Sherene Nili manages a company that makes wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

	Custom Dresses	Standard Dresses	Total
Number of dresses	10	20	30
Sales revenue	$50,000	$30,000	$80,000
Materials	$10,000	$8,000	$18,000
Labor	20,000	9,000	29,000
Machine depreciation	600	300	900
Rent	4,200	2,800	7,000
Heat and light	1,000	600	1,600
Other production costs			2,800
Marketing and administration			7,700
Total costs			67,000
Operating profit			$13,000

Ms. Nili already has orders for the 10 custom dresses refl ected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of$1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 900 hours, of which 600 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of fl oor space occupied.

A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili’s company is working at capacity and would have to give up some other business to make this dress. She can’t renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay$24,000 for the special order. Materials and labor for the order will cost $6,000 and$10,000, respectively. The special order would require 140 hours of machine time. Ms. Nili’s company would save 150 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Required
What is the minimum price Ms. Nili should accept to take the special order?

CTU Industries, Inc., began business on January $2$, $2009$. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in $2010$, before the Wage and Tax Statements (Form W-$2$) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees’ earnings records were inadvertently destroyed.
$\hspace{10pt}$ None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of $6.0\%$ on the first $\$100,000$ of salary and Medicare tax at the rate of $1.5\%$ on salary. Data on dates of employment, salary rates, and employees’ income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records:

$$\begin{array}{lccc} &&& \textbf{Monthly}\\ & \textbf{Date First} & \textbf{Monthly} & \textbf{Income Tax}\\ \textbf{Employee} & \textbf{Employed} & \textbf{Salary} & \textbf{Withheld}\\ \hline \text{Brown} & \text{Aug.}\hspace{9pt} 1 & \$3,600 & \$\hspace{13pt}552\\ \text{Carroll} & \text{Jan.}\hspace{9pt} 2 & \hspace{5pt} 9,500 & \hspace{5pt}2,113\\ \text{Grobe} & \text{May}\hspace{9pt} 1 & \hspace{5pt}6,500 & \hspace{5pt}1,277\\ \text{Meyer} & \text{July}\hspace{9pt} 1 & \hspace{5pt}4,200 & \hspace{15pt}702\\ \text{Saban} & \text{Jan.}\hspace{9pt} 2 & \hspace{5pt}5,100 & \hspace{15pt}927\\ \text{Tressel} & \text{Apr.}\ 16 & \hspace{5pt}3,200 & \hspace{15pt}452\\ \text{Weis} & \text{Oct.}\hspace{9pt} 1 & \hspace{5pt}3,000 & \hspace{15pt}402 \end{array}$$

$\textsf{\textcolor{#4257b2}{Instructions}}$
$1$. Calculate the amounts to be reported on each employee’s Wage and Tax Statement (Form W-$2$) for $2009,$ arranging the data in the following form:

$$\begin{array}{ccccc} & \textbf{Gross} & \textbf{Federal Income} & \textbf{Social Security} & \textbf{Medicare Tax}\\ \textbf{Employee} & \textbf{Earnings} & \textbf{Tax Withheld} & \textbf{Tax Withheld} & \textbf{Withheld}\\ \hline \end{array}$$

$2$. Calculate the following employer payroll taxes for the year: $\left(\text{a}\right)$ social security; $\left(\text{b}\right)$ Medicare; $\left(\text{c}\right)$ state unemployment compensation at $4.8\%$ on the first $\$10,000$ of each employee’s earnings; $\left(\text{d}\right)$ federal unemployment compensation at $0.8\%$ on the first $\$10,000$ of each employee’s earnings; $\left(\text{e}\right)$ total.

See Table down below showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco repurchases $2.3$ million shares each year from $2013$ to $2016$. What would its earnings per share be in years $2013-2016$? (Assume Mydeco pays for the shares using its available cash and that Mydeco earns no interest on its cash balances.)

