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School of Administrative Studies Atkinson Faculty of Liberal and Professional Studies York University ADMS2510 April 15, 2007, 7 to 10 pm Instructions: - This is a closed book examination and no collaboration is allowed. . - There are a total of 100 marks. - Write your name, student number, and section at the top of the page. - There are five questions. Answer each question on the examination paper, and on the back of a page if necessary. - You must write in pencil or pen. Programmable calculators are not allowed. Cell phones cannot be used as calculators. Dictionaries are not allowed. - You have three hours; you must not leave before 9:00 pm - Place photo identification on your desk at the beginning of the examination to facilitate verification. Good luck. Question 1: ________ Question 2: ________ Question 3: ________ Question 4: ________ Question 5: ________ Total: /100

Question 1 (20 marks) Seco Corp., a wholesale supply company, uses independent sales agents to market the company's products. These agents currently receive a commission of 20% of sales, but are demanding an increase to 25% of sales. Seco had already prepared its budget for next year before learning of the sales agents' demand for an increase in commissions. That budgeted income statement appears below:

Seco is considering the possibility of employing its own salespersons. Three individuals would be required, at a salary of $30,000 each, plus commissions of 5% of sales. In addition, a sales manager would be employed at a fixed annual salary of $160,000. Required: a) Compute Seco's break-even point in sales dollars based upon the company's budgeted income statement, assuming that the company employs its own salespersons [6 marks].

b) Compute the sales dollars required to attain the target profit of $1,900,000, assuming that the company continues to use independent sales agents and the company agrees to their demand for a 25% sales commission (round the answer to two decimal places) [7 marks].

c) Compute the sales dollars that would be required to generate the same net income, whether Seco employs its own salespersons or continues to use the independent sales agents and pays them a 25% commission [7 marks].

Question 2: (20 Marks) Jackson Painting paints the interiors and exteriors of homes and commercial buildings. The company uses an activity-based costing system for its overhead costs. The company has provided the following data concerning its activity-based costing system. Activity Cost Pool Painting Job support Activity Measure Square metres Jobs Annual Activity 10,000 square metres 320 jobs

The company has already finished the first stage of the allocation process in which costs were allocated to the activity cost centres. The results are listed below: Painting $54,000 $16,000 Job support $42,000 $96,000

Painting overhead Office expense

Required: a) Compute the activity rates (i.e., cost per unit of activity) for the Painting and Job Support activity cost pools. Round off all calculations to the nearest whole cent [8 marks].

b) Job M involves painting 63 square metres and has direct materials and direct labour cost of $2,070. Calculate the cost of Job M using ABC [8 marks].

c) Before installing an ABC system, Jackson allocated overhead to jobs using direct labour hours. 10,000 direct labour hours were consumed; Job M consumed 30 hours. Determine the pre-ABC cost of Job M [4 marks].

Question 3 (20 marks) Weng Fu Lee is a manufacturer of electronic components for toys manufacturers located in Formosa Island. The general manager is exited about the good news just received: they have won a contract to manufacture 10,000 components of a doll to be assembled in Australia. Now he asks you to tell the production manager the size of the batch to employ in producing the doll component. You talked with the engineer that designed the component and he told you that the standards are the following ones: Direct materials: Silice pads 1 Circuits 5 grams Direct labour of an electronic technician: 20 minutes Set up costs per production run: $2,000 Also you know that 1,000 silice pads cost $50, a kilogram (or 1,000 grams) of circuits cost $100, the hourly wage of an electronic technician is $3, the variable overhead allocation rate is $0.6 per direct labour hour, and that a box with 100 doll components costs $40 per month to storage.

