Case Study-1 (1)
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Apr 3, 2024
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TASTY FOODS CORPORATION (A)
l Budgeting Methods and Cash Flow Estimation
Tasty Foods Corporation is a food conglomerate with major product lines of cereals, frozen dinn
Abigail, a Harvard MBA graduate and an amateur marathon runner, has a number of new produ
High Energy has been on the market for eighteen months, and recent market surveys indicate th
Production facilities for High Energy-Lite would be set up in an unused section of Tasty Foods’
Tasty Foods’ management expects to sell 700,000 16-ounce cartons of the new lite drink in each
Tasty Foods’ federal-plus-state tax rate is 40 percent, and its overall cost of capital is 12 percent
As you began to look into the situation, you learned from Abigail that All Natural Foods, Inc. ha
Your task is to work with Abigail to analyze the situation. You must recommend acceptance or Abigail also noted that the 12% discount rate is based on quoted, or nominal, market-determined
In fact, immediately after she was hired, Abigail worked with the company’s marketing and new
In examining the sales figures, you noted a short memo from Tasty Foods’ sales manager which
ners, and canned sodas and fruit juices. The firm was founded in 1965 by Henry Abercrombie, an ambitious c
uct ideas she would like the company to introduce. She believes Tasty Foods has not stayed current with gener
hat the drink does indeed have a small following, but would receive a much larger market share if it were avail
’ main plant. Relatively inexpensive used machinery with an estimated cost of only $700,000 would be purcha
h of the next 4 years. The price is expected to be $2.00 per carton. Fixed costs are estimated to be $190,000 pe
t, calculated as follows: as expressed an interest in leasing the space that would be used to produce High Energy-Lite. The terms of th
rejection, and evaluate he project’s acceptability using the NPV, IRR, modified IRR (MIRR), and payback cr
d component costs of capital, while both the sales price and the operating cost per unit are in current dollar ter
w product development departments to launch a new athletic drink called “High Energy.” Marketing surveys h
h indicated that High Energy-Lite would cut into the firm’s sales of High Energy-Original -
this type of effect
college graduate who had just acquired a small inheritance and who wanted to be his own boss. Equipped with
ral foods trends, especially the trend toward low fat and low sodium content products and the introduction of a
lable in a “lite” version. So, Abigail and Tasty Foods’ management are currently evaluating “High Energy- Li
ased, but shipping costs to move the machinery to Tasty Foods’ plant would add another $35,000, and installa
er year, and variable cash operating costs are estimated at $1.25 per unit. Note that operating cost are a functio
he lease, if it were made, would call for Tasty Foods to receive rental payments of $43,750 at the beginning of riteria. The company currently requires a project payback to be less than two and one-half years. For the initia
rms; does that present a problem? She also wondered whether it would be appropriate to assume neutral inflat
had shown that the public was dissatisfied with athletic drinks currently on the market because they tasted too
t is called cannibalization. Specially, the sales manager estimated that sales of High Energy-Original would fa
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Al Khoud Training Center (KTC) is an industrial training company operating in Muscat Knowledge Oasis. Following
increased competition and customer expectations, KTC has been forced to revisit its operational strategy and its
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Number of Trainees
6,000 Operating Income
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Foods
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Budgeted Fixed Cost per Training
16,000
5,000
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OMR12 Salaries
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Based on the customer survey it conducted, KTC has learned that several improvements to its products and
services are required. The improvements would provide the following impacts:
Increase in the Number of Trainees
Increase in the Total Variable Costs
Increase in the Total Fixed Costs
70%
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(0)
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Upon receipt of the budget, the team
manager, has now informed you that, in
keeping with industry players, that
management has indicated an industry
requirement to maintain a minimum cash
balance of $155,000 each month. He has
also noted that management is very keen
on keeping the gearing ratio of the business
as low as possible and would therefore
prefer to cushion any gaps internally using
equity financing.
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business be achieving this desired industry
target? Suggest three (3) internal strategies
that may be employed by management to
improve the organization's monthly cash
flow and militate against or reduce any
possible shortfall reflected in the budget
prepared. Each strategy must be fully
explained.
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It encourages managers to generate reasonable forecasts.
It helps improve operations.
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Ignore taxes.