2012–2016 Financial Statement Data and Stock Price Data for Mydeco Corp

Mydeco Corp. 2012–2016 $\hspace{30mm}$ (All data as of fiscal year end; in $million)$

$$\begin{array}{lccccc} \text{Income statement} & 2012 & 2013 & 2014 & 2015 & 2016 \\ \text{Revenue} & 401.9 & 361.6 & 429.6 & 513.6 & 602.6 \\ \underline{\text{Cost of Goods Sold}} & (192.1) & (175.4) & (207.1) & (248.3) & (295.8)\\ \text{Gross Profit} & 209.8 & 186.2 & 222.5 & 265.3 & 306.8\\ \text{Sales and Marketing} & (65.0) & (64.4) & (84.3) & (104.9) & (121.1)\\ \text{Administration} & (61.8) & (57.1) & (59.0) & (66.9) & (79.8)\\ \underline{\text{Depreciation $\And$ Amortization}} & (27.5) & (26.3) & (32.5) & (38.3) & (40.1)\\ \text{EBIT} & 55.5 & 38.4 & 46.7 & 55.2 & 65.8\\ \underline{\text{Interest Income (Expense)}} & (32.4) & (31.8) & (32.0) & (37.0) & (40.9)\\ \text{Pretax Income} & 23.1 & 6.6 & 14.7 & 18.2 & 24.9\\ \underline{\text{Income Tax}} & (8.1) & (2.3) & (5.1) & (6.4) & (8.7)\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Shares outstanding (millions)} & 56.8 & 56.8 & 56.8 & 56.8 & 56.8\\ \text{Earnings per share} & \$0.26 & \$0.08 & \$0.17 & \$0.21 & \$0.29\\ \text{Balance Sheet} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Assets}\\ \text{Cash} & 49.4 & 68.0 & 91.7 & 80.4 & 83.6\\ \text{Accounts Receivable} & 87.6 & 70.6 & 69.3 & 77.4 & 84.2\\ \text{Inventory} & 33.5 & 32.2 & 27.3 & 30.2 & 35.8\\ \text{Total Current Assets} & 170.5 & 170.8 & 188.3 & 188.0 & 203.6\\ \text{Net Property, Plant $\And$ Equip.} & 244.3 & 243.3 & 306.1 & 349.6 & 347.9\\ \text{Goodwill $\And$ Intangibles} & 365.5 & 365.5 & 365.5 & 365.5 & 365.5\\ \text{Total Assets} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Liabilities $\And$ Stockholders’ Equity}\\ \text{Accounts Payable} & 18.8 & 18.8 & 22.4 & 27.1 & 30.3\\ \text{Accrued Compensation} & 7.6 & 6.3 & 7.5 & 7.7 & 9.4\\ \text{Total Current Liabilities} & 26.4 & 25.1 & 29.9 & 34.8 & 39.7\\ \text{Long-term Debt} & 498.9 & 498.9 & 572.2 & 597.5 & 597.5\\ \text{Total Liabilities} & 525.3 & 524 & 602.1 & 632.3 & 637.2\\ \text{Stockholders’ Equity} & 255.0 & 255.6 & 257.8 & 270.8 & 279.8\\ \text{Total Liabilities $\And$ Stockholders’ Equity} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Statement of Cash Flows} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Depreciation $\And$ Amortization} & 27.5 & 26.3 & 32.5 & 38.3 & 40.1\\ \text{Chg. in Accounts Receivable} & 3.9 & 17.0 & 1.3 & (8.1) & (6.8)\\ \text{Chg. in Inventory} & (2.9) & 1.3 & 4.9 & (2.9) & (5.6)\\ \underline{\text{Chg. in Payables $\And$ Accrued Comp.}} & 1.7 & (1.3) & 4.8 & 4.9 & 4.9\\ \text{Cash from Operations} & 45.2 & 47.6 & 53.1 & 44.0 & 48.8\\ \underline{\text{Capital Expenditures}} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Cash from Investing Activities} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Dividends Paid} & (5.2) & (5.2) & (5.2) & (5.2) & (5.6)\\ \text{Sale (or purchase) of stock} & — & — & — & — & —\\ \underline{\text{Debt Issuance (Pay Down)}} & — & — & 73.3 & 25.3 & —\\ \text{Cash from Financing Activities} & (5.2) & (5.2) & 68.1 & 20.1 & (5.6)\\ \text{Change in Cash} & 13.4 & 18.6 & 23.7 & (11.3) & 3.2\\ \text{Mydeco Stock Price} & \$7.02 & \$3.55 & \$5.86 & \$8.33 & \$11.57\\ \end{array}$$

