When answering the questions, the work that you submit for grading must be your work. Any plagiarism will result in a grade of zero for the exam. If you have questions, please consult with the instructor. The evaluation of the work,especially the qualitative questions depends on the organization of the material and the depth of the answers. The quantitative questions should show the computations/process not just an answer. Each question should be answered thoroughly discussing concepts, which were discussed in class. It is better to write too much rather than too little.
1. In the context of this course, you will be asked to address the issues/questions below for Nordstrom, Inc., http://shop.nordstrom.com. When addressing the issues/questions, be sure to do so in the context of this course and Nordstrom. You have been appointed as the special assistant to the Co-President, Blake Nordstrom, who has asked you to address the following five situations:
(2 pts) a) A fellow MBA alum from Lynn University, who now works in Admission at Lynn University would like to give each MBA student a benefit, which is programmed into the Lynn University ID card. This benefit would allow the student to buy online a sweater for $30.00. Normally the sweater sells for $70.00. The full cost of the sweater is $35.00. Discuss whether this would be feasible, i.e. Nordstrom is able to do this transaction without it being a donation.
(2 pts) b) Nordstrom currently contracts for much of its apparel from a manufacturer in China. A representative from a consortium in Vietnam is offering to sell the apparel for 20% less than the cost from the manufacturer in China. Discuss the issues that you would consider in deciding whether to acceptthis offer.
(8 pts) c) The Co-President wishes to develop an incentive plan for the store managers.
Before this is put into place, the Co-President wishes you to make sure that budgeting in the stores is done correctly. He has asked you to submit a document discussing the key points that you have learned in MBA 640. These key points would be the foundation of the budgeting process for the retail stores.Be as thorough as possible.
(2 pts) d) Nordstrom has only used absorption costing. The Co-President has asked you to explain the merits of using variable costing under certain circumstances.
(2 pts) e) The Co-President has asked you to explain how target costing/pricing would be
used in Nordstrom’s pricing policies.
(20 pts) 2. Eco-Beverage, Inc. is a manufacturer of ceramic bottles. The company has these standards:
Direct materials (clay) 1 pound per bottle, at a cost of $0.40 per pound
Direct labor 1/5 hour per bottle, at a cost of $14 per hour
Static budget variable overhead $ 70,000
Static budget fixed overhead $ 30,000
Static budget direct labor hours 10,000 hours
Static budget number of bottles 50,000
Eco-Beverage, Inc. allocates manufacturing overhead to production based on standard direct labor hours.
Last month, Eco-Beverage, Inc. reported the following actual results for the production of 70,000 bottles:
Direct materials, used 1.1 pound per bottle
Direct materials, purchased 80,000 pounds at $.50 per pound
Direct labor ¼ hour per bottle, at a cost of $13 per hour
Actual variable overhead $104,000
Actual fixed overhead $28,000
a) Determine the standard cost of a single ceramic bottle.
b) Compute the eight variances that were discussed in class. Comment on the results.
(12 pts) 3. Darden Company prepared the following absorption-costing income statement
for the year ended January 31, 2017.
Sales (16,000 units) $320,000
Cost of goods sold 216,000
Gross profit $104,000
Selling and administrative expenses 46,000
Operating income $ 58,000
Additional information follows:
Selling and administrative expenses include $1.50 of variable cost per unit sold. There was no beginning inventory, and 17,500 units were produced. Variable manufacturing costs were $11 per unit; of that amount, $9 was for direct materials. Actual fixed costs were equal to budgeted fixed costs, which were a total of $65,750 ($22,000 is selling and administrative expenses).
a) Determine the unit product cost for January using absorption costing and variable coasting.
b) Prepare a variable-costing income statement for the same period.