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Balance Sheet
October 31
Accounts receivable
Merchandise inventory
Property, plant and equipment, net of $624,000 accumulated depreciation
Total assets
Liabilities and Stockholders' Equity
Accounts payable
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Retained earnings
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Selling price per unit
Variable cost per unit
Fixed costs (per year)
Required:
$ 100.00
60.00
1,113,040
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2. Assume that the goal of the company is to earn a pretax (operating) profit of $316,000 for the coming year. How many units would
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company indicate some uncertainty regarding the labor cost component of the variable cost figure presented above. What is the effect
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Required:
1. Compute the ROI of the following (round to the nearest whole percent):
a. The division if the radio project is not undertaken.
b. The radio project alone.
c. The division if the radio project is undertaken.
2. Compute the residual income of the following:
a. The division if the radio project is not undertaken.
b. The radio project alone.
c. The division if the radio project is undertaken.
3. This depends on whether Leslie's…
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(a2)
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Calculate variable overhead per unit and variable selling and…
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Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product-a weather radio that would put out a warning if the county in which the listener lived were under a severe
thunderstorm or tornado alert.
The budgeted income of the division was $825,000 with operating assets of $4,525,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of
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Required:
2. Compute the residual income of the following:
a. The division if the radio project is not undertaken.
$
b. The radio project alone.
$
c. The division if the radio project is undertaken.
3. This depends on whether Leslie's division is evaluated on the basis of ROI or on the basis of residual income. Overall division ROI wills decrease
; so if ROI is the basis for evaluation, she will decline
the investment. On the other hand,…
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Return on Investment and Investment Decisions
Leslie Blandings, division manager of Audiotech Inc., was debating the merits of a new product-a weather radio that would put out a warning if the county in which the listener lived were under a severe
thunderstorm or tornado alert.
The budgeted income of the division was $825,000 with operating assets of $4,525,000. The proposed investment would add income of $640,000 and would require an additional investment in equipment of
$4,000,000. The minimum required return on investment for the company is 12%.
Required:
1. Compute the ROI of the following (round to the nearest whole percent):
a. The division if the radio project is not undertaken.
%
b. The radio project alone.
0%
c. The division if the radio project is undertaken.
%
2. Compute the residual income of the following:
a. The division if the radio project is not undertaken.
b. The radio project alone.
$
c. The division if the radio project is undertaken.
3. This depends on whether…
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Check my work
As a newly hired management accountant, you have been asked to prepare a profit plan for the company for which you
work. As part of this task, you've been asked to do some what-if analyses. Following is the budgeted information
regarding the coming year:
Selling price per unit
Variable cost per unit
Fixed costs (per year)
Required:
$ 100.00
63.00
1,227,327
1. What is the breakeven volume, in units and dollars, for the coming year?
2. Assume that the goal of the company is to earn a pretax (operating) profit of $332,001 for the coming year. How many
units would the company have to sell to achieve this goal?
3. Assume that of the $63 variable cost per unit the labor-cost component is $29. Current negotiations with the
employees of the company indicate some uncertainty regarding the labor cost component of the variable cost figure
presented above. What is the effect on the breakeven point in units if selling price and fixed costs are as planned, but the
labor cost for the…
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Calculate the volume variance. $fill in the blank 12. Calculate the unused capacity variance. $fill in the blank 3 3. What if the actual
usage drops to 9,000 orders? What effect will this have on capacity management? $fill in the blank 5
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Activity-Based Budgeting (ABB) with Continuous Improvement OFC Company (Exercise10-41) has decided to implement a kaizen (continuous-improvement) program to enhance operational efficiency. After a careful study, management and employees agree that the firm will be ableto reduce cost rates for batch-level activities by 2% and unit-level activities (other than Storage) by1% per month during the first year of the program starting February 2019. The firm has decided todelay the implementation of the program for customer-sustaining and facility-level activities until2020. The firm expects the amount of cost-driver usage in each of the next two months to be thesame as those in January. (Use 4 decimal points for all cost rates.)Required2. What are the total budgeted costs for each activity and for the division as a whole in February andMarch?
