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Principles of Accounting, Volume 2: Managerial Accounting

Problem Set A

Principles of Accounting, Volume 2: Managerial AccountingProblem Set A
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PA 1.

LO 9.3Use the following information to answer the questions that follow.

Bluff Run Golf Courses, Income Statement, Month Ending July 31, 2018 for Blue Course, Black Course, and Gold Course, respectively: Revenues: Greens fees revenue, $62,500, $89,000, $42,800; Outings revenue, $?, $6,000, $28,000; Total revenue, $73,500, $95,000, $70,800; Expenses: Landscaping, $7,800, $14,200, $6,400; Wages, $43,900, $?, $32,600; Repairs and maintenance, $5,600, $2,600, $4,400; Fuel, $3,100, $3,000, $1,980; Utilities, $1,800, $3,000, $1,650; Total expenses, $62,200, $79,100, $47,030; Operating income $11,300, $15,900, $?; Operating income %, $?, $?, $?.
  1. Calculate the operating income percentage for each of the courses. Comment on how your analysis has changed for each course.
  2. Perform a vertical analysis for each course. Based on your analysis, what accounts would you want to investigate further? How might management utilize this information?
  3. Which method of analysis (using a dollar value or percentage) is most relevant and/or useful? Explain.
PA 2.

LO 9.3Use Netflix’s 2017 annual report to answer the following questions.

  1. Using the revenue and contribution profit information, calculate the contribution profit (loss) percentage for each of the divisions. Comment on how your analysis has changed compared to your analysis of the dollar amounts for each division.
  2. Since companies typically do not publicly provide more than macro levels of asset values, let’s assume the following level of assets (investment):
     Assets (fictitious) for 2017, 2016, and 2015 respectively: Domestic streaming, $15,000,000, $14,000,000, $10,000,000; International streaming, $6,000,000, $4,000,000, $2,000,000; Domestic DVD, $1,500,000, $2,000,000, $3,000,000.
    Calculate the return on investment (ROI) for each division. Comment on the results.
  3. Assume that Netflix uses a cost of capital of 7%. Calculate the residual income (RI) for each of the divisions. Comment on the results.
PA 3.

LO 9.3The income statement comparison for Forklift Material Handling shows the income statement for the current and prior year.

Forklift Material Handling, Income Statement Comparison for the current year and prior year, respectively (amounts in thousands): Sales, $33,750, $24,750; Cost of goods sold, $21,938, $16,830; Gross profit, $11,813, $7,920; Expenses: Wages, $8,775, $6,188; Utilities, $675, $250; Repairs, $169, $325; Selling, $506, $200; Total expenses, $10,125, $6,963; Operating income, $?, $?; Operating income %, $?, $?; Total assets (investment base) $4,500, $1,500; Return on investment, $?, $?; Residual income (8% cost of capital) $?, $?.
  1. Determine the operating income (loss) (dollars) for each year.
  2. Determine the operating income (percentage) for each year.
  3. The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the total assets amounts as the investment base, calculate the return on investment. Was the decision to invest additional assets in the company successful? Explain.
  4. Assuming an 8% cost of capital, calculate the residual income for each year. Explain how this compares to your findings in part C.
PA 4.

LO 9.3Assume you are the leather department manager at the Famous Football Factory. The leather department is a cost center and you are reviewing the scrap costs for the previous year, shown here:

Famous Football Factory Cost Center Data-Leather Division. For each month, respectively, starting with January: Leather scrap expense: $10,000, $10,100, $10,302, $10,405, $11,029, $11,801, $13,100, $14,278, $15,135, $11,351, $11,351, $11,465.
  1. Using Microsoft Excel or another spreadsheet application, create a line chart with markers showing the leather scrap expense. Describe your observations.
  2. Knowing that leather is susceptible to indoor temperature, you decide to talk with the maintenance manager and obtain the following information:
For each month, respectively, starting with January: Average indoor temperature (degrees Fahrenheit): 70, 71, 70, 70, 71, 73, 74, 76, 74, 72, 71, 70; Air conditioning spare parts inventory: $3,500, $3,150, $2,898, $2,695, $2,426, $2,207, $2,031, $2,010, $2,010, $2,010, $2,010, $1,990; Number of air conditioning breakdowns: 0, 0, 0, 1, 2, 4, 4, 6, 5, 1, 0, 0.