(12 pts) 4. Management at Ithaca Machine Tool Co. is considering the development of a new automated drill press called the AutoDrill. After conferring with the design engineers, the controller’s staff assembled the following data about this product:
Target selling price $7,500 per unit
Desired profit percentage 30% of selling price
Projected unit demand 4,500 units
Activity-based cost rates
Materials handling 5% of direct materials and purchased parts cost
Engineering $300 per unit
Prod. &Assembly Overhead $50 per machine hour
Delivery $570 per unit for AutoDrill
Marketing $400 per unit for AutoDrill
Direct materials cost $1,620
Purchased parts cost $840
Manufacturing labor hours 6 hours
Hourly labor rate $14
Assembly labor hours 10 hours
Hourly labor rate $15
Machine hours 30 hours
a) Compute the product’s target cost.
b) Compute the product’s projected unit cost based on the design engineers’ estimates. What is the difference in profit using target cost as opposed to the cost based on the design engineers ‘estimates?
c) Should management produce and market the AutoDrill? Defend your answer.
(8 pts) 5. Assume that a division of Bose makes an electronic component for its speakers. Its manufacturing process for the component is a highly automated part of a just-in-time production system. All labor is considered to be an overhead cost, and all overhead is regarded as fixed with respect to output volume. Production costs for 100,000 units of the components are as follows:
Direct materials $300,000
Indirect labor $ 80,000
Allocated occupancy cost 40,000 150,000
Total cost $450,000
A small, local company has offered to supply the components at a price of $3.35 each. If the division discontinued its production of the component, it would save two-thirds of the supplies cost and $30,000 of indirect labor cost. All other overhead costs would continue.
The division manager recently attended a seminar on cost behavior and learned about fixed and variable costs. He wants to continue to make the component because the variable cost of $3.00 is below the $3.35 bid.
a) Compute the relevant cost of (a) making and (b) purchasing the component. Which alternative is less costly and by how much?
b) What qualitative factors might influence the decision about whether to make or to buy the component?
(12 pts) 6. Top managers of Jasper manufacturing predicted the following year’s sales of 147,000 units of its product at a unit price of $9.20. Actual sales for the year were 144,000 units at $11.60 each. Variable expenses were budgeted at $2.35 per unit, and actual variable expenses were $2.80 per unit. Actual fixed expenses of $430,000 exceeded budgeted fixed expenses by $27,500
a) Prepare a report showing actual results, a static budget and a flexible budget.
b) Explain the significance of a flexible budget versus a static budget.
(12 pts) 7. The operating results in summarized form for a retail computer store for 2017 are:
Hardware sales $4,800,000
Software sales 2,000,000
Maintenance contracts 1,200,000
Total revenue $8,000,000
Costs and expenses:
Cost of hardware sales $3,360,000
Cost of software sales 1,200,000
Marketing expenses 600,000
Customer maintenance costs 640,000
Administrative expenses 1,120,000
Total costs and expenses $(6,920,000)
Operating income $1,080,000
The computer store is in the process of formulating its operating budget for 2018 and has made the following assumptions:
• The selling prices of hardware are expected to increase 10 percent but there will be no selling price increases for software and maintenance contracts.
• Hardware unit sales are expected to increase 5 percent with a corresponding 5 percent growth in the number of maintenance contracts; growth in unit software sales is estimated at 8 percent.
• The cost of hardware and software is expected to increase 4 percent.
• Marketing expenses will be increased 5 percent in the coming year.
• Three technicians will be added to the customer maintenance operations in the coming year, increasing the customer maintenance costs by $120,000.
• Administrative costs will be held at the same level.
a) Compute the computer retail store’s budgeted operating income for 2018.
(8 pts) 8. On May 1, Bass Industries received a special order request for 120 10-foot aluminum fishing boats. Operating on a fiscal year ending September 30, the company already has orders that will allow it to produce at budget levels for the period. However, extra capacity exists to produce the 120 additional boats.
The terms of the special order call for a selling price of $675 per boat, and the customer will pay all shipping costs. No sales personnel were involved in soliciting the order.
The 10-foot fishing boat has the following cost estimates: direct materials, aluminum, two 4’ x 8’ sheets at $155 per sheet; direct labor, 14 hours at $15.00 per hour; variable manufacturing overhead, $7.25 per direct labor hour, fixed manufacturing overhead, $4.50 per direct labor hour; variable selling expenses, $46.50 per boat; and variable shipping expenses, $57.50 per boat. Typically, each boat sells for$980.
Prepare an analysis for management of Bass Industries to use in deciding whether to accept or reject the special order. What decision should be made? Include qualitative issues in making the decision.