$

Gridiron Concepts Co. began business on January $2$, $2009$. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in $2010$, before the Wage and Tax Statements (Form W-$2$) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees’ earnings records were inadvertently destroyed.
$\hspace{20pt}$ None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of $6.0\%$ on the first $\$100,000$ of salary and Medicare tax at the rate of $1.5\%$ on salary. Data on dates of employment, salary rates, and employees’ income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records:

$$\begin{array}{lccc} &&& \textbf{Monthly}\\ & \textbf{DateFirst} & \textbf{Monthly} & \textbf{Income Tax}\\ \textbf{Employee} & \textbf{Employed} & \textbf{Salary} & \textbf{Withheld}\\ \hline \text{Brooks} & \text{Jan.}\hspace{9pt} 2 & \$\hspace{5pt}3,400 & \$\hspace{12pt}502\\ \text{Croom} & \text{June}\ 16 & \hspace{9pt} 5,600 & \hspace{9pt} 1,052\\ \text{Fulmer} & \text{Apr.}\hspace{9pt} 1 & \hspace{9pt} 2,500 & \hspace{19pt} 310\\ \text{Johnson} & \text{Oct.}\hspace{9pt} 1 & \hspace{9pt} 2,500 & \hspace{19pt} 310\\ \text{Nutt} & \text{Jan.}\hspace{9pt} 2 & \hspace{3pt} 10,000 & \hspace{9pt} 2,253\\ \text{Richt} & \text{Jan.}\hspace{4pt} 16 & \hspace{9pt} 3,600 & \hspace{19pt} 552\\ \text{Spurrier} & \text{Mar.}\hspace{7pt} 1 & \hspace{9pt} 8,600 & \hspace{9pt}1,861 \end{array}$$

$\textsf{\textcolor{#4257b2}{Instructions}}$
$1$. Calculate the amounts to be reported on each employee’s Wage and Tax Statement (Form W-$2$) for $2009$, arranging the data in the following form:

$$\begin{array}{ccccc} & \textbf{Gross} & \textbf{Federal Income} & \textbf{Social Security} & \textbf{Medicare Tax}\\ \textbf{Employee} & \textbf{Earnings} & \textbf{Tax Withheld} & \textbf{Tax Withheld} & \textbf{Withheld}\\ \hline \end{array}$$

$2$. Calculate the following employer payroll taxes for the year: $\left(\text{a}\right)$ social security; $\left(\text{b}\right)$ Medicare; $\left(\text{c}\right)$ state unemployment compensation at $4.8\%$ on the first $\$8,000$ of each employee’s earnings; $\left(\text{d}\right)$ federal unemployment compensation at $0.8\%$ on the first $\$8,000$ of each employee’s earnings; $\left(\text{e}\right)$ total.

See Table down below showing financial statement data and stock price data for Mydeco Corp.

a. Compare accounts payable days in $2012$ and $2016$.

b. Did this change in accounts payable days improve or worsen Mydeco's cash position in $2016$?

2012–2016 Financial Statement Data and Stock Price Data for Mydeco Corp

Mydeco Corp. 2012–2016 $\hspace{30mm}$ (All data as of fiscal year end; in $million)$

