1. Budgeting (8 points)
Ratario Company has budgeted the following unit sales for the first quarter of 2014:
Units
January
February
March
12,000
17,000
15,000
It takes 3 pounds of direct materials, which cost $6 per pound, to manufacture one unit of
product. It is the company’s policy to have a finished goods inventory on hand at the end of each
month equal to 30% of next month’s sales and to maintain a direct materials inventory at the end
of the month equal to 20% of the next month’s production needs. The inventory levels at
December 31, 2013, were in accordance with company policy.
Instructions
Answer the following independent questions and show computations to support your answers.
a. Calculate the number of units that should be scheduled for production in the month of
February.
b. What was the number of units in ending finished goods inventory at December 31, 2013?
c. What was the number of pounds in ending direct materials inventory at December 31, 2013?
d. What was the number of pounds and the dollar amount of direct materials purchases
budgeted for the month of January?
2. Variance Analysis (8 points)
Pillow Talk manufactures luxury down bed pillows. Each pillow requires 3.9 pounds of down and
takes 0.25 hours of direct labor. The standard cost of the down used is $6.50 per pound, and the
standard labor cost is $12 per hour. In November, Pillow Talk purchased and used 25,000 pounds
of down for $157,500. It manufactured 6,200 pillows. Payroll reported a total of 1,520 direct labor
hours at a cost of $17,936.
Instructions
(a)
Compute the materials price and quantity variances and indicate whether the variances are
favorable or unfavorable.
(b)
Compute the labor price and quantity variances and indicate whether the variances are
favorable or unfavorable.
3. Capital Budgeting (9 points)
Weston Company is considering a capital investment of $145,000 in new equipment. The
equipment is expected to have a useful life of 10 years with no salvage value. Depreciation is
computed by the straight-line method. During the life of the investment, annual net income and
cash inflows are expected to be $11,000 and $25,500, respectively. Easton requires either a 10%
cost of capital "hurdle" rate, or a payback period of 7 years.
Instructions
Compute the (a) cash payback period, (b) net present value, (c) internal rate of return (to the
nearest percent), and (d) annual rate of return. Show all computations. State whether the project
should be accepted or rejected for each of the four capital budgeting techniques.
Present Value of an Annuity of 1
(n)
Periods
5%
10 7.72173
6%
7.36009
8%
6.71008
9%
6.41766
10%
6.14457
11%
5.88923
12%
5.65022
15%
5.01877
