Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

Due to erratic sales of its sole product—a high-capacity battery for laptop computers—PEM, Inc., has been experiencing difficulty for some time. The company’s contribution format income statement for the most recent month is given below:

  

Sales (19,500 units × $30 per unit)	$	585,000
Variable expenses		409,500
Contribution margin		175,500
Fixed expenses		180,000
Net operating loss	$	(4,500)

  

Required:
1.	Compute the company’s CM ratio and its break-even point in both unit sales and dollar sales.

2.

The president believes that a $16,000 increase in the monthly advertising budget, combined with an intensified effort by the sales staff, will result in an $80,000 increase in monthly sales. If the president is right, what will be the effect on the company’s monthly net operating income or loss? (Use the incremental approach in preparing your answer.)

3.	Refer to the original data. The sales manager is convinced that a 10% reduction in the selling price, combined with an increase of $60,000 in the monthly advertising budget, will double unit sales. What will the new contribution format income statement look like if these changes are adopted?

4.

Refer to the original data. The Marketing Department thinks that a fancy new package for the laptop computer battery would help sales. The new package would increase packaging costs by 75 cents per unit. Assuming no other changes, how many units would have to be sold each month to earn a profit of $9,750? (Do not round intermediate calculations.)

5.	Refer to the original data. By automating, the company could reduce variable expenses by $3 per unit. However, fixed expenses would increase by $72,000 each month.

 
 

a.	Compute the new CM ratio and the new break-even point in both unit sales and dollar sales. (Use the CM ratio to calculate your break-even point in dollars.)

b.	Assume that the company expects to sell 26,000 units next month. Prepare two contribution format income statements, one assuming that operations are not automated and one assuming that they are.

c.	Would you recommend that the company automate its operations?

Yes

Loomis, Inc. reported the following on the company’s income statement in 2014 and 2013:

Loomis, Inc. reported the following on the company’s income statement in 2014 and 2013:


2014 2013
Interest expense $ 13,500,000 $ 16,000,000
Income before income tax expense 310,500,000 432,000,000


a. Determine the number of times interest charges were earned for 2014 and 2013. Round to one decimal place.

b. Is the number of times interest charges are earned improving or declining?


Answer:

a. Number of times interest charges earned:
2014:
2013:
$310,500,000 + $13,500,000
$13,500,000
$432,000,000 + $16,000,000
$16,000,000
= 24.0
= 28.0

b. The number of times interest charges are earned has decreased from 28.0 in 2013 to 24.0 in 2014. Although Loomis has adequate earnings to pay interest, the decline in this ratio may cause concern among debtholders.

The financial statements for Nike, Inc., are presented in Appendix C at the end of the text

The financial statements for Nike, Inc., are presented in Appendix C at the end of the text. What is the major source of financing for Nike?


Answer:
Nike’s major source of financing is common stock. It has relatively little long term debt compared to stockholders’ equity.

The following data (in thousands) were taken from recent financial statements of Under Armour, Inc.:

The following data (in thousands) were taken from recent financial statements of Under Armour, Inc.:


December 31
Year 2 Year 1
Current assets $555,850 $448,000
Current liabilities 149,147 120,162



a. Compute the working capital and the current ratio as of December 31, Year 2 and Year 1. Round to two decimal places.


b. What conclusions concerning the company’s ability to meet its financial obligations can you draw from part (a)?


Answer:

a.
Current assets……………
Current liabilities………
Working capital……………
Year 2
$555,850
149,147
$406,703
December 31
Year 1
$448,000
120,162
$327,838
Current ratio……………… 3.73
($555,850 ÷ $149,147)
3.73
($448,000 ÷ $120,162)


b. Under Armour’s working capital increased by $78,865 ($406,703 – $327,838) during Year 2. The current ratio remained the same at 3.73 in Year 1 and Year 2. A current ratio of 3.73 indicates a strong solvency position. Thus, short-term creditors should not be concerned about receiving payment from Under Armour.

Back Country Life, Inc., does business in two product segments, Camping and Fishing

Back Country Life, Inc., does business in two product segments, Camping and Fishing. The following annual revenue information was determined from the accounting system’s invoice information:



2014 2013
Camping $280,000 $240,000
Fishing 140,000 160,000
Total revenue $420,000 $400,000



Prepare a horizontal and vertical analysis of the segments. Round to one decimal place.


Answer:

Horizontal analysis:
2014 2013
Increase/(Decrease)
Amount Percent
Camping $280,000 $240,000 $ 40,000 16.7%
Fishing 140,000 160,000 (20,000) –12.5%
Total revenue $420,000 $400,000 $ 20,000 5.0%
Vertical analysis:
2014 2013
Amount Percent Amount Percent
Camping $280,000 66.7% $240,000 60.0%
Fishing 140,000 33.3% 160,000 40.0%
Total revenue $420,000 100.0% $400,000 100.0%

The following data (in millions) were taken the financial statements of Walmart Stores, Inc.

The following data (in millions) were taken the financial statements of Walmart Stores, Inc.


Recent Year Prior Year Revenue $421,849 $408,085 Operating expenses  396,307 384,083 Operating income $  25,542 $  24,002 



a. For Walmart Stores, Inc., determine the amount of change in millions and the percent of change (round to one decimal place) from the prior year to the recent year for:
1. Revenue
2. Operating expenses
3. Operating income

b. Comment on the results of your horizontal analysis in part (a).

c. Based upon Exercise 2-23, compare and comment on the operating results of Target and Walmart for the recent year.

