XYZ final 1

— “ru 7 Ecole de gestion * John Molson \j Concordia ‘John-Molson School of Business G e Student Name ID# Sample Exam #4 # OF PAGES: 12 (incl. cover page) MATERIALS ALLOWED: 1) NON-ELECTRONIC ENGLISH LANGUAGE / OTHER LANGUAGE DICTIONARY 2) NON-PROGRAMMABLE CALCULATOR - MAY NOT BE SHARED SPECIAL INSTRUCTIONS: READ THE INSTRUCTIONS BELOW INSTRUCTIONS 1. ANSWER ALL QUESTIONS IN THE ANSWER BOOKLET THAT HAS BEEN PROVIDED TO YOU. 2. BE SURE TO RETURN THE EXAM PAPER ALONG WITH THE ANSWER BOOKLET AT THE END OF THE EXAM. 3. ANY STUDENT WHO FAILS TO RETURN THE ENTIRE EXAM PAPER ALONG WITH THE ANSWER BOOKLET(S) WILL BE REPORTED FOR CHEATING. 4. DO NOT TEAR YOUR EXAM PAPER OR YOUR ANSWER BOOKLET(S). 5. BE SURE TO PUT YOUR NAME AND STUDENT I.D. NUMBER ON THE EXAM PAPER AND THE ANSWER BOOKLET. 6. START EACH QUESTION ON A NEW PAGE IN THE ANSWER BOOKLET. 7.1T IS VERY IMPORTANT TO WRITE THE NAME OF YOUR INSTRUCTOR AND SECTION LETTER/NUMBER ON YOUR ANSWER BOOKLET(S). Good Luck!

Question 1 (20 Multiple Choice Questions) (45 - 50 minutes) (24 marks) Choose the Best answer of the following multiple-choice questions. Do not answer on the EXAM PAPER; write your answers in the ANSWER BOOKLET. Use the following information to answer questions 1-4: XYZ Corporation begins the month of March with 10,000 units in beginning inventory of work-in-process, 55% complete. 50,000 units were started during the month. Ending inventory of work-in-process is 8,000 units, 25% complete. Units are inspected for rework when they are 75% compete. Rejected units are returned to the 40% point. Normal rework is 2% of the units surviving the inspection. During the period, 48,000 units were inspected for rework. An inspection for spoilage occurs at 20%. Normal spoilage is 10% of the units inspected, 7,000 units were discarded at this point. 1. Normal spoilage during March amounted to: A) 6,000 B) 5,000 C) 4,200 D) 5,200 E) None of the above. (1.5 mark) 2. Normal rework during March amounted to: A) 1,040 B) 1,200 C) 960 D) 900 E) None of the above. (1.5 mark) 3. Assuming the answers of questions 1 and 2 above are 4,000 and 1,000, respectively, the proportion of normal spoilage cost allocated to normal rework would be: A) 1/63 B) 1/60 C) 1/57 D)0 E) None of the above. (1 mark) 4. Assuming the answers of questions 1 and 2 above are 4,000 and 1,000, respectively, the proportion of normal rework cost allocated to normal spoilage would be: A) 4/63 B) 4/60 C) 4/57 D)0 E) None of the above. (1 mark)

Use the following information to answer questions 10-15 Assume that overhead is applied to the production on the basis of standard labour hours. Number of labour hours in the master budget 6,000 Standard labour hours allowed per unit 2 Actual labour hours used per unit 2.1 Actual total variable overhead costs $20,000 Actual total fixed overhead costs $23,750 Fixed overhead applied to production $25,000 Variable overhead efficiency variance $937.50U Fixed overhead volume variance $1,000F 10. What is the standard variable overhead rate per labour hour? A) $2.00 B) $3.00 C) $4.00 D) $4.80 E) None of the above. (1.5 marks) 11. What is the fixed overhead predetermined rate per labour hour? A) $2.00 B) $3.00 C) $4.00 D) $4.80 E) None of the above. (1 mark) 12. What is the variable overhead allowed in the flexible budget using actual units of output? A) $14,400 B) $18,750 C) $19,250 D) $22,350 E) None of the above. (1.5 marks) 13. What is the fixed overhead allowed in the flexible budget? A) $23,500 B) $24,500 C) $25,500 D) $26,000 E) None of the above. (1 mark) 14. What is the variable overhead spending variance? A)$125.50 F B) $312.50U C) $240.50 F D) $240.50 U E) None of the above. (1 mark)