Required: 1) Determine the optimal production run for the doll component (7 marks)

2) What is the total cost of each doll component (7 marks)

3) If another company offers you to supply the doll component, what is the maximum price that you would consider to start negotiating? (3 marks)

4) What would be your concerns when considering outsourcing this doll component? (2 marks)

Question 4 (20 marks) Viatu Company Limited May, 2008 Balance is given below; Assets Cash $ 40,000 Liabilities and Equity Accounts Payable Common Stock Retained Earnings $ 272,000 120,000 220,400

Accounts receivable (net of $3,800 144,400 provision for bad debts) Inventory Plant Assets (net of accumulated amortization Total Assets 108,000 $40,00 320,000 $612,400

Total Liabilities and 612,000 equities

Additional information: a) The company wants a minimum cash balance of $40,000 b) Revenues of $ 360,000 and $ 480,000 are expected for June and July 2008 respectively c) The collection Pattern is 60% in the month of sale, 38% in the next month and 2%is uncollectible d) Cost of goods sold is 75% of sales. e) Purchases each month are 60% of the current months sales and 40% of the following months sales. All purchases are paid in the month following the purchase. d) Other monthly expenses total $ 48,000. This amount includes $2,000 of depreciation but does not include bad debts expense. Required: 1) June cash collections. (2 Marks)

2) June 30th inventory balance. (2 Marks)

3) June 30th retained earnings balance (2 marks)

4) June ash Budget, including the amount available for investment or to be borrowed in June. (10 Marks)

5) Why should a firm want to maintain a minimum cash balance of $40,000? Who would set such a policy? (4 marks)

Question 5 (20 marks) The Justa Corporation produces and sells three products: shaving crme, aftershave and cologne. Each product is designed, manufactured and sold by a different division; each one of the three divisions (Shaving Crme Division, Aftershave Division and Cologne Division) being treated as an investment center. The manager of each division has a quarterly bonus based on return on sales, while the bonus of the CEO of the company is tied to ROI. The three products are sold in Canada and in the US. At the end of the last quarter of 2006 the following income statement was available:

Sales Cost of goods sold Gross margin Selling expenses Administrative expenses Total expenses Net income

Total 1,300,000 1,010,000 290,000 105,000 52,000 157,000 133,000

Canada US 1,000,000 300,000 775,000 235,000 225,000 65,000 60,000 45,000 40,000 12,000 100,000 57,000 125,000 8,000

Management has expressed special concern with the US market because of the extremely poor return on sales. This market was entered during the year 2005 because of excess capacity. It was originally believed that the return on sales would improve with time, but after a year no noticeable improvement can be seen from the results reported in the above quarterly statement. In attempting to decide whether to eliminate the regional market, the following information has been gathered: Shaving crme Sales $500,000 Variable manufacturing expenses 60% as a percentage of sales Variable selling expenses as a 3% percentage of sales Sales of products by markets Shaving crme Aftershave Cologne Sales in Canada $400,000 $300,000 $300,000 Aftershave Cologne $400,000 $400,000 70% 60% 2% 2%

Sales in the US $100,000 $100,000 $100,000

All administrative expenses and fixed manufacturing expenses are common to the three products and the two markets and are fixed and unavoidable for the period. Remaining selling expenses are fixed for the period, separable by market, and avoidable if the market is dropped. All fixed expenses are based upon a prorated yearly amount. Required: Use the case approach to identify and solve the problem faced by Justa Corporation.

Exhibit 1: Contribution margin of 3 divisions and per market

Shaving crme Aftershave Cologne Company's Canada US Total Canada US Total Canada US Total total Sales 400000 100000 500000 300000 100000 400000 300000 100000 400000 1300000 Variable manuf expens 240000 60000 300000 210000 70000 280000 180000 60000 240000 820000 12000 3000 15000 6000 2000 8000 6000 2000 8000 31000 Variable selling expens Contribution margin Fixed expenses Manufacturing Selling Administrative Net income 148000 37000 185000 84000 28000 112000 114000 38000 152000 449000

190000 74000 52000 133000

Exhibit 2: Segment margins

Sales Variable manuf expenses Variable selling expense Contribution margin Fixed avoidable Selling Segment margin Fixed expenses Manufacturing Administrative Net income Canada US Total 1000000 300000 630000 190000 24000 7000 0 0 346000 103000

36000 310000

38000 65000

375000

190000 52000 133000