Accounting Questions

Question
1. Uncertain Future Cash Flows

Union Bay Plastics is investigating the purchase of automated equipment that would save $100,000 each year in direct labor and inventory carrying costs. This equipment costs $750,000 and is expected to have a 10-year useful lift with no salvage value. The company’s required rate of return is 15% on all equipment purchases. This equipment would provide intangible benefits such as greater flexibility and higher-quality output that are difficult to estimate and yet are quite significant.

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Required:

(Ignore income taxes)

What dollar value per year would the intangible benefits have to have in order to make the equipment an acceptable investment?

2. Production Budget

Chrystal Telecom has budgeted the sales of its innovative mobile phone over the next four months as follows:

Sales in Units

July………………………………………………………………………30,000

August………………………………………………………………….45,000

September…………………………………………………………..60,000

October……………………………………………………………….50,000

The company is now in the process of preparing a production budget for the third quarter. Past experience has shown that end-of-month finished goods inventories must equal 10% of the next month’s sales. The inventory at the end of Jun was 3,000 units.

Required:

Prepare a production budget for the third quarter showing the number of units to be produced each month and for the quarter in total.

3. Manufacturing Overhead Budget

The direct labor budget of Krispin Corporation for the upcoming fiscal year includes the following budgeted direct labor-hours.

1st quarter 2nd quarter 3rd quarter 4th quarter

Budgeted direct labor-hours………. 5,000 4,800 5,200 5,400

The company’s variable manufacturing overhead rate is $1.75 per direct labor-hour and the company’s fixed manufacturing overhead is $35,000 per quarter. The only noncash item included in fixed manufacturing overhead is depreciation, which is $15,000 per quarter.

Required:

1. Construct the company’s manufacturing overhead budget for the upcoming fiscal year.

2. Compute the company’s manufacturing overhead rate (including both variable and fixed manufacturing overhead) for the upcoming fiscal year. Round off to the nearest whole cent.

4. Residual Income

Midlands Design Ltd. Of Manchester, England, is a company specializing in providing design services to residential developers. Last year the company had net operating income of £400,000 on sales of £2,000,000. The company’s average operating assets for the year were £2,200,000 and its minimum required rate of return was 16%. (The currency in the United Kingdom is the pound, denoted by £)

Required:Compute the company’s residual income for the year.

1.

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