15. What is the fixed overhead flexible budget variance? A)$250F B)$1,250 F C)$1,250U D) $1,750 U E) None of the above. (1 mark) 16. Company F has two production departments, A and B, and two service departments, janitorial and personnel. Personnel costs are allocated based on number of employees and janitorial costs are allocated based on size of the department in square meters. Department No. of Sq. Meters Direct Costs Employees A 150 10,000 $ 750,000 B 200 20,000 600,000 Janitorial 25 1,000 25,000 Personnel 15 2,000 18.000 Total 390 33,000 $1,393,000 Under the reciprocal allocation method, what amount of personnel costs would be allocated to Department B (round to the nearest dollar)? A) $7,585 B) $8,733 C) $9,866 D) $10,477 E) None of the above (2 marks) 17. LLS Inc. produces various lighting products, including lamps and lampshades. The following data pertains to the direct labour costs associated with the production of 3,000 lampshades during January: Actual direct labour costs incurred $14,685 Standard direct labour cost allowed for actual units produced $12,375 Direct labour efficiency variance $3,300 unfavourable The actual direct labour rate was $2 per hour lower than the budgeted direct labour rate. What was the actual amount of direct labour time used to produce one lampshade in January? A) 0.385 hour per unit B) 1.1 hours per unit ) 0.165 hour per unit D) 0.935 hour per unit E) 0.55 hour per unit (1.5 marks)

Question 2 (20-24 minutes) (16 marks) Modial, Inc. has two alternative means of manufacturing its product. Process A has fixed costs of $20,000 per period and a variable cost of $6 per unit produced. Process B requires fixed costs of $45,000 per period plus a variable cost of $4 per unit produced. The product sells for $8 per unit. The firm has forecast sales to be as follows: Sales units = 8,000 units per period + 0.0002 X (Disposable income) The equation was determined by fitting a regression line to 25 pairs of data relating sales to the disposable income of residents in various marketing areas. The standard error of the estimate is 700 units. The firm estimates that the disposable income of residents in a new marketing area is $25,000,000 for the next period. Required: YOU MUST Provide all the detailed supporting computations. a. If the firm uses process B in this new area, what is the probability of losing money in the next period? (2.5 marks) b. What is the range of sales in units the firm can expect in the new area with confidence of 90% for the next period? (2 marks) c. What is the probability that sales in this area will exceed 14,964 units per period? (2.5 marks) d. Assume that based on market surveys, the company expects to sell 14,000 units during next period, and accordingly made the appropriate investment. Also, assume that the management expects the demand will be equally likely over a range of 8,000 to 28,000 units during the next period. Now, compute the expected cost of prediction error for next period. (9 marks)

Question 3 (50-55 minutes) (30 marks) Mike Jerguson, the president of Jerguson Foundry Limited (JFL), sat in his office early on June 2, 2004, reviewing the financial statements of JFL for the fiscal year ended May 31, 2004. The results for the year were both a shock and a disappointment. JFL produces two types of wood stoves: Basic and Deluxe. Mr. Jerguson presented to you the statement of budgeted and actual results (Exhibit 1), as well as a statement of standard costs (Exhibit 2), plus some market and job-cost data (Exhibit 3). He approached you for some advice and described to you his concerns to profit declining, despite the increase in sales volume. Exhibit 1 Jerguson Foundry Limited Static Budget and Actual Results For the year Ended May 31, 2004 Static Budget Basic Deluxe Total Sales volume (in units) 4,500 5,500 10,000 Sales Revenue $1,350,000 $4,400,000 §$5,750,000 Variable Costs: Direct materials 315,000 1,045,000 1,360,000 Direct labor 405,000 1,320,000 1,725,000 Overhead 202,500 660,000 862,500 Selling and administration 67,500 220,000 287,500 Contribution margin $360,000 $1,155,000 $1,515,000 Fixed costs: Manufacturing 750,000 Selling and administration 132,500 Operating income $632.500 Actual Results Basic Deluxe Total Sales volume (in units) 7,200 4,800 12,000 Sales Revenue $2,340,000 $3,360,000 §5,700,000 Variable Costs: Direct materials 486,000 820,800 1,306,800 Direct labor 748,800 1,190,400 1,939,200 Overhead 374,400 595,200 969,600 Selling and administration 108.000 192.000 300,000 Contribution margin $622.800 $561,600 $1,184,400 Fixed costs: Manufacturing 780,000 Selling and administration 139,500 Operating income $264.900

