Explain how knowledge of managerial accounting can

1. Explain how knowledge of managerial accounting can assist a manager with regard to the following
concerns:
a. He is deciding whether to push through with a project.
b. He is determining whether a branch is profitable or not.
c. He is deciding whether to process a certain product further before selling.
d. He would like to show to the Board of Directors how the business is financially performing and
how cash is being used.
e. He would like to plan for the year so that he will be prepared to deal with shortage of cash fund. 2. Gold Company's comparative balance sheet and income statement for last year appear below:
Statement of Financial Position
Ending
Beginning
Balance
Balance
Cash............................................................
$ 70,000
$ 38,000
Accounts receivable...................................
76,000
52,000
Inventory....................................................
24,000
42,000
Prepaid expenses........................................
8,000
16,000
Long-term investments..............................
260,000
210,000
Plant and equipment...................................
530,000
510,000
Accumulated depreciation......................... ( 398,000) ( 350,000)
Total assets.................................................
$570,000
$518,000
Accounts payable.......................................
Accrued liabilities......................................
Taxes payable.............................................
Bonds payable............................................
Deferred taxes............................................
Common stock...........................................
Retained earnings.......................................
Total liabilities and owners’ equity............
Income Statement
Sales...........................................................
Cost of goods sold......................................
Gross margin..............................................
Selling and administrative expense............
Net operating income.................................
Income taxes..............................................
Net income................................................. $ 32,000
34,000
4,000
160,000
38,000
150,000
152,000
$570,000 $ 54,000
25,000
11,000
200,000
25,000
120,000
83,000
$518,000 $610,000
310,000
300,000
190,000
110,000
33,000
$ 77,000 The company declared and paid $8,000 in cash dividends during the year.
Required:
Construct in good form the operating activities section of the company's statement of cash flows for the
year using the direct method.
3. Diamond Company is considering purchasing a machine that would cost $756,000 and have a useful life
of 8 years. The machine would reduce cash operating costs by $132,632 per year. The machine would
have a salvage value of $151,200 at the end of the project. Compute:
a. Net present value
b. Internal rate of return
c. Profitability index
d. Payback period
e. Simple rate of return
f. Should the company purchase the machine? Why or why not?
4. Pearl, Inc. produces three products. Data concerning the selling prices and unit costs of the three
products appear below:
Selling price...................................
Variable costs.................................
Fixed costs.....................................
Milling machine time (minutes)..... Product F Product G Product H
$50
$80
$70
$40
$50
$55
$15
$20
$12
4
2
5 Fixed costs are applied to the products on the basis of direct labor hours.
Demand for the three products exceeds the company's productive capacity. The milling machine is the
constraint, with only 2,400 minutes of milling machine time available this week.
Required:
a. Given the milling machine constraint, which product should be emphasized? Support your answer
with appropriate calculations.
b. Assuming that there is still unfilled demand for the product that the company should emphasize in
part (a) above, up to how much should the company be willing to pay for an additional hour of
milling machine time?
5. Emerald, Inc, produces a single product. The results of the company's operations for a typical month are
summarized in contribution format as follows:
Sales...................................
Variable expenses...............
Contribution margin...........
Fixed expenses...................
Net operating income......... $540,000
360,000
180,000
120,000
$ 60,000 The company produced and sold 120,000 kilograms of product during the month. There was no
beginning or ending inventories.
Required:
a. Given the present situation, compute
1) The break-even sales in kilograms.
2) The break-even sales in dollars.
3) The sales in kilograms that would be required to produce net operating income of $90,000.
4) The margin of safety in dollars.
b. An important part of processing is performed by a machine that is currently being leased for $20,000
per month. The company has been offered an arrangement whereby it would pay $0.10 royalty per
kilogram processed by the machine rather than the monthly lease.
1) Should the company choose the lease or the royalty plan?
2) Under the royalty plan compute break-even point in kilograms. 3) Under the royalty plan compute break-even point in dollars.
4) Under the royalty plan determine the sales in kilograms that would be required to produce net
operating income of $90,000.
6. Selected data about Ruby Company's manufacturing operations at two levels of activity are given below:
Number of units produced.............
10,000
15,000
Total manufacturing costs.............. $157,000 $225,000
Direct material cost per unit...........
$4
$4
Direct labor cost per unit................
$6
$6
Required:
a. Using the high-low method, estimate the cost formula for manufacturing overhead. Assume that
both direct material and direct labor are variable costs.
b. What is the purpose of knowing the cost formula?
7. Jade Company manufactures and sells premium tomato juice by the gallon. The company just finished
its first year of operations. The following data relates to this first year:
Number of gallons produced...........................................
Number of gallons sold....................................................
Sales price........................................................................
Unit product cost under variable costing.........................
Total contribution margin................................................
Total fixed manufacturing overhead cost........................
Total fixed selling and administrative expense................ 75,000
70,000
$3.00 per gallon
$1.45 per gallon
$84,000
$63,000
$10,500 Required:
a. Using the absorption costing method, prepare the company's income statement for the year.
b. Using variable costing method, prepare the company’s income statement for the year.
c. For decision making purpose, which is the better method? Why?
8. Platinum Corporation belongs to the rubber tire trading industry. Its most recent balance sheet and
income statement appear below:
Statement of Financial Position
December 31, Year 2 and Year 1
(in thousands of dollars)
Year 2
Assets
Current assets:
Cash....................................................................
Accounts receivable............................................
Inventory.............................................................
Prepaid expenses.................................................
Total current assets.................................................
Plant and equipment, net........................................
Total assets.............................................................
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable................................................ Year 1 $ 30 $ 110
210
260
190
170
70
70
500
610
810
740
$1,310 $1,350 $ 140 $ 150 Accrued liabilities...............................................
Notes payable, short term...................................
Total current liabilities...........................................
Bonds payable........................................................
Total liabilities........................................................
Stockholders’ equity:
Preferred stock, $100 par value, 5%...................
Common stock, $2 par value..............................
Additional paid-in capital–common stock..........
Retained earnings................................................
Total stockholders’ equity......................................
Total liabilities & stockholders’ equity.................. 30
40
210
190
400 30
40
220
240
460 100
100
400
400
130
130
280
260
910
890
$1,310 $1,350 Income Statement
For the Year Ended December 31, Year 2
(in thousands of dollars)
Sales (all on account).............................................
Cost of goods sold..................................................
Gross margin..........................................................
Selling and administrative expense........................
Net operating income.............................................
Interest expense......................................................
Net income before taxes.........................................
Income taxes (30%)...............................................
Net income............................................................. $1,260
770
490
400
90
26
64
19
$ 45 Required:
A. Compute the following for Year 2:
a. Working capital.
e. Average collection period.
b. Current ratio.
f. Inventory turnover.
c. Acid-test ratio.
g. Average sale period
d. Accounts receivable turnover.
B. What can you say about the company’s short-term liquidity?
C. If the industry average in terms of collection period is 45 days, and inventory turnover is 6 times,
how is the company performing compared to the industry?