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Problem 1
Glidden Company manufactures a line of chocolate bars that are sold in various department and grocery stores. The company’s controller has just received the sales forecast for the coming year for Glidden Company’s three products which are the High Protein, High Sugar and No Sugar chocolate bars. Glidden has experienced large fluctuations in sales volumes and variable costs over the past two years and the controller believes the sales forecast should be carefully evaluated from a CVP perspective. Preliminary budget information for 2023 is as follows:
High Sugar High Protein No Sugar
Unit sales 100,000 100,000 200,000
Unit selling price $ 48 $ 56 $ 68
Variable manufacturing cost per unit $ 11 $ 10 $ 21
Variable selling cost per unit $ 7 $ 6 $ 10
For 2023, Glidden’s fixed factory overhead is budgeted at $ 2,000,000 and the company’s fixed, selling and administrative expenses are forecasted to be $ 600,000. Glidden’s income tax rate is 40%.
Required: (Show all calculations.…
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Upon receipt of the budget, the team manager, Hilux James, has now informed you that, in keeping with industry players, the management of Toyota & Sons have indicated an industry requirement to maintain a minimum cash balance of $155,000 each month. He has also noted that management is very keen on keeping the gearing ratio of the business as low as possible and would therefore prefer to cushion any gaps internally using equity financing. Based on the budget prepared, will the business be achieving this desired target? Suggest three (3) internal strategies that may be employed by management to improve the organization’s monthly cash flow and militate against or reduce any possible shortfall reflected in the budget prepared. Each strategy must be fully explained.
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KMC Manufacturing Company makes garden and lawn equipment. The company operates through three divisions. Each division is an investment centre. Operating data for the lawn mower division for the year ended December 31, 2020, and relevant budget data are as follows:
Actual
Comparison with Budget
Sales
$2,900,000
$150,000
unfavourable
Variable cost of goods sold
1,400,000
100,000
unfavourable
Variable selling and administrative expenses
300,000
40,000
favourable
Controllable fixed cost of goods sold
270,000
On target
Controllable fixed selling and administrative expenses
140,000
On target
Average operating assets for the year for the lawn mower division were $5million, which was also the budgeted amount.
Required:
Prepare a responsibility report (in thousands of dollars) for the lawnmower division.
Calculate the expected ROI in 2020 for the KMC division, assuming the following independent changes:
The…
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Completing a comprehensive budgeting problem—merchandising Company
Alliance Printing Supply of Baltimore has applied for a loan. Its bank has requested a budgeted income statement for April 2018 and a balance sheet at April 30, 2018. The March 31, 2018, balance sheet follows:
As Alliance Printing Supply’s controller, you have assembled the following additional information:
April dividends of $7,000 were declared and paid.
April capital expenditures of $16,300 budgeted for cash purchase of equipment.
April depreciation expense, $1,000.
Cost of goods sold, 40% of sales.
Desired ending inventory for April is $22,400.
April selling and administrative expenses include salaries of $37,000, 30% of which will be paid in cash and the remainder paid next month.
Additional April selling and administrative expenses also include miscellaneous expenses of 10% of sales, all paid in April.
April budgeted sales, $89,000, 80% collected in April and 20°/0 in May.
