1. (TCO 7) Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the snail extraction line of products takes up approximately 50 percent of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering snail extraction tools or focus only on serving pieces. If the snail extraction tools are dropped, salaries and other direct fixed costs can be avoided and serving piece sales would increase by 13 percent. Allocated fixed costs are assigned based on relative sales.
Snail Extraction Serving
Tools Pieces Total
Sales $1,200,000 $800,000 $2,000,000
Less cost of goods sold 700,000 500,000 1,200,000
Contribution margin 500,000 300,000 800,000
Less direct fixed costs:
Salaries 175,000 175,000 350,000
Other 60,000 60,000 120,000
Less allocated fixed costs:
Rent 14,118 9,882 24,000
Insurance 3,529 2,471 6,000
Cleaning 4,117 2,883 7,000
Executive salary 76,470 53,530 130,000
Other 7,058 4,942 12,000
Total costs 340,292 308,708 649,000
Net income $159,708 ($ 8,708) $151,000
Prepare an incremental analysis in good form to determine the incremental effect on profit of discontinuing the snail extraction tool line.
(Points : 6)
2. (TCO 4) Paschal’s Parasailing Enterprises has estimated that fixed costs per month are $115,600 and variable cost per dollar of sales is $0.38.
(a) What is the break-even point per month in sales?
(b) What level of sales is needed for a monthly profit of $67,000?
(c) For the month of August, Paschal’s anticipates sales of $585,000. What is the expected level of profit?
(Points : 6)
3. (TCO 6) Princess Cruise Lines has the following service departments; concierge, valet, and maintenance. Expense for these departments are allocated to Mediterranean and Trans-Atlantic cruises. Expenses for the departments are totaled (both variable and fixed components are combined) and as follows:
The sea miles logged are 6,000,000 for the Mediterranean and 18,000,000 for the Trans-
Based upon the sea miles logged, allocate the service department costs. (Points : 6)
(TCO 9) Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center his lot. The building and equipment are estimated to cost $1,100,000 and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munster’s required rate of return
for this project is 12 percent. Net income related to each year of the investment is as follows:
Material cost $ 60,000
Labor 100,000 Depreciation
Other 10,000 280,000
Income before taxes 170,000
Taxes at 40% 68,000
Net income $102,000
(a) Determine the net present value of the investment in the service center. Should Munster invest in the service center?
(b) Calculate the internal rate of return of the investment to the nearest ½ percent.
(c) Calculate the payback period of the investment.
(d) Calculate the accounting rate of return.
(Points : 8)
5. (TCO 5) The following information relates to Vice Versa Ventures for calendar year 20XX, the company’s first year of operations:
Units produced 20,000
Units sold 17,000
Selling price per unit $35
Direct material per unit