complete the following activities in good form. Use excel or
1. Provide all supporting calculations to show how you arrived at
Part A: Capital Budgeting Decisions
Matheson Electronics has just developed a new electronic device that it believes will have broad
market appeal. The company has performed marketing and cost studies that revealed the following
a. New equipment would have to be acquired to produce the device. The equipment would cost
$138,000 and have a six-year useful life. After six years, it would have a salvage value of
b. Sales in units over the next six years are projected to be as follows:
Year Sales in Units
c. Production and sales of the device would require working capital of $46,000 to finance
accounts receivable, inventories, and day-to-day cash needs. This working capital would be
released at the end of the project’s life.
d. The devices would sell for $55 each; variable costs for production, administration, and sales
would be $35 per unit.
e. Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line
depreciation on the equipment would total $149,000 per year. (Depreciation is based on cost
less salvage value.)
f. To gain rapid entry into the market, the company would have to advertise heavily. The
advertising costs would be:
Amount of Yearly
1–2 $ 75,000
3 $ 55,000
4–6 $ 45,000
g. The company’s required rate of return is 13%.
1. Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses)
anticipated from sale of the device for each year over the next six years.
2-a. Using the data computed in (1) above and other data provided in the problem, determine the net
present value of the proposed investment.
2-b. Would you recommend that Matheson accept the device as a new product?
B. Master Budget
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of
earrings to various retail outlets located in shopping malls across the country. In the past, the
company has done very little in the way of budgeting and at certain times of the year has
experienced a shortage of cash. Since you are well trained in budgeting, you have decided to
prepare a master budget for the upcoming second quarter. To this end, you have worked with
accounting and other areas to gather the information assembled below.
The company sells many styles of earrings, but all are sold for the same price—$13 per pair. Actual
sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs
January (actual) 20,600 June (budget) 50,600
February (actual) 26,600 July (budget) 30,600
March (actual) 40,600 August (budget) 28,600
April (budget) 65,600 September (budget) 25,600
May (budget) 100,600
The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should
be on hand at the end of each month to supply 40% of the earrings sold in the following month.
Suppliers are paid $4.30 for a pair of earrings. One-half of a month’s purchases is paid for in the
month of purchase; the other half is paid for in the following month. All sales are on credit. Only 20%
of a month’s sales are collected in the month of sale. An additional 70% is collected in the following
month, and the remaining 10% is collected in the second month following sale. Bad debts have been
Monthly operating expenses for the company are given below:
Sales commissions 4 % of sales
Advertising $ 230,000
Rent $ 21,000
Salaries $ 112,000
Utilities $ 8,500
Insurance $ 3,300
Depreciation $ 17,000
Insurance is paid on an annual basis, in November of each year.
The company plans to purchase $17,500 in new equipment during May and $43,000 in new
equipment during June; both purchases will be for cash. The company declares dividends of
$17,250 each quarter, payable in the first month of the following quarter.
The company’s balance sheet as of March 31 is given below:
Cash $ 77,000
Accounts receivable ($34,580 February sales; $422,240 March sales) 456,820
Prepaid insurance 22,500
Property and equipment (net) 980,000
Total assets $ 1,649,152
Liabilities and Stockholders’ Equity
Accounts payable $ 103,000
Dividends payable 17,250
Common stock 860,000
Retained earnings 668,902
Total liabilities and stockholders’ equity $ 1,649,152
The company maintains a minimum cash balance of $53,000. All borrowing is done at the beginning
of a month; any repayments are made at the end of a month.
The company has an agreement with a bank that allows the company to borrow in increments of
$1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for
simplicity we will assume that interest is not compounded. At the end of the quarter, the company
would pay the bank all of the accumulated interest on the loan and as much of the loan as possible
(in increments of $1,000), while still retaining at least $53,000 in cash.
Prepare a master budget for the three-month period ending June 30. Include the following detailed
1. a. A sales budget, by month and in total.
b. A schedule of expected cash collections, by month and in total.
c. A merchandise purchases budget in units and in dollars. Show the budget by month and in
d. A schedule of expected cash disbursements for merchandise purchases, by month and in total.
2. A cash budget. Show the budget by month and in total. Determine any borrowing that would be
needed to maintain the minimum cash balance of $53,000.