April cash payments of March 31…
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Related Questions
- How does the budgeting process translate long-term goals into operating objectives? Suppose Framecraft has an Information Processing Division that provides database management services for the professional photographers and artists who buy its frames. The division uses state-of-the-art equipment and employs five information specialists. Each specialist works an average of 160 hours a month. The division’s controller has com piled the following information: Actual Data for Past Year Forecasted Data for This Year November December January February March Client billings (sales) $25,000 $35,000 $25,000 $20,000 $40,000 Selling and administrative expenses 12,000 13,000 12,000 11,000 12,500 Operating supplies 2,500 3,500 2,500 2,500 4,000 Processing overhead 3,200 3,500 3,000 2,500 3,500 Of the client billings, 60 percent are cash sales collected during the month of sale, 30 per cent are collected in the first month following the sale, and 10 percent are collected in the second month…arrow_forward(a) Al Khoud Training Center (KTC) is an industrial training company operating in Muscat Knowledge Oasis. Following increased competition and customer expectations, KTC has been forced to revisit its operational strategy and its quality standards. The following budgeted data for 2022 are available: Number of Trainees 5,500 Operating Income OMR24,000 Budgeted Variable Cost per Trainee Trainee's Support Service Training Materials Foods Budgeted Fixed Cost per Training 14,800 13,000 OMR16 Facilities OMR21 Salaries OMR20 OMR10 Miscellaneous Products & Services Based on the customer survey it conducted, KTC has learned that several improvements to its products and services are required. The improvements would provide the following impacts: Increase in the Number of Trainees 30% Increase in the Total Variable Costs 25% Increase in the Total Fixed Costs 25% You are required to: (1) Calculate the budgeted revenue per trainee based on the available data. (i) Assuming that budgeted revenue per…arrow_forwardBudgeting Production, Direct Materials and Income Statement Lane Products manufactures a popular kitchen utensil. The company recently expanded, and the controller believes that it will need to borrow cash to continue operations. It opened negotiations with the local bank for a one-month loan of $42,000 starting March 1. The bank would charge interest at the rate of 0.5 percent per month and require the company to repay interest and principal on March 31. In considering the loan, the bank requested a projected income statement and cash budget for March. The following information is available: • The company budgeted sales at 13,000 units per month in February, April, and May and at 10,000 units in March. The selling price is $61 per unit. • The company offers a 2 percent discount for cash sales. The company's experience is that bad debts average 1 percent of credit sales. • The inventory of finished goods on February 1 was 2,500 units. The desired finished goods inventory at the end of…arrow_forward
- Al Khoud Training Center (KTC) is an industrial training company operating in Muscat Knowledge Oasis. Following increased competition and customer expectations, KTC has been forced to revisit its operational strategy and its quality standards. The following budgeted data for 2022 are available: Number of Trainees 6,000 Operating Income OMR45,000 Budgeted Variable Cost per Trainee Trainee's Support Service Training Materials Foods Miscellaneous Products & Services OMR15 Budgeted Fixed Cost per Training 16,000 5,000 OMR26 Facilities OMR12 Salaries OMR22 Based on the customer survey it conducted, KTC has learned that several improvements to its products and services are required. The improvements would provide the following impacts: Increase in the Number of Trainees Increase in the Total Variable Costs Increase in the Total Fixed Costs 70% 65% 50% You are required to: (0) Calculate the budgeted revenue per trainee based on the available data. (i) Assuming that budgeted revenue per…arrow_forwardBudget Excel Project – Bloomfield Co. Bloomfield is an ice cream company, who makes homestyle ice creams using fresh and all-natural ingredients and sells to retail stores. In preparing the budget for the coming year, 2024, they forecasted the following expected sales and gathered the costs data from managers in various areas of the company. Sales Forecasted to sell 25,000 units in the 1st Quarter of 2024, and an additional 2,000 units each quarter. The 2,000 additional units per quarter are expected to continue through the end of 2nd quarter of 2025. The 2023 4th quarter sales were 24,000 units. Selling price for one unit of ice cream is $15. Bloomfield maintains 15% of the next quarter’s unit sales in ending inventory. All sales to retail stores are on account, with collections of 75% made in the quarter of sales and 25% collected in the quarter after sale. Accounts receivable on December 31, 2023 is $72,000. Direct Materials Direct materials cost $3 per pound. 1.5 pounds of…arrow_forwardCapital Budgeting: Natural Organics Products, a company with profitable ongoing operations, is considering a major six-year project on which the company has already incurred $1,200,000 in research and development costs. The vice-president in charge of finance has provided you with the following data and worksheet and has asked you to determine, using an NPV analysis, if the project should be undertaken. She has also hinted that your future with the company hinges on a successful analysis of the project. Data Sheet: Company’s tax rate = 40% Company’s opportunity cost of capital = 15% Net working capital requirements of the project if it is accepted: Year 0 $160,000 Year 1 $240,000 Year 2 $240,000 Year 3 $240,000 Year 4 $180,000 Year 5 $50,000 Year 6 $0 New equipment purchases required for the project total $14,000,000. At the end of the project, it is expected that the equipment can be sold to a competitor for $2,000,000. This equipment would be placed in the company’s in the…arrow_forward
