Accounting, Financial Reporting and Decision
Accounting, Financial Reporting and Decision
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Accounting, Financial Reporting and Decision
Making
Directions:
1. Complete this exam on your own. This is NOT a group project.
2. In a new document or pdf, provide typed or an image of handwritten
answers embed in a word doc or pdf file to the questions on the following
pages. For questions that require supporting work calculations, answers
without supporting work calculations will not be graded.
3. Turn in your answers on Canvas by 10 pm EST on Thursday
Capital Budgeting Problem (28 points)
Smith Inc. owns an industrial furnace which it bought for $5,000,000. The furnace had an
estimated useful life of 8 years and a salvage value of $150,000. The furnace has been in service
for 5 years and Smith Inc. has depreciated the furnace using the straight-line method (as a result,
the balance in accumulated depreciation is $3,031,250). Smith Inc. is considering replacing the
old furnace with a new furnace. If Smith Inc. disposes of the old furnace, it will be able to sell
the old furnace for $2,000,000 but the company will have to pay shipping costs of $12,000 in
order to get rid of the old furnace.
The new furnace would cost Smith Inc. $6,000,000. In addition, Smith Inc. will have to
pay a delivery fee of $6,000 and installation charges of $4,000. The new furnace is expected to
produce annual operating revenues of $2,000,000 and incur $400,000 in annual operating
expenditures. Smith Inc. will also incur annual non-tax deductible environmental impact fees of
$5,000. In the first year of operation of the new furnace, Smith Inc. will have to train employees
on the new furnace at a cost of $35,000. Due to high employee turnover, Smith Inc. will again
incur this training cost in year 3 of operating the new furnace.
Additional Information:
1. For financial accounting and tax purposes Smith Inc. will depreciate the new furnace
using the straight-line method of depreciation. The estimated useful life is 6 years and the
salvage value for depreciation is estimated to be $40,000.
2. Smith Inc. estimates they will be able to sell the new furnace at the end of its useful life
for $20,000.
3. Smith Inc. operates in a 30% tax-bracket for the entire period.
4. Management at Smith Inc. requires an 8 % return on all new investments.
Required: Answer the following questions. Be sure to show your work, answers without
supporting calculations will not be graded.
1. Calculate the NPV of the proposed investment in the new furnace. Should Smith Inc. go
ahead with the project? (12 Points)
2. Calculate the payback period for the proposed investment described above. (7 points)
3. Discuss how the NPV of the project would change if management’s required rate of
return was higher than 8%? Similarly, what if management’s required rate of return was
below 8%? (5 points)
4. Discuss how the use of an accelerated depreciation method instead of the straight-line
method would affect the NPV of any proposed capital investment? (4 points)
Cost Behavior (20 points total, 4 points each)
Smith Industries wanted to determine the relationship between its monthly operating costs and a
potential cost driver, machine hours. The output of a regression analysis showed the following
information.
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.97578654
R Square 0.95215938
Adjusted R Square 0.94019922
Standard Error 143.982415
Observations 6
ANOVA
Significance
F df SS MS F
Regression 1 1650410 1650410 79.61095 0.000872
Residual 4 82923.74 20730.94
Total 5 1733333
Standard
Error
Coefficients t Stat P-value
Intercept 2413.21376 413.6629 5.833769 0.004303
X Variable 1 0.89728684 0.100565 8.922497 0.000872
Required (supporting work calculations are not necessary or required):
1. What is the variable cost per machine hour?
2. What are the fixed costs?
3. If the company used 4,000 machine hours in a month, what would the total monthly
operating cost be (assume 4,000 machine hours is within the relevant range)?
4. Discuss whether it would be appropriate to use this analysis for making forecasts of
monthly operating costs.
5. Discuss what the relevant range is in the context of analyzing cost behavior.
CVP Analysis (24 points total, 4 points each)
ZYX, sells a single product. The company's most recent income statement is given below. Ignore
income tax effects.
Sales (4,000 units) $120,000
Less variable expenses (68,000)
Contribution margin 52,000
Less fixed expenses (40,000)
Net income $ 12,000
Required (supporting work calculations are not necessary or required):
1. Contribution margin per unit is $ ________ per unit
2. If sales are doubled to $240,000,
total variable costs will equal $ ________
3. If sales are doubled to $240,000,
total fixed costs will equal $ ________
4. If 10 more units are sold, profits will increase by $ ________
5. Compute how many units must be sold to break even. # ________
6. Compute how many units must be sold
to achieve profits of $20,000. # ________
Budgeting and Variance Analysis, Part 1 (18 points total, 3 points each)
Tim Company manufacturers fans. Some of the company's data was misplaced. Use the
following information to replace the lost data:
Analysis
Actual
Results
Flexible
Variances
Flexible
Budget
Sales-
Volume
Variances
Static
Budget
Units Sold 112,500 112,500 103,125
Revenues $42,080 $1,000 F (A) $1,400 U (B)
Variable Costs (C) $200 U $15,860 $2,340 F $18,200
Fixed Costs $8,280 $860 F $9,140 $9,140
Operating Income $17,740 (D) $16,080 (E) $15,140
Required (amount and favorable/unfavorable if applicable)
(Supporting work calculations are not necessary or required):
1. What are the respective flexible-budget revenues (A)?
2. What are the static-budget revenues (B)?
3. What are the actual variable costs (C)?
4. What is the total flexible-budget variance (D)?
5. What is the total sales-volume variance (E)?
6. What is the total static-budget variance?
Budgeting and Variance Analysis, Part 2 (10 points total, 5 points each)
ABC, developed standard costs for direct material and direct labor. In 2020, ABC estimated the
following standard costs for one of their products, industrial fans.
Budgeted quantity Budgeted price
Direct materials 0.20 pounds $25 per pound
Direct labor 0.10 hours $15 per hour
During March, ABC produced and sold 5,000 fans using 1,100 pounds of direct materials at an
average cost per pound of $24 and 525 direct manufacturing labor hours at an average wage of
$14.75 per hour.
Required (amount and favorable/unfavorable if applicable):
1. The March direct material price variance is?
2. The March direct material efficiency variance is?