the contribution margin (sales - variable cost). Similarly, a 10% drop in sales of Kitchen Department will result in a 10% loss of contribution margin. Of the fixed expenses of Bath Department, 370,000 are allocated cost and will continue, so the savings in fixed expenses will be 900,000-370,000=530,000.

Contribution margin lost if the Bath Department is dropped:
Lost from the Bath Department $700,000
Lost from the Kitchen Department (10% × $2,400,000) 240,000
Total lost contribution margin 940,000
Less avoidable fixed costs ($900,000 - $370,000) 530,000
Decrease in overall net operating income $410,000

please see the file for the complet solution.