COMM 312

FALL 2015




ASSIGNMENT TWO

COMM 312 F15

Assignment Two

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Question One
Tofino Furniture is an elite desk manufacturer. It manufacturer two products:

Executive desks: 0.91 m x 1.5 m oak desks = 1.365m

Director desks: 1.8 m x 1.2 m red oak desks = 2.16 m

The budgeted direct cost inputs for each product in 2016 are as follows:

Executive Line

Director Line

Direct Materials:
Oak top 1.5 square metres ---
Red oak top --- 2.3 square metres
Oak legs 4 legs ----
Red oak legs ----- 4 legs
Direct manufacturing labour 3 hours 5 hours

Unit data pertaining to the direct materials for March 2016 are as follows:
Actual Beginning Direct Materials Inventory
(March 1, 2016)

Product

Executive Line Director Line

Oak top



29.8 square metres ------
Red oak top ------ 13.9 square metres
Oak legs
100 legs ------
Red oak legs ----- 40 legs

Target Ending Direct Materials Inventory
(March 31, 2016)

Product

Executive Line Director Line

Oak top 17.9 square metres ------

Red oak top ----- 18.6 square metres
Oak legs 80 legs -----
Red oak legs ------ 44 legs



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Unit cost data for direct cost inputs pertaining to February 2016 and March 2016 are:

February 2016 March 2016

(Actual) (Budgeted)
Oak top (per square metre) $21.60 $24.00
Red oak top (per square metre) 27.60 30.00
Oak legs (per leg) 13.20 14.40
Red oak legs (per leg) 20.40 21.60
Manufacturing labour cost per hour 36.00 36.00

Manufacturing overhead (both variable and fixed) is allocated to each desk based on budgeted direct
manufacturing labour-hours per desk. The budgeted variable manufacturing overhead rate for March
2016 is $42 per direct manufacturing labour-hour. The budgeted fixed manufacturing overhead for
March 2016 is $51,000. Both variable and fixed manufacturing overhead costs are allocated to each unit
of finished goods. Data relating to finished goods inventory for March 2016 are:
Executive Line Director Line
Beginning inventory 20 units 5 units
Beginning inventory in dollars (cost) $12,576 $5,820
Budgeted ending inventory 30 units 15 units

Budgeted sales for March 2016 are 740 units of the Executive Line and 390 units of the Director Line.
The budgeted selling prices per unit in March 2016 are $1,224 for an Executive Line desk and $1,920 for
a Director Line desk.
Assume the following in your answer:
A. Work-in-process inventories are negligible and ignored.
B. Direct materials inventory and finished goods inventory are costed using the FIFO method.
C. Unit costs of direct materials purchased and finished goods are constant in March 2016.

Required:
Prepare the following budgets for March 2016:
1.
2.
3.
4.
5.
6.
7.

Revenue budget
Production budget in units
Direct materials usage budget and direct materials purchases budget
Direct manufacturing labour budget
Manufacturing overhead budget
Ending inventory budget
Costs of goods sold budget and gross margin calculation

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Question Two
Coast Finance helps prospective homeowners of substantial means to find low-cost financing and assists
existing homeowners in refinancing their current loans at lower interest rates. Coast works only for
customers with excellent borrowing capacity. Hence, Coast is able to obtain a loan for every customer
with whom it decides to work.

Coast charges clients 0.5% of the loan amount it arranges. In 2013, the average loan amount per
customer was $238,800. In 2014, the average loan amount was $240,252. In its 2015 flexible-
budgeting system, Coast assumes the average loan amount will be $240,000. Budgeted cost data per
loan application for 2015 are:
Professional labour: 6 budgeted hours at a budgeted rate of $48 per hour
Loan filing fees: budgeted at $120 per loan application
Creditworthiness checks: budgeted at $144 per loan application
Courier mailings: budgeted at $60 per loan application
Office support (the costs of leases, administrative staff, and others) is budgeted to be $37,200 per
month. Coast Finance views this amount as a fixed cost.

Required:
1. Prepare a static budget for November 2015 assuming 90 loan applications.
2. Actual loan applications in November 2015 were 120. Other actual data for November 2015
were:
a. Professional labour: 7.2 hours per loan application at $50.40 per hour
b. Loan filing fees: $120 per loan application
c. Creditworthiness checks: $150 per loan application
d. Courier mailings: $64.80 per loan application

Office support costs for November 2015 were $40,200. The average loan amount for November
2015 was $268,800. Coast received its 0.5% fee on all loans. Prepare a Level 2 variance analysis of
Coast Finance for November 2015. Coasts output measure in its flexible-budgeting system is the
number of loan applications.

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Question Three
CellOne is a cellular phone service reseller, contracting with major cellular operators for airtime in bulk
and then reselling service to retail customers. Having adopted an ABC system last year, CellOne has
defined the following activity areas- contracting, marketing, technical service, and customer service.
The technical service area has one major cost driver- technical support-hours. One hour of technical
support is budgeted for every 5,000 minutes of airtime sold. For the month ended August 31, 2015,
CellOne budgeted to sell 6,850,000 minutes; however, actual minutes sold totaled 7,350,000. During
August 2015, 1,500 actual technical support-hours were logged. Some additional data follows:









Actual Budget

Variable technical service activity cost $37,800 $39,456
Fixed technical service activity costs 81, 000 83,844

Budgeted input allowed for actual output achieved totaled 1,470 hours of technical support.