$$\begin{array}{lccccc} \text{Income statement} & 2012 & 2013 & 2014 & 2015 & 2016 \\ \text{Revenue} & 401.9 & 361.6 & 429.6 & 513.6 & 602.6 \\ \underline{\text{Cost of Goods Sold}} & (192.1) & (175.4) & (207.1) & (248.3) & (295.8)\\ \text{Gross Profit} & 209.8 & 186.2 & 222.5 & 265.3 & 306.8\\ \text{Sales and Marketing} & (65.0) & (64.4) & (84.3) & (104.9) & (121.1)\\ \text{Administration} & (61.8) & (57.1) & (59.0) & (66.9) & (79.8)\\ \underline{\text{Depreciation $\And$ Amortization}} & (27.5) & (26.3) & (32.5) & (38.3) & (40.1)\\ \text{EBIT} & 55.5 & 38.4 & 46.7 & 55.2 & 65.8\\ \underline{\text{Interest Income (Expense)}} & (32.4) & (31.8) & (32.0) & (37.0) & (40.9)\\ \text{Pretax Income} & 23.1 & 6.6 & 14.7 & 18.2 & 24.9\\ \underline{\text{Income Tax}} & (8.1) & (2.3) & (5.1) & (6.4) & (8.7)\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Shares outstanding (millions)} & 56.8 & 56.8 & 56.8 & 56.8 & 56.8\\ \text{Earnings per share} & \$0.26 & \$0.08 & \$0.17 & \$0.21 & \$0.29\\ \text{Balance Sheet} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Assets}\\ \text{Cash} & 49.4 & 68.0 & 91.7 & 80.4 & 83.6\\ \text{Accounts Receivable} & 87.6 & 70.6 & 69.3 & 77.4 & 84.2\\ \text{Inventory} & 33.5 & 32.2 & 27.3 & 30.2 & 35.8\\ \text{Total Current Assets} & 170.5 & 170.8 & 188.3 & 188.0 & 203.6\\ \text{Net Property, Plant $\And$ Equip.} & 244.3 & 243.3 & 306.1 & 349.6 & 347.9\\ \text{Goodwill $\And$ Intangibles} & 365.5 & 365.5 & 365.5 & 365.5 & 365.5\\ \text{Total Assets} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Liabilities $\And$ Stockholders’ Equity}\\ \text{Accounts Payable} & 18.8 & 18.8 & 22.4 & 27.1 & 30.3\\ \text{Accrued Compensation} & 7.6 & 6.3 & 7.5 & 7.7 & 9.4\\ \text{Total Current Liabilities} & 26.4 & 25.1 & 29.9 & 34.8 & 39.7\\ \text{Long-term Debt} & 498.9 & 498.9 & 572.2 & 597.5 & 597.5\\ \text{Total Liabilities} & 525.3 & 524 & 602.1 & 632.3 & 637.2\\ \text{Stockholders’ Equity} & 255.0 & 255.6 & 257.8 & 270.8 & 279.8\\ \text{Total Liabilities $\And$ Stockholders’ Equity} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Statement of Cash Flows} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Depreciation $\And$ Amortization} & 27.5 & 26.3 & 32.5 & 38.3 & 40.1\\ \text{Chg. in Accounts Receivable} & 3.9 & 17.0 & 1.3 & (8.1) & (6.8)\\ \text{Chg. in Inventory} & (2.9) & 1.3 & 4.9 & (2.9) & (5.6)\\ \underline{\text{Chg. in Payables $\And$ Accrued Comp.}} & 1.7 & (1.3) & 4.8 & 4.9 & 4.9\\ \text{Cash from Operations} & 45.2 & 47.6 & 53.1 & 44.0 & 48.8\\ \underline{\text{Capital Expenditures}} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Cash from Investing Activities} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Dividends Paid} & (5.2) & (5.2) & (5.2) & (5.2) & (5.6)\\ \text{Sale (or purchase) of stock} & — & — & — & — & —\\ \underline{\text{Debt Issuance (Pay Down)}} & — & — & 73.3 & 25.3 & —\\ \text{Cash from Financing Activities} & (5.2) & (5.2) & 68.1 & 20.1 & (5.6)\\ \text{Change in Cash} & 13.4 & 18.6 & 23.7 & (11.3) & 3.2\\ \text{Mydeco Stock Price} & \$7.02 & \$3.55 & \$5.86 & \$8.33 & \$11.57\\ \end{array}$$

$

See Table down below showing financial statement data and stock price data for Mydeco Corp.

a. What were Mydeco's retained earnings each year?

b. Using the data from $2012$, what was Mydeco's total stockholders' equity in $2011$?

2012–2016 Financial Statement Data and Stock Price Data for Mydeco Corp

Mydeco Corp. 2012–2016 $\hspace{30mm}$ (All data as of fiscal year end; in $million)$

