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Homework answers / question archive / Problem 1: Preparation of a Production Budget Yolinda Garden Color, Inc

Problem 1: Preparation of a Production Budget Yolinda Garden Color, Inc


Problem 1: Preparation of a Production Budget

Yolinda Garden Color, Inc., manufactures floral containers. The controller is preparing a budget for the coming year and asks for your assistance. The following costs and other data apply to container production: h

Direct material per container:
1 pound Z-A styrene at $.40 per pound
2 pounds Vasa finish at $.80 per pound
Direct Labor per container:
1/4 hour at $8.60 per hour
Overhead per container:
Indirect labor........................... $.11
Indirect material....................... .04
Power...................................... .07
Equipment costs....................... .34
Building occupancy.................. .21
Total overhead per unit............... $.77

You learn that equipment costs and building occupancy are facility-level (fixed) costs and are based on a normal production of 20,000 units per year. Other overhead costs are unit-level (variable) costs. Plan capacity is sufficient to produce 25,000 units per year.
Labor costs per hour are not expected to change during the year. However,
the Vasa finish supplier has informed Yolinda's management that it will impose
a 10 percent price increase at the start of the coming budget period. No oter costs are expected to change.
During the coming budget period, Yolinda expects to sell 18,000 units. Finished-goods inventory is targeted to increase from 4,000 units to 7,000 units to prepare for an expected sales increase the year after next. Production will occur evenly throughout the year. Inventory levels for Vasa finish and Z-A styrene are expected to remain unchanged throughout the year. There is no work-in-process inventory.

Required: Prepared a production budget and estimate the material, labor, and overhead costs for the coming year.

Problem 2. Add/Drop Business Unit

Chapman & Tracy is a regional firm that offers audit, tax, and consulting services. The partners are concerned about the profitability of their audit business, and a closure decision might be forthcoming. If the firm drops the audit activities, it might do more tax work. Only 30 percent of the facility costs associated with auditing disappears by dropping the auditing function. More tax work can increase tax revenues by 40 percent, but tax service-level costs also increase by 40 percent. Total facility cost is unchanged whether or not tax work is increased. Segmented income statements for these three product lines follow.

Auditing Tax Consulting
Sales $300,000 $500,000 $600,000
Service-level cost 250,000 300,000 350,000
Shared facility cost 50,000 60,000 80,000
Operating income (loss) $0 $140,000 $170,000

A. Determine which alternative Chapman & Tracy should choose: (1) drop the auditing line without increasing tax work or (2) drop auditing and increase tax work.
B. What other considerations are important to the decision to drop auditing?

Problem 3. Use Forecasts in Net Present Value Analysis

Furlong Manufacturing is considering investing in a robotics manufacturing process. Purchase and installation of the process will cost an estimated $2,900,000. This amount must be paid immediately. The company expects to dismantle this production process at the end of its seven-year life and salvage the equipment for $100,000. Furlong will depreciate the process equipment at $400,000 per year. Starting in year 4, the company expects significant quality improvements valued at $2.1 million untl the end of the process in year 7. Because this investment is risky, the company believes it should use an 18 percent discount rate. The company's effective tax rate is 35 percent.

A. Compute the net present value of this investment.
B. Is this a routine or strategic investment. Explain
C. What is your evaluation of the way this company models risk?

Problem 4. Cost-Volume-Profit

Canyon Escape sells individual tickets for $75 walking tours of the Grand Canyon. Unit-level costs, including lunch, are $15 per ticket; fixed costs total $200,000 per year.

A. How many tickets must be sold to break even?
B. What level of revenue is needed to earn a target income of $42,000?
C. If unit-level costs increase to $20 per ticket, what decrease in annual fixed costs must be achieved to keep the same break-even point as calculated in requirement (a)?
D. Prepare a spreadsheet to complete requirements (a)-(c) of this exercise.

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