3. A budgeted income statement for the three-month period ending June 30. Use the contribution
4. A budgeted balance sheet as of June 30.
Part C: Variance Analysis for Decision Making
Marvel Parts, Inc., manufactures auto accessories. One of the company’s products is a set of seat
covers that can be adjusted to fit nearly any small car. The company has a standard cost system in
use for all of its products. According to the standards that have been set for the seat covers, the
factory should work 1,055 hours each month to produce 2,110 sets of covers. The standard costs
associated with this level of production are:
Direct materials $ 51,273 $ 24.30
Direct labor $ 10,550 5.00
Variable manufacturing overhead (based on direct labor-hours) $ 4,853 2.30
During August, the factory worked only 1,000 direct labor-hours and produced 2,100 sets of covers.
The following actual costs were recorded during the month:
Direct materials (6,800 yards) $ 49,980 $ 23.80
Direct labor $ 10,920 5.20
Variable manufacturing overhead $ 5,460 2.60
At standard, each set of covers should require 3.0 yards of material. All of the materials purchased
during the month were used in production.
1. Compute the materials price and quantity variances for August.
2. Compute the labor rate and efficiency variances for August.
3. Compute the variable overhead rate and efficiency variances for August.
D: Measures of Internal Business Process Performance
DataSpan, Inc., automated its plant at the start of the current year and installed a flexible
manufacturing system. The company is also evaluating its suppliers and moving toward Lean
Production. Many adjustment problems have been encountered, including problems relating to
performance measurement. After much study, the company has decided to use the performance
measures below, and it has gathered data relating to these measures for the first four months of
1 2 3 4
Throughput time (days) ? ? ? ?
Delivery cycle time (days) ? ? ? ?
Manufacturing cycle efficiency (MCE) ? ? ? ?
Percentage of on-time deliveries 91 % 86 % 82 % 78 %
Total sales (units) 3460 3312 3143 3025
Management has asked for your help in computing throughput time, delivery cycle time, and MCE.
The following average times have been logged over the last four months:
Average per Month (in days)
1 2 3 4
Move time per unit 0.7 0.5 0.6 0.6
Process time per unit 2.8 2.7 2.6 2.5
Wait time per order before start of production 23.0 25.2 28.0 30.2
Queue time per unit 4.6 5.3 6.1 7.0
Inspection time per unit 0.5 0.6 0.6 0.5
1-a. Compute the throughput time for each month.
1-b. Compute the delivery cycle time for each month.
1-c. Compute the manufacturing cycle efficiency (MCE) for each month.
2. Evaluate the company’s performance over the last four months.
3-a. Refer to the move time, process time, and so forth, given for month 4. Assume that in month 5
the move time, process time, and so forth, are the same as in month 4, except that through the use
of Lean Production the company is able to completely eliminate the queue time during
production. Compute the new throughput time and MCE.
3-b. Refer to the move time, process time, and so forth, given for month 4. Assume in month 6 that
the move time, process time, and so forth, are again the same as in month 4, except that the
company is able to completely eliminate both the queue time during production and the inspection
time. Compute the new throughput time and MCE.
E. Preparing Statement of Cash Flows
Comparative financial statements for Weaver Company follow:
Comparative Balance Sheet
at December 31
This Year Last Year
Cash $ 9 $ 21
Accounts receivable 610 380
Inventory 175 240
Prepaid expenses 10 8
Total current assets 804 649
Property, plant, and equipment 690 580
Less accumulated depreciation 80 70
Net property, plant, and equipment 610 510
Long-term investments 10 48
Total assets $ 1,424 $ 1,207
Liabilities and Stockholders’ Equity
Accounts payable $ 400 $ 290
Accrued liabilities 50 60
Income taxes payable 85 78
Total current liabilities 535 428
Bonds payable 390 280
Total liabilities 925 708
Common stock 341 450
Retained earnings 158 49
Total stockholders’ equity 499 499
Total liabilities and stockholders’ equity $ 1,424 $ 1,207
For This Year Ended December 31
Sales $ 880
Cost of goods sold 490
Gross margin 390
Selling and administrative expenses 203
Net operating income 187
Gain on sale of investments $ 12
Loss on sale of equipment (9 ) 3
Income before taxes 190
Income taxes 57
Net income $ 133
During this year, Weaver sold some equipment for $10 that had cost $49 and on which there was
accumulated depreciation of $30. In addition, the company sold long-term investments for $50 that
had cost $38 when purchased several years ago. Weaver paid a cash dividend this year and the
company repurchased $109 of its own stock. This year Weaver did not retire any bonds.
1. Using the direct method, adjust the company’s income statement for this year to a cash basis.
2. Using the information obtained in (1) above, along with an analysis of the remaining balance sheet
accounts, prepare a statement of cash flows for this year.
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