$$\begin{array}{lccccc} \text{Income statement} & 2012 & 2013 & 2014 & 2015 & 2016 \\ \text{Revenue} & 401.9 & 361.6 & 429.6 & 513.6 & 602.6 \\ \underline{\text{Cost of Goods Sold}} & (192.1) & (175.4) & (207.1) & (248.3) & (295.8)\\ \text{Gross Profit} & 209.8 & 186.2 & 222.5 & 265.3 & 306.8\\ \text{Sales and Marketing} & (65.0) & (64.4) & (84.3) & (104.9) & (121.1)\\ \text{Administration} & (61.8) & (57.1) & (59.0) & (66.9) & (79.8)\\ \underline{\text{Depreciation $\And$ Amortization}} & (27.5) & (26.3) & (32.5) & (38.3) & (40.1)\\ \text{EBIT} & 55.5 & 38.4 & 46.7 & 55.2 & 65.8\\ \underline{\text{Interest Income (Expense)}} & (32.4) & (31.8) & (32.0) & (37.0) & (40.9)\\ \text{Pretax Income} & 23.1 & 6.6 & 14.7 & 18.2 & 24.9\\ \underline{\text{Income Tax}} & (8.1) & (2.3) & (5.1) & (6.4) & (8.7)\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Shares outstanding (millions)} & 56.8 & 56.8 & 56.8 & 56.8 & 56.8\\ \text{Earnings per share} & \$0.26 & \$0.08 & \$0.17 & \$0.21 & \$0.29\\ \text{Balance Sheet} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Assets}\\ \text{Cash} & 49.4 & 68.0 & 91.7 & 80.4 & 83.6\\ \text{Accounts Receivable} & 87.6 & 70.6 & 69.3 & 77.4 & 84.2\\ \text{Inventory} & 33.5 & 32.2 & 27.3 & 30.2 & 35.8\\ \text{Total Current Assets} & 170.5 & 170.8 & 188.3 & 188.0 & 203.6\\ \text{Net Property, Plant $\And$ Equip.} & 244.3 & 243.3 & 306.1 & 349.6 & 347.9\\ \text{Goodwill $\And$ Intangibles} & 365.5 & 365.5 & 365.5 & 365.5 & 365.5\\ \text{Total Assets} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Liabilities $\And$ Stockholders’ Equity}\\ \text{Accounts Payable} & 18.8 & 18.8 & 22.4 & 27.1 & 30.3\\ \text{Accrued Compensation} & 7.6 & 6.3 & 7.5 & 7.7 & 9.4\\ \text{Total Current Liabilities} & 26.4 & 25.1 & 29.9 & 34.8 & 39.7\\ \text{Long-term Debt} & 498.9 & 498.9 & 572.2 & 597.5 & 597.5\\ \text{Total Liabilities} & 525.3 & 524 & 602.1 & 632.3 & 637.2\\ \text{Stockholders’ Equity} & 255.0 & 255.6 & 257.8 & 270.8 & 279.8\\ \text{Total Liabilities $\And$ Stockholders’ Equity} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Statement of Cash Flows} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Depreciation $\And$ Amortization} & 27.5 & 26.3 & 32.5 & 38.3 & 40.1\\ \text{Chg. in Accounts Receivable} & 3.9 & 17.0 & 1.3 & (8.1) & (6.8)\\ \text{Chg. in Inventory} & (2.9) & 1.3 & 4.9 & (2.9) & (5.6)\\ \underline{\text{Chg. in Payables $\And$ Accrued Comp.}} & 1.7 & (1.3) & 4.8 & 4.9 & 4.9\\ \text{Cash from Operations} & 45.2 & 47.6 & 53.1 & 44.0 & 48.8\\ \underline{\text{Capital Expenditures}} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Cash from Investing Activities} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Dividends Paid} & (5.2) & (5.2) & (5.2) & (5.2) & (5.6)\\ \text{Sale (or purchase) of stock} & — & — & — & — & —\\ \underline{\text{Debt Issuance (Pay Down)}} & — & — & 73.3 & 25.3 & —\\ \text{Cash from Financing Activities} & (5.2) & (5.2) & 68.1 & 20.1 & (5.6)\\ \text{Change in Cash} & 13.4 & 18.6 & 23.7 & (11.3) & 3.2\\ \text{Mydeco Stock Price} & \$7.02 & \$3.55 & \$5.86 & \$8.33 & \$11.57\\ \end{array}$$

$

Holbrook Corporation has three divisions: pulp, paper, and fibers. Holbrook’s new controller, Paul Weber, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2013:

$$\begin{array}{lrrr} &\textbf{Pulp} &\textbf{Paper} &\textbf{Fibers}\\\hline \text{Revenues} &\$ 9,800,000 &\$17,100,000 &\$25,500,000\\ \text{Direct manufacturing costs}&3,500,000 &7,800,000 &11,100,000\\ \text{Division administrative costs} &\underline{~~3,300,000}& \underline{~~~~2,000,000} &\underline{~~~~4,700,000}\\ \text{Division margin} &\underline{\underline{\$3,000,000}}& \underline{\underline{\$~~7,300,000}}& \underline{\underline{\$~~9,700,000}}\\ \text{Number of employees }&300& 150 &550\\ \text{Floor space (square feet)}& 53,200 &35,340& 101,460\\ \end{array}$$

Until now, Holbrook Corporation has allocated fixed corporate-overhead costs to the divisions on the basis of division margins. Weber asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:

$$\begin{array}{lrl} \textbf{Fixed Corporate Overhead Costs}&&\textbf{Suggested Allocation Bases}\\\hline \text{Human resource management} & \$~~2,300,000 & \text{Number of employees} \\ \text{Facility} & 3,200,000 & \text{Floor space (square feet)} \\ \text{Corporate administration} & \underline{~~~~4,600,000} & \text{Division administrative costs} \\ \text{Total} & \underline{\underline{\$ 10,100,000}} \end{array}$$

1. Allocate 2013 fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division’s operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)?

