1. Hinds Industries, Inc. is a manufacturer of soup and condiment products under its own standard and premium labels. The company has been in business for many years, and is a “household name”. Their Denver soup plant has a capacity of 120,000 cases/mo, but has been operating at a normal volume of 85,000 cases/mo. Hinds has been approached by Mondo Mart, a large discount retailer, about producing a line of soups under a Mondo Mart house label. Mondo would initially place an order for 15,000 cases/mo,with the understanding that the order will be expanded if the product is successful. The initial order would be for a reduced line of four relatively simple soups, following Hinds’ normal recipes. All of these soups have essentially the same production cost of $31 per case, as follows: ingredients and packaging, $17; direct labor, $3; overhead, $11. The overhead is 55% fixed manufacturing costs, 25% variable manufacturing costs, and 20% allocated general corporate overhead. Hinds would incur $6,000/mo additional setup costs if the order is accepted. Packaging would cost twenty cents/case less because of a cheaper label used by Mondo.
Hinds normally sells these soups for $38/case. Mondo Mart has offered $29/case, arguing that the steep discount is necessary for them to price the product in conformity with their pricing philosophy and customer expectations.
The regional marketing director is inclined to reject the offer, because it is below cost, and therefore Hinds will lose money on the contract. The ultimate decision is up to the regional director of operations. Discuss the factors that the operations director should consider in making the decision.
2. Ajax Company manufactures a variety of industrial products sold throughout the United States. Harley Davidson has been manager of Southwest Division for the past three years. In years 2 and 3, he was able to qualify for an annual bonus of $50,000 by meeting a target growth rate of 10% of gross sales. Income statements for the division (in $thousands):
Year 1 Year 2 Year 3
Gross sales 30,200 33,300 36,700
Returns and allowances 150 285 370
Net sales 30,050 33,015 36,330
COGS 15,210 17,820 19,770
Gross profit 14,840 15,195 16,560
Sales commissions 3,020 3,330 3,670
Manager salary/bonus 100 150 150
Advertising 460 780 975
Other division overhead 4,050 4,890 5,630
General and administrative 6,040 6,660 7,340
13,670 15,810 17,765
Net income/loss 1,170 (615) (1,205)
All advertising is local to the division and controlled by the manager. General and administrative expense represents corporate overhead which is allocated at the rate of 20% of gross sales.
1) Comment on the effectiveness of the bonus plan used by Ajax.
2) Because Southwest Division is showing increasing losses, a senior vice president has suggested that the division be closed. Comment.
3. If this item is selected, answer BOTH parts (10 points each)
a.Acme Manufacturing is a decentralized corporation. Divisions are treated as investment centers. In recent years, Acme has been running about 11% ROA for the corporation as a whole, and has a cost of capital of 8%. One of their most profitable divisions is Walker Products, which last year had ROA of 20% ($1,600,000 operating income on assets of $8,000,000). Walker has an opportunity to expand one of its plants to produce a promising new product. The expansion will cost two million dollars, and is expected to increase operating earnings to $1,900,000. What factors should Walker’s manager and her supervisor, the VP of operations, consider in deciding whether to go forward with the expansion?
b. Connor Company, a manufacturer of small tools, has a new bookkeeper.
During a recent month, the bookkeeper made the following entries, among
others. For each, state whether the entry is correct or incorrect under US GAAP,
and explain briefly. If incorrect, specify the correct entry.
1. Connor purchased manufacturing equipment, and issued a two-year note
to the seller in payment. The bookkeeper debited Manufacturing Equipment,
and credited Notes Payable.
2. It was determined that an account receivable from a customer was uncollectible
due to the bankruptcy of the customer, and needed to be written off. The
bookkeeper debited Bad Debt Expense and credited Accounts Receivable.
3. The county assessor determined that the value of the land on which Connor’s
factory sits had increased by $50,000. The bookkeeper debited Land and
Gain on Land for $50,000.
4. Connor repurchased shares of stock from one of its investors. The bookkeeper
debited Treasury Stock and credited Cash.
5. The electric utility sent a bill for current use of electric power in the factory.
The bookkeeper debited Utility Expense and credited Accounts Payable.
4. If this item is selected, answer BOTH parts (10 points each)
a.Preston Company has budgeted the following sales for the first four months of next year:
Actual sales for November of this year were $430,000, and for December $420,000. Gross profit is 60% of sales.
The pattern of accounts receivable collection is: 45% in month of sale; 38% in first month following; 14% in second month following; remainder uncollectible.
Preston has a policy of having an ending inventory each month equal to the following month’s budgeted sales. Trade accounts payable are paid 50% in the month of purchase and 50% in the following month. Cash operating expenses of $20,000 are paid each month.
Prepare a schedule of budgeted cash receipts and disbursements, by month, for the first quarter of next year.
b.Poudre Industries is a diversified manufacturing company with a decentralized management structure. Each division is treated as a profit center. One of these divisions is Wellington Processing, which produces a variety of products at a single plant. Wellington operates below capacity. Wellington’s biggest customer for a major product, XB42, is Eaton Industries, another division of Poudre. At the normal production level of 30,000 units, XB42 costs $840 to produce: direct materials, $310; direct labor, $80; overhead, $450. The composition of the overhead cost is 60% fixed and 40% variable. The current selling price of XB42 is $1,120/unit. Eaton has been paying $1,075/unit, with the discount reflecting lower transaction costs for Wellington. Eaton has found another supplier for XB42 at a price of $690/unit. Wellington’s president refuses to meet this price, as it is below cost and she will lose money on the sale. As CEO of Poudre, discuss the factors to be considered in resolving the pricing dispute between Wellington and Eaton .