Using Microsoft Excel or another spreadsheet application, create individual line charts with markers showing the indoor temperature, spare parts inventory, and breakdowns. Describe your observations and actions you might consider.

PA 5.

LO 9.4Financial information for BDS Enterprises for the year-ended December 31, 20xx, was gathered from an accounting intern, who has asked for your guidance on how to prepare an income statement format that will be distributed to management. Subtotals and totals are included in the information, but you will need to calculate the values.

  1. In the correct format, prepare the income statement using the following information:
  2. Calculate the profit margin, return on investment, and residual income. Assume an investment base of $100,000 and 6% cost of capital.
  3. Prepare a short response to accompany the income statement that explains why uncontrollable costs are included in the income statement.
Pretax income $?, Gross profit $?, Allocated costs (uncontrollable) $2,035, Labor expense $41,580, Sales $189,000, Research and development (uncontrollable) $315, Depreciation expense $17,000, Net income/(loss) $?, Cost of goods sold $119,070, Selling expense $1,250, Total expenses $?, Marketing costs (uncontrollable) $790, Administrative expense $690, Income tax expense (21% of pretax income) $?, Other expenses $320.
PA 6.

LO 9.4Using the information from BDS Enterprises, prepare the income statement to include all costs, but separate out uncontrollable costs. Insert subtotals where appropriate (include one for operating income) before the uncontrollable costs. Income tax expense should be based on all expenses (that is, it will be the same amount as in question 1). Calculate net income, profit margin, ROI, and RI, excluding uncontrollable expenses. Prepare a short response to accompany the income statement that explains why uncontrollable costs are separated in the income statement.

PA 7.

LO 9.4Management of Great Springs Bottled Water Company has asked you, the controller, to develop a transfer pricing system for the company. The Transportation Department of the company sells all of its product to the Bottling Department of the company. Thus the Transportation Department’s sales become the Bottling Department’s cost of goods sold. In order to determine an optimal transfer pricing system, management would like you to demonstrate what an income statement would look like under a cost, market, and negotiated transfer pricing structure. These various transfer prices are listed as follows. Prepare an income statement for each of the transfer prices by filling in the missing numbers in the provided income statement based on each transfer price (thus three different income statements) and calculate the operating income/loss percentage. Prepare a brief summary of the results.

Cost-basted $0.62, Market-based $0.74, Negotiated $0.70, Gallons transferred 278,000. Great Springs Bottled Water, Income Statement, Month Ending August 31,2018 for Transportation and Bottling, respectively: Sales, $?, $286,000; Cost of good sold, $89,627, $?; Gross profit, $?, $?; Fuel/utility expense, $15,000, $3,200; Wages expense, $43,090, $57,200; Costs allocated form corporate, $17,236, $15,000; Total expenses, $75,326, $75,400; Operating income/(loss) $, $?, $?; Operating income/(loss) %, ?, ?.
PA 8.

LO 9.4The following revenue data were taken from the December 31, 2017, Coca-Cola annual report (10-K):

Chart showing 2017 (in millions) for Europe, Middle East, Africa; Latin America; North America; Asia Pacific; and Bottle Investments; respectively: Outside sales, $7,332, $3,956, $8,651, $4,767, $10,524; Intersegment sales, $42, $73, $1,986, $409, $81; Total sales, $7,374, $4,029, $10,637, $5,176, $10,605. Chart showing 2016 (in millions) for Europe, Middle East, Africa; Latin America; North America; Asia Pacific; and Bottle Investments, respectively: Outside sales, $7,014 , $3,746, $6,437, $4,788, $19,751; Intersegment sales, $264, $73, $3,773, $506, $134; Total sales, $7,278, $3,819, $10,210, $5,294, $19,885.

For each segment and each year, calculate intersegment sales (another name for transfer sales) as a percentage of total sales. Using Microsoft Excel or another spreadsheet application, create a clustered column graph to show the 2016 and 2017 percentages for each division. Comment on your observations of this data. How might a division sales manager use this data?

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