2. Allocate 2013 fixed costs using the allocation bases suggested by Weber. What is each division’s operating margin percentage under the new allocation scheme?

3. Compare and discuss the results of requirements 1 and 2. If division performance is linked to operating margin percentage, which division would be most receptive to the new allocation scheme? Which division would be the least receptive? Why?

4. Which allocation scheme should Holbrook Corporation use? Why? How might Weber overcome any objections that may arise from the divisions?

The National Oceanic and Atmospheric Administration reports the following record high temperatures (degrees Fahrenheit) in 50 U.S. cities. These data are also provided in the file XR02056.

,City Temperature Mobile, AL 105 Juneau, AK 90 Phoenix, AZ 122 Little Rock, AR $\quad 112$ Los Angeles, CA $\quad 110$ Denver, CO 105 Hartford, CT 102 Wilmington, DE 102 Miami, FL 98 Atlanta, GA $\quad 105$ Honolulu, HI 95 Boise, 10 111 Chicago, IL 104 Indianapolis, IN $\quad 104$ Des Moines, IA 108 Wichita, KS 113 Louisville, KY 106 New Orleans, LA 102 Portland, ME 103 Baltimore, MD 105 Boston, MA 102 (continued)

City Temperature Detroit, MI 104 Duluth, MN 97 Jackson, MS 107 St. Louis, MO $\quad 107$ Great Falls, MT $\quad 106$ Omaha, NE $\quad 114$ Reno, NV 108 Concord, $\mathrm{NH}$ Atlantic City, NJ 106 Albuquerque, NM $\quad 107$ Buffalo, NY 99 Charlotte, NC $\quad 104$ Bismarck, ND $\quad 111$ Cleveland, $\mathrm{OH}$ Oklahoma City, OK $\quad 110$ Portland, OR $\quad 107$ Pittsburgh, PA 103 Providence, RI $\quad 104$ Columbia, SC 107 Sioux Falls, SD $\quad 110$ Nashille, TN $\quad 107$ Houston, TX 109 Salt Lake City, UT $\quad 107$ Burlington, VT 101 Norfolk, VA 104 Seattle, WA 100 Charleston, WV 104 Milwaukee, WI 103

$$\begin{array}{ll}\text { Cheyenne, WY } & 100\end{array}$$

b. Construct a frequency distribution.

The Svenson Corporation manufactures cellular modems. It manufactures its own cellular modem circuit boards (CMCB), an important part of the cellular modem. It reports the following cost information about the costs of making CMCBs in 2014 and the expected costs in 2015:

$$\begin{array}{lcc} &\textbf{Current Costs}&\textbf{Expected }\\ &\textbf{in 2014} &\textbf{Costs in 2015}\\\hline \text{Variable manufacturing costs}\\ \quad\text{Direct material cost per CMCB} &\$~~~~~~180 &\$~~~~~~170\\ \quad\text{Direct manufacturing labor cost per CMCB} &~~~~~~~~~~50 &~~~~~~~~~~45\\ \quad\text{Variable manufacturing cost per batch for setups, materials }\\ \quad\text{handling, and quality control}& ~~~~1,600 &~~~~1,500\\ \text{Fixed manufacturing cost}\\ \quad\text{Fixed manufacturing overhead costs that can be avoided if CMCBs }\\ \quad\text{are not made} &320,000 &320,000\\ \quad\text{Fixed manufacturing overhead costs of plant depreciation,} \\ \quad\text{insurance, and administration that cannot be avoided even if }\\ \quad\text{CMCBs are not made}& 800,000 &800,000 \end{array}$$

Svenson manufactured 8,000 CMCBs in 2014 in 40 batches of 200 each. In 2015, Svenson anticipates needing 10,000 CMCBs. The CMCBs would be produced in 80 batches of 125 each.

The Minton Corporation has approached Svenson about supplying CMCBs to Svenson in 2015 at $300 per CMCB on whatever delivery schedule Svenson wants.

