you-are-the-new-controller-for-the-consumer-division

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QUESTION 1

1. You are the new controller for the consumer division of XYZ Company. In the past five years, XYZ’s earnings have grown by at least 15% annually, with the consumer division’s earnings growing by over 20% annually over the same time-period. In the 4th quarter of the current year, however, it is projected that consumer’s income will grow by 8% and XYZ’s will grow by 10%. The consumer division’s president wants you to take some of the following “end of the year” actions in order to improve consumer’s reported earnings. Under the previous controller, these types of actions were more or less taken as acceptable practices.

1. Deferring routine monthly maintenance on equipment by an outside vendor until January.

2. Extending the close of the fiscal year beyond December 31 so that some sales from next year are counted in the current fiscal year.

3. Altering dates on shipping documents so that sales made in January of the next year appear to have occurred in December of the current year.

4. Giving salespeople a double bonus to exceed December targets.

5. Reducing the number of December advertising spots and increasing the number to be run in January.

6. Deferring advertising costs by asking the outside advertising agency to delay sending out bills for December advertisements until January or by having the agency indicate that advertisements run in December were run in January.

7. Persuading customers to accept merchandise for shipment in December that they would normally not order until the following year.

a) Classify each of these possible actions as “acceptable” or “unacceptable” according to the IMA Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management. Be sure to justify / explain your classifications.

b) What should you do if the president suggests that these actions are taken in every division of XYZ and that the consumer division will be greatly harmed if it does not present “better” results than 8% growth?

24 points

QUESTION 2

1. A firm produces two products in the same facility using the same equipment. Product XYZ is a higher volume product that takes a relatively small amount of machine-time per unit to produce, while Product FTP is a lower volume product that takes a significantly higher amount of machine-time per unit to produce. In addition, it takes very little set-up time to prepare to produce a batch of Product XYZ, while a batch of Product FTP requires a more time-consuming set-up. Product XYZ is produced in large batches, while Product FTP is produced in small batches. Customers who purchase XYZ make relatively large purchases (in terms of the number of units purchased) while customers who purchase FTP make relatively small purchases (in terms of the number of units purchased). Both products are shipped in a similar way, with each shipment requiring a similar amount of work.

a. If this firm allocates manufacturing overhead based on production volume, what result would you expect? Be specific in your answer.

b. How could the firm improve its allocation system? Be specific in your answer.

QUESTION 3

1. A firm believes it can generate an additional $1,500,000 per year in revenues for the next 6 years if it replaces existing equipment that is no longer usable with new equipment that costs $1,850,000. The new equipment will likely be able to be sold for $50,000 at the end of the project (after 6 years). The additional sales will require an initial investment in net working capital of $100,000, which it expects to recover at the end of the project (after 6 years). The existing equipment has a book value of $5,000 and a market value of $3,000. The contribution margin is expected to be 45% of revenue. Assume the firm uses straight-line depreciation, its marginal tax rate is 40%, its weighted-average cost of capital is 11%, and the risk of this project is similar to the risk of its other projects.

a) How much value will this new equipment create for the firm?

b) At what discount rate will this project break even?

c) Should the firm purchase the new equipment? Be sure to justify your recommendation.

d) How would your analysis change if this project was more risky than the firm’s other projects? Be specific.

32 points

QUESTION 4

Consider the following information, prepared based on a monthly capacity of 100,000 units:

Category

Cost per Unit

Variable manufacturing costs

$22

Fixed manufacturing costs

$8

Variable selling costs

$7

Fixed selling costs

$6

Capacity cannot be added in the short run and the firm currently sells the product for $50 per unit.

The company is currently producing 95,000 units per month. A potential customer has contacted the firm and offered to purchase 5,000 units this month only. Since the potential customer approached the firm, there will be no variable selling costs incurred. What is the minimum amount that the firm should be willing to accept for this order?

12 points

QUESTION 5

Consider the following information, prepared based on a monthly capacity of 100,000 units:

Category

Cost per Unit

Variable manufacturing costs

$22

Fixed manufacturing costs

$8

Variable selling costs

$7

Fixed selling costs

$6

Capacity cannot be added in the short run and the firm currently sells the product for $50 per unit.

The company is currently producing 100,000 units per month. A potential customer has contacted the firm and offered to purchase 5,000 units this month only. The customer is willing to pay $41 per unit. Since the potential customer approached the firm, there will be no variable selling costs incurred. Should the company accept the special order? Why or why not?Be specific.

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