Required:

1. What is the actual variable technical service activity area cost per technical support-hour?
Budgeted cost per hour?
2. What is the allocated fixed technical service area overhead?
3. Calculate the rate variance, the efficiency variance, and the flexible-budget variance for variable
overhead costs. Explain these variances based on the data provided.
4. Has CellOne management underallocated or overallocated fixed overhead for August 2015? Show
how you calculate the underallocation or overallocation.

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Question Four
The TechMech Company produces and sells 6,000 modular computer desks per year at a selling prices of
$500 each. Its current production equipment, purchased for $1,500,000 and with a five-year useful life,
is only two years old. It has a terminal disposal value of $0 and is depreciated on a straight-line basis.
The equipment has a current disposal price of $600,000. However, the emergence of a new moulding
technology has led TechMech to consider either upgrading or replacing the production equipment. The
following table presents data for the two alternatives:

A
1
2
3
4
5

One-time equipment costs
Variable manufacturing cost per desk
Remaining useful life of equipment (years)
Terminal disposal value of equipment

B
Upgrade
$2,700,000
$ 140
3
$ 0

C
Replace
$4,200,000
$ 80
3
$ 0

All equipment costs will continue to be depreciated on a straight-line basis. For simplicity, ignore income
taxes and time value of money.

Required:
1. Should TechMech upgrade its production line or replace it? Show your calculations.
2. Now suppose the one-time equipment cost to replace the production equipment is somewhat
negotiable. All other data are as given previously. What is the maximum one-time equipment
cost that TechMech would be willing to pay to replace the old equipment rather than upgrade
it?
3. Assume the capital expenditures to replace and upgrade the production equipment are as given
in the original exercise, but that the production and sales quantity is not known. For what
production and sales quantity would TechMech (a) upgrade the equipment or (b) replace the
equipment?
4. Assume that all data are as given in the original exercise. Dan Doria is TechMechs manager, and
his bonus is based on operating income. Because he is likely to relocate after about a year, his
current bonus is his primary concern. Which alternative would Doria choose? Explain.

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Question Five
Clover, Inc. manufactures and sells television sets. Its assembly division (AD) buys television screens
from the screen division (SD) and assembles the TV sets. The SD, which is operating at capacity, incurs
an incremental manufacturing cost of $80 per screen. The SD can sell all its output to the outside market
at a prices of $120 per screen, after incurring a variable marketing and distribution cost of $5 per screen.
If the AD purchases screens from outside suppliers at a price of $120 per screen, it will incur a variable
purchasing cost of $3 per screen. Clovers division managers can act autonomously to maximize their
own divisions operating income.

Required:
1. What is the minimum transfer price at which the SD manager would be willing to sell screens to
the AD?
2. What is the maximum transfer price at which the AD manager would be willing to purchase
screens from the SD?
3. Now suppose that the SD can sell only 80% of its output capacity of 10,000 screens per month on
the open market. Capacity cannot be reduced in the short run. The AD can assemble and sell
more than 10,000 sets per month.
a. What is the minimum transfer price at which the SD manager would be willing to sell
screens to the AD?
b. From the point of view of Clovers management, how much of the SD output should be
transferred to the AD?
c. What transfer-pricing policy will achieve the outcome desired in requirement 3b?

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Question Six
Community Credit Union (CCU) recently introduced a new bonus plan for its business unit executives.
The company believes that current profitability and customer satisfaction levels are equally important to
the banks long-term success. As a result, the new plan awards a bonus equal to 1% of salary for a 1%
increase in net income or a 1% increase in the companys customer satisfaction index. For example,
increasing net income from $3 million to $3.3 million (or 10% from its initial value) leads to a bonus of
10% of salary, while increasing the banks customer satisfaction index from 70 to 73.5 (or 5% from its
initial value) leads to a bonus of 5% of salary. There is no bonus penalty when net income or customer
satisfaction declines. In 2014 and 2015, CCUs three business units reported the following performance
results:

Retail Banking Business Banking

Credit Cards

2014 2015 2014 2015

2014 2015

Net Income $2,800,000 $3,220,000 $2,900,000 $3,016,000

$2,750,000 $2,722,000

Customer Satisfaction 73 73 70 75.6 69 79.35

Required:
1. Compute the bonus as a percent of salary earned by each business unit executive in 2015.
2. What factors might explain the different improvement rates for net income and customer
satisfaction in the three units?
3. CCUs board of directors is concerned that the 2015 bonus awards may not actually reflect the
executives overall performance. In particular, it is concerned that executives can earn large
bonuses by doing well on one performance dimension but underperforming on the other. What
changes can it make to the bonus plan to prevent this from happening in the future? Explain
briefly.

COMM 312 F15

Assignment Two

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