Question 4 (14-18 minutes) (10 marks) Paradox Manufacturing Limited (PML) produces a chemical, Paradox, which is used to kill budworms. Analysis has shown that a 10-litre container of Paradox is made from 5 litres of Deet and 6 litres of Balox. For fiscal 2003, Deet was forecast to cost $12 per litre and Balox was expected to retail for $6 per litre. The manufacture of Paradox involves heating the Deet and Balox to exactly 110°C and then mixing the two together. As a result of heating the ingredients, some input is lost due to evaporation. The budget for 2003 estimated that sales and production volume would be 150,000 litres of Paradox. Due to the massive and unexpected infestation of the budworm in Northern Ontario, the sales and production volume was actually 206,000 litres. PML buys the necessary ingredients and produces Paradox to order; the risk of environmental damage resulting from the storage of Paradox (and the related liability insurance costs) is too high for the company to consider any other policy. Because of the increase in expected sales volume on January 1, 2003, the price of Balox increased to $9 per litre, and the price of Deet decreased to $11 per litre. The results for 2003 were interesting. Due to the increase in the price of Balox, every effort was made to reduce Balox evaporation. Less care was devoted to the Deet. The actual quantities used were 123,826 litres of Deet and 115,083 litres of Balox. The president of PML was very pleased with the results for the year. With sales increasing, profits were of course greater than expected. Paradox sells for $32 per litre; standard costs for materials, labour, and overhead amount to $20 per litre. With selling and administrative costs of $1,320,000 (all fixed), profit was estimated to be $480,000. Actual profits earned were $731,767. All revenues and expenses were as predicted with the exception of raw materials. A large bonus was planned for workers and management and the president planned to propose a large dividend for shareholders at the next meeting of the board of directors. Required a. For the fiscal year 2003, compute the price and usage variances for each of the two raw materials used to produce Paradox: Deet and Balox. (4 marks) b. For the fiscal year 2003, divide the total raw materials usage variance into yield and mix components. (3 marks) c. For the fiscal year 2003, provide specific comments on the raw materials variances and their effect on PML’s profit. (3 marks) 10

Question 5 (28-33 minutes) (20 marks) AMC is a semiconductor firm that specializes in the production of extended life memory chips. The first stage of the manufacturing operation is fabrication in which raw silicon wafers are first photolithographed and then baked at high temperatures. This process yields three individual products at a common split-off point. For each batch of 1,600 raw silicon wafers, these products are: : 1. 300 high-density (HD) memory chips 2. 900 low-density (LD) memory chips 3. 400 defective memory chips. The density of a memory chip is based on the number of good memory bits on each chip, with HD chips having more memory bits per chip than LD chips. The 400 defective memory chips from each batch have zero salvage value and are considered normal spoilage. The joint cost of purchasing and processing the 1,600 raw silicon wafers to the split-off point is $5,000. AMC has two options for each grade of good memory chip at the split-off point: 1. Sell immediately. HD chips have a sales price of $10 each. LD chips have a sales price of $5 each. 2. Process further into extended life memory chips. This processing step exposes the chips to extreme conditions (e.g., as to high temperature), and those that survive are sold as extended life memory chips. Data pertaining to this further processing stage include the following: Extended life high-density (EL-HD) chips: From a batch of 300 HD chips, the yield is 200 EL-HD chips. The 100 defective chips from this further processing step have a salvage value of $3 each. All 100 defective chips are considered normal spoilage specific to EL-HD. The separable cost to further process the 300 HD chips is $1,300. The sales price for each EL-HD chips is $30. Extended life low-density (EL-LD) chips: From a batch of 900 LD chips, the yield is 500 EL-LD chips. The 400 defective chips from this further processing step have a salvage value of $2 each. All 400 defective chips are considered normal spoilage specific to EL-LD. The separable cost to further process the 900 LD chips is $3,800. The sales price for each EL-LD chip is $18. AMC has consistently followed the policy of further processing the entire output of both the HD and LD chips into their EL-HD and EL-LD forms. . Required: YOU MUST Provide all the detailed supporting computations. a. Compute the unit cost of EL-HD and the unit cost of EL-LD under the two allocation methods: (1) Physical measure method. (7 marks) (2) The net realizable value (NRV) method. (8 marks) b. Peach Computer Systems offers to buy 900 LD memory chips from AMC at $5 a chip. What is the effect on operating income of accepting this offer as opposed to AMC’s current policy of further processing the LD chips into EL-LD form? (5 marks) 11