ECONOMICS

World Company expects to operate at 80% of its productive capacity of 55,000 units per month. At this planned level, the company expects to use 27,500 standard hours of direct labor. Overhead is allocated to products using a predetermined standard rate based on direct labor hours. At the 80% capacity level, the total budgeted cost includes $66,000 fixed overhead cost and $313,500 variable overhead cost. In the current month, the company incurred $360,000 actual overhead and 24,500 actual labor hours while producing 39,000 units.

 

(1) Compute the overhead volume variance. (Round all your intermediate calculations to 2 decimal places.)

 

Marathon Running Shop has two service departments (advertising and administration) and two operating departments (shoes and clothing). During 2013, the departments had the following direct expenses and occupied the following amount of floor space.

 

  Department Direct Expenses Square Feet
  Advertising $ 16,000 780
  Administrative 18,300 1,040
  Shoes 101,600 7,020
  Clothing 12,100 4,160

 

The advertising department developed and distributed 120 advertisements during the year. Of these, 90 promoted shoes and 30 promoted clothing. The store sold $350,000 of merchandise during the year. Of this amount, $280,000 is from the shoes department, and $70,000 is from the clothing department. The utilities expense of $65,000 is an indirect expense to all departments.

 

Complete the departmental expense allocation spreadsheet for Marathon Running Shop. Assign (1) direct expenses to each of the four departments, (2) the $65,000 of utilities expense to the four departments on the basis of floor space occupied, (3) the advertising department’s expenses to the two operating departments on the basis of the number of ads placed that promoted a department’s products, and (4) the administrative department’s expenses to the two operating departments based on the amount of sales.

 

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

 

  Sales $ 150,000
  Costs
    Materials, labor, and overhead (except depreciation) 80,000
    Depreciation on new equipment 20,000
    Selling and administrative expenses 15,000


  Total costs and expenses 115,000


  Pretax income 35,000
  Income taxes (50%) 17,500


  Net income $ 17,500





 

1. Compute the payback period.
2. Compute the accounting rate of return for this equipment.

 

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $369,600 with a 7-year life and no salvage value. It will be depreciated on a straight-line basis. B2B Co. concludes that it must earn at least a 9% return on this investment. The company expects to sell 147,840 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1FV of $1PVA of $1, and FVA of $1(Use appropriate factor(s) from the tables provided.)

 

  Sales $ 231,000
  Costs
     Materials, labor, and overhead (except depreciation) 81,000
     Depreciation on new equipment 52,800
     Selling and administrative expenses 23,100


  Total costs and expenses 156,900


  Pretax income 74,100
  Income taxes (40%) 29,640


  Net income $ 44,460





 

Compute the net present value of this investment. (Round “PV Factor” to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount.)

 

 

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