1. Calculate the total expected manufacturing cost per unit of making CMCBs in 2015.

2. Suppose the capacity currently used to make CMCBs will become idle if Svenson purchases CMCBs from Minton. On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton? Show your calculations.

3. Now suppose that if Svenson purchases CMCBs from Minton, its best alternative use of the capacity currently used for CMCBs is to make and sell special circuit boards (CB3s) to the Essex Corporation. Svenson estimates the following incremental revenues and costs from CB3s:

On the basis of financial considerations alone, should Svenson make CMCBs or buy them from Minton? Show your calculations.

Petah, Ltd., of Tel Aviv, Israel, has budgeted costs in its various departments as follows for the coming year:

(in shekel)

$$\begin{array}{lrr} \text{Factory Administration}&&540,000\\ \text{Custodial Services}&&137,520\\ \text{Personnel}&&57,680\\ \text{Maintenance }&&90,400\\ \text{Stamping—overhead}&&752,600\\ \text{Assembly—overhead}&\hspace{40pt}&\underline{\hspace{15pt}351,800}\\ \text{Total overhead cost}&&\underline{\underline{\hspace{5pt}1,930,000}}\\\\ \end{array}$$

The company allocates service department costs to other departments, in the order listed below.

Stamping and Assembly are operating departments; the other departments are service departments. Factory Administration is allocated on the basis of labor-hours; Custodial Services on the basis of square meters occupied; Personnel on the basis of number of employees; and Maintenance on the basis of machine-hours.

Required:

1. Allocate service department costs to consuming departments by the step-down method. Then compute predetermined overhead rates in the operating departments, using a machine-hours basis in Stamping and a direct labor-hours basis in Assembly.

2. Repeat (1) above, this time using the direct method. Again, compute predetermined overhead rates in Stamping and Assembly.

3. Assume that the company doesn’t bother with allocating service department costs but simply computes a single plantwide overhead rate based on total overhead costs (both service department and operating department costs) divided by total direct labor-hours. Compute the plantwide overhead rate.

4. Suppose a job requires machine and labor time as follows:

Using the overhead rates computed in (1), (2), and (3) above, compute the amount of overhead cost that would be assigned to the job if the overhead rates were developed using the step-down method, the direct method, and the plantwide method. (Round allocations to the nearest whole shekel.)

Morrison Company uses a job-order costing system to assign manufacturing costs to jobs. Its balance sheet on January 1 is as follows:

During January the company completed the following transactions:

3. Paid $167,000 of salaries and wages in cash$95,000 was direct labor, $35,000 was indirect labor, and$37,000 was related to employees responsible for selling and administration).

Required:

Calculate the ending balances that would be reported on the company's balance sheet on January 31. You can derive your answers using Microsoft Excel and Exhibit 3A-2 as your guide, or you can use paper, pencil, and a calculator. (Hint: Be sure to calculate the underapplied or overapplied overhead and then account for its affect on the balance sheet.)

What is Morrison Company's net operating income for the month of January?

The following problem is based on information from the National Oceanic and Atmospberic Administration (NOAA) Environmental Data Service. Let x be a random variable that represents the average daily temperature (in degrees Fahrenheit) in July in the town of Kit Carson, Colorado. The x distribution has a mean $\mu$ of approximately $75^{\circ} \mathrm{F}$ and standard deviation $\sigma$ of approximately $8^{\circ} \mathrm{F}$. A 20 -year study (620 July days) gave the entries in the rightmost column of the following table.

$$\scriptscriptstyle\begin{array}{lccc} \hline I & II & III & I\mathrm{V} \\ \hline & & & \text { Observed } \\ \text { Region under } & & \text { Expected \% from } & \text { Number of Days } \\ \text { Normal Curve } & x^{\circ} \mathrm{F} & \text { Normal Curve } & \text { in 20 Years } \\ \hline \mu-3 \sigma \leq x<\mu-2 \sigma & 51 \leq x<59 & 2.35 \% & 16 \\ \mu-2 \sigma \leq x<\mu-\sigma & 59 \leq x<67 & 13.5 \% & 78 \\ \mu-\sigma \leq x<\mu & 67 \leq x<75 & 34 \% & 212 \\ \mu \leq x<\mu+\sigma & 75 \leq x<83 & 34 \% & 221 \\ \mu+\sigma \leq x<\mu+2 \sigma & 83 \leq x<91 & 13.5 \% & 81 \\ \mu+2 \sigma \leq x<\mu+3 \sigma & 91 \leq x<99 & 2.35 \% & 12 \\ \hline \end{array}$$

(i) Remember that $\mu=75$ and $\sigma=8.$. Write a brief explanation for Columns I, II, and III in the context of this problem. (ii) Use a 1% level of significance to test the claim that the average daily July temperature follows a normal distribution with $\mu=75$ and $\sigma=8$. Find the value of the chi-square statistic for the sample. Are all the expected frequencies greater than 5? What sampling distribution will you use? What are the degrees of freedom?