Answer:
a.
1.  Revenue:
$13,764 million increase ($421,849 – $408,085)
3.4% increase ($13,764 ÷ $408,085)

2.  Operating expenses:
$12,224 million increase ($396,307 – $384,083)
3.2% increase ($12,224 ÷ $384,083)

3.  Operating expenses:
$1,540 million increase ($25,542 – $24,002)
6.4% increase ($1,540 ÷ $24,002)

b.  During the recent year, revenue increased by 3.4%, while operating expenses increased by 3.2%. As a result, operating income increased by 6.4%, a favorable trend from the prior year.

c.  Because of the size differences between Target and Walmart (Walmart has over 6 times the revenue), it is best to compare the two companies on the basis of percent changes. Target and Walmart increased their revenue from the prior year by approximately the same percent (3.1% for Target and 3.4% for Walmart). However, Target's operating expenses increased by only 2.4% compared to Walmart's 3.2% increase. As a result, Target's operating income increased by 12.4% compared to Walmart's 6.4% increase. Based upon this analysis, it appears that Target was better able to control its operating expenses as its revenue increased than was Walmart.

The Home Depot, Inc., is the world’s largest home improvement retailer and one of the largest retailers in the United States

The Home Depot, Inc., is the world’s largest home improvement retailer and one of the largest retailers in the United States based on net sales volume. The Home Depot operates over 2,200 Home Depot® stores that sell a wide assortment of building materials and home improvement and lawn and garden products.
The Home Depot recently reported the following balance sheet data (in millions):

                                                Year 2          Year 1
Total assets                          $40,125         $40,877
Total stockholders’ equity     18,889          19,393

a. Determine the total liabilities at the end of Years 2 and 1.

b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.

c. What conclusions regarding the margin of protection to the creditors can you draw from (b)?

Answer:
a.
Year 2:  $21,236  ($40,125 – $18,889)
Year 1:  $21,484  ($40,877 – $19,393)

b.
Year 2:  1.12  ($21,236 ÷ $18,889)
Year 1:  1.11  ($21,484 ÷ $19,393)

c.
The ratio of liabilities to stockholders’ equity increased from 1.11 to 1.12 indicating a slight increase in risk for creditors from Year 1 to Year 2.

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market.

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the rigid model. The flexible model requires 2.0 hours of direct labor time per unit, and the rigid model requires 1.0 hours. Direct materials and labor costs per unit are given below:

  

	Flexible		Rigid
Direct materials cost per unit	$	110.00	$	80.00
Direct labor cost per unit	$	30.00	$	15.00

   

Required:
1-a.	Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

1-b.	Compute the unit product cost for one unit of each model.

2.	An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

			Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost		Flexible	Rigid	Total
Purchase orders (number of orders)	$	20,000	100	300	400
Rework requests (number of requests)		10,000	60	140	200
Product testing (number of tests)		210,000	900	1,200	2,100
Machine related (machine-hours)		360,000	1,500	2,500	4,000
	$	600,000

     

Compute the activity rate for each of the activity cost pools.

3.	Using activity-based costing, do the following:

a.	Determine the total amount of overhead that would be assigned to each model for the year.

b.	Compute the unit product cost for one unit of each model. (Round your answers to 2 decimal places.)

Marwick’s Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The pianos cost, on the average, $2,450 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its customers at an average price of $3,125 each.

2.

Marwick’s Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The pianos cost, on the average, $2,450 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its customers at an average price of $3,125 each. The selling and administrative costs that the company incurs in a typical month are presented below:

Costs	Cost Formula
Selling:
Advertising	$700 per month
Sales salaries and commissions	$950 per month, plus 8% of sales
Delivery of pianos to customers	$30 per piano sold
Utilities	$350 per month
Depreciation of sales facilities	$800 per month
Administrative:
Executive salaries	$2,500 per month
Insurance	$400 per month
Clerical	$1,000 per month, plus $20 per piano sold
Depreciation of office equipment	$300 per month

During August, Marwick’s Pianos, Inc., sold and delivered 40 pianos.

Required:
1.	Prepare an income statement for Marwick’s Pianos, Inc., for August. Use the traditional format, with costs organized by function. 2. Prepare an income statement for Marwick’s Pianos, Inc., for August, this time using the contribution format, with costs organized by behavior. Show costs and revenues on both a total and a per unit basis down through contribution margin.

Explanation:

1.

Sales: (40 pianos × $3,125 per piano) = $125,000

Cost of goods sold: (40 pianos × $2,450 per piano) = $98,000

Sales salaries and commissions: [$950 + (8% × $125,000)] = $10,950

Delivery of pianos: (40 pianos × $30 per piano) = $1,200

Clerical: [$1,000 + (40 pianos × $20 per piano)] = $1,800

2.

Sales: (40 pianos × $3,125 per piano) = $125,000

Cost of goods sold: (40 pianos × $2,450 per piano) = $98,000

Sales commissions: (8% × $125,000) = $10,000

Delivery of pianos: (40 pianos × $30 per piano) = $1,200

Clerical: (40 pianos × $20 per piano) = $800