- As a newly hired management accountant, you have been asked to prepare a profit plan for the company for which you work. As part of this task, you've been asked to do some what-if analyses. Following is the budgeted information regarding the coming year: Selling price per unit Variable cost per unit Fixed costs (per year) $ 100.00 70.00 1,200,000 Required: 1. What is the breakeven volume, in units and dollars, for the coming year? 2. Assume that the goal of the company is to earn a pretax (operating) profit of $300,000 for the coming year. How many units would the company have to sell to achieve this goal? 3. Assume that of the $70 variable cost per unit the labor-cost component is $25. Current negotiations with the employees of the company indicate some uncertainty regarding the labor cost component of the variable cost figure presented above. What is the effect on the breakeven point in units if selling price and fixed costs are as planned, but the labor cost for the coming year is…arrow_forwardCurrent Attempt in Progress Concord Company manufactures a variety of tools and industrial equipment. The company operates through three divisions. Each division is an investment center. Operating data for the Home Division for the year ended December 31, 2022, and relevant budget data are as follows. Actual Comparison with Budget Sales $1,400,000 $101,000 favorable Variable cost of goods sold 680,000 55,000 unfavorable Variable selling and administrative expenses 124,000 24,000 unfavorable Controllable fixed cost of goods sold 169,000 On target Controllable fixed selling and administrative expenses 79,000 On target Average operating assets for the year for the Home Division were $2,000,000, which was also the budgeted amount. (a) Prepare a responsibility report for the Home Division. (List variable costs before fixed costs. Round ROI to 2 decimal places, e.g. 1.57%.) CONCORD COMPANYHome…arrow_forwardUpon receipt of the budget, the team manager, has now informed you that, in keeping with industry players, that management has indicated an industry requirement to maintain a minimum cash balance of $155,000 each month. He has also noted that management is very keen on keeping the gearing ratio of the business as low as possible and would therefore prefer to cushion any gaps internally using equity financing. Based on the budget prepared, will the business be achieving this desired industry target? Suggest three (3) internal strategies that may be employed by management to improve the organization's monthly cash flow and militate against or reduce any possible shortfall reflected in the budget prepared. Each strategy must be fully explained.arrow_forward
- 5. Capital budgeting and the post-audit process Cramer Designs produces a wide range of women’s apparel. Three years ago, the company spent $1.2 million to launch its line of designer handbags. Brittany Cramer, the company’s CEO and founder, is conducting a post-audit on the handbag line to determine how the division’s performance compared to the company’s expectations. She has found that the revenue from the handbag division was much lower than expected; however, the company was able to produce the handbags for a much lower cost per unit than expected. Which of the following should be considered the main purpose(s) of the post-audit? Check all that apply. A. It helps improve operations. B. It encourages managers to generate reasonable forecasts. C. It helps project the firm’s tax liability. When a firm a exhausts its retained earnings and must raise capital from external sources, its weighted average cost of capital (WACC) will _________ .arrow_forward5. Capital budgeting and the post-audit process Cramer Designs produces a wide range of women’s apparel. Three years ago, the company spent $1.2 million to launch its line of designer handbags. Brittany Cramer, the company’s CEO and founder, is conducting a post-audit on the handbag line to determine how the division’s performance compared to the company’s expectations. She has found that the revenue from the handbag division was much lower than expected; however, the company was able to produce the handbags for a much lower cost per unit than expected. Which of the following should be considered the main purpose(s) of the post-audit? Check all that apply. It helps project the firm’s tax liability. It encourages managers to generate reasonable forecasts. It helps improve operations. When a firm a exhausts its retained earnings and must raise capital from external sources, its weighted average cost of capital (WACC) will (increase/decrease) . Thank…arrow_forwardChapter : Budgeting South Hampton University is preparing its budget for the upcoming academic year. This is a specialised private university that charges fees for all degree courses. Currently, 30,000 students are enrolled on campus. However, the university is forecasting a 5 per cent growth in student numbers in the coming year, despite an increase in fees to $3,000 per subject. The following additional information has been gathered from an examination of university records and conversations with university managers: South Hampton is planning to award scholarships to 200 students, which will cover their fees. The average class has 80 students, and the typical student takes 4 subjects per semester. South Hampton operates 2 semesters per year. The average academic staff salary is $120,000 per annum including on-costs. South Hampton’s academic staff are evaluated on the basis of teaching, research, administration and professional/community service. Each of the academic staff teaches…arrow_forward
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