MUF, a Chartered Accounting firm, has provided audit and tax services to businesses in the London area for over 50 years. Recently, the firm decided to use ABM and activity-based costing to assign its overhead costs to those service functions. Ginny Fior is interested in seeing how the change from the traditional to the activity-based costing approach affects the average cost per audit job. The following information has been provided to assist in the comparison:

$$\begin{array}{ll} \text{Total direct labor costs} & \text{400,000 pound}\\ \text{Other direct costs} & \underline{\text{120,000 pound}}\\ \text{Total direct costs} & \underline{\underline{\text{520,000 pound}}}\\ \end{array}$$

The traditional costing approach assigned overhead costs at a rate of 120 percent of direct labor costs.

Data for activity-based costing of the audit function follow.

$$\begin{array}{llll} \textbf{Activity} & \textbf{Cost Driver} & \textbf{Activity Cost Rate} & \textbf{Activity Usage}\\ \\ \text{Professional development} & \text{Number of employees} & \text{2,000 pound per employee} & \text{50 employees}\\ \text{Administration} & \text{Number of jobs} & \text{1,000 pound per job} & \text{50 jobs}\\ \text{Client development} & \text{Number of new clients} & \text{5,000 pound per new client} & \text{29 new clients}\\ \end{array}$$

1. Using traditional costing and direct labor cost as the cost driver, calculate the total costs for the audit function. What is the average cost per job?

2. Using activity-based costing to assign overhead, calculate the total costs for the audit function. What is the average cost per job?

3. Calculate the difference in total costs between the two approaches. Why would activity based costing be the better approach for assigning overhead to the audit function?

The postclosing trial balance of the general fund of Serene Hospital, a not-for-profit entity, on December 31, 20X1, was as follows:

$$\begin{array}{lrr} & \textbf{ Debit } & \textbf{Credit} \\ \\ \text{Cash} & \$\hspace{10pt}125,000 \\ \text{Accounts Receivable} & 400,000 \\ \text{Allowance for Uncollectibles} && \$\hspace{15pt}50,000 \\ \text{Due from Specific - Purpose Fund} & 40,000 \\ \text{Inventories} & 95,000 \\ \text{Prepaid Expenses} & 20,000 \\ \text{Investments} & 900,000 \\ \text{Property, Plant \& Equipment} & 6,100,000 \\ \text{Accumulated Depreciation} & & 1,500,000 \\ \text{Accounts Payable} & & 150,000 \\ \text{Accrued Expenses} & & 55,000 \\ \text{Deferred Revenue - Reimbursement} & & 75,000 \\ \text{Bonds Payable} & & 3,000,000 \\ \text{Fund Balance - Without Donor Restrictions} && 2,850,000 \\ \hline \text{Total} & \underline{\underline{\$7,680,000}} & \underline{\underline{\$7,680,000}}\\ \end{array}$$

During 20X2 the following transactions occurred:

1. Provided the value of patient services, $6,160,000.

2. Approved contractual adjustments of$330,000 from patients' bills.

3. Had operating expenses totaling $5,600,000 as follows:

$$\begin{array}{lr} \text{Nursing services} & \$1,800,000 \\ \text{Other professional services} & 1,200,000\\ \text{Fiscal services} & 250,000 \\ \text{General services} & 1,550,000\\ \text{Bad debts} & 120,000 \\ \text{Administration} & 280,000 \\ \text{Depreciation} & 400,000 \\ \end{array}$$

Accounts credited for operating expenses other than depreciation:

$$\begin{array}{lr} \text{Cash} & \$4,580,000 \\ \text{Allowance for Uncollectibles} & 120,000 \\ \text{Accounts Payable} & 170,000 \\ \text{Accrued Expenses} & 35,000 \\ \text{Inventories} & 195,000 \\ \text{Prepaid Expenses} & 30,000 \\ \text{Donated Services} & 70,000 \\ \end{array}$$