Answer the following questions

[Ayush Nair]

(1) Footy fever purchases football jerseys for $55 and sells them for $65. Sales of football jerseys (in units) for the first quarter of 2018 are expected to be as follows: Jan 5,000; Feb 5,500; Mar 6,000 and 7,000 for April 2018.

The business expects inventory of 1,250 units on hand at 1st January 2018 and has a target finished inventory of 25% of the following month’s sales units.

Actual sales for November and December 2017 were 9,000 and 7,500 jerseys respectively.
Sales are 80% cash, and 20% credit. Credit customers pay 40% in the month following the sale and 60% two months following.

Payment for purchases is made in the month following the purchase. The budgeted cash balance on 1 January 2018 is $1,000.

Required:

a) Prepare a sales budget for the quarter January – March 2018 (note 1)
b) Prepare a purchases budget for the quarter January – March 2018 (note 1)
c) Prepare a schedule of receipts from accounts receivable for quarter January – March 2018 (note 1)
d) Prepare a cash budget for the quarter January – March 2018 (note 1)
e) Comment on the cash position of Footy Fever for each month

(2) NRG Ltd has a current breakeven point of 43,000 units. Which of the following would result in a decrease to the breakeven point?

a. a decrease in the variable costs per unit
b. an increase in the contribution margin per unit
c. a decrease in the selling price per unit
d. an increase in the fixed costs

(3) Zen Ltd has 13,000 units in inventory that cost $2.75 per unit to produce. Due to changing technology, the sales department is having difficulty selling this product. It will cost $4,300 to scrap the units and Zen Ltd needs to clear the warehouse to make room for new stock. A customer has approached Zen Ltd and is willing to take all 13,000 units. However, as this is old technology, they are not willing to pay for this item. Should Zen Ltd simply give these units away? If not, what is the minimum price for which Zen Ltd should sell these units?

(4) Kendo Ltd has fixed costs of $149,000 and variable costs are 75% of the selling price. To realize profits of $741,000 from sales of 35,600 units, what must the selling price be per unit?

(5) Dragon’s Lair makes small gadgets. The manufacturing costs per unit to produce a gadget are as follows:

Direct Materials $65
Direct Labor $25
Variable Manufacturing Overhead $15
Fixed Manufacturing Overhead $95
Total Manufacturing Costs $200

Variable selling costs to obtain and fill orders normally average $5 per unit when Dragon’s Lair sells gadgets locally. Dragon’s Lair has recently paid $48,000 to advertise in an international magazine. Dragon’s Lair has just received an order from a German Company for 400 gadgets for a total offering price of $45,000. The German Company will pay all shipping charges except the initial packaging costs which are expected to be $2.75 per gadget. Dragon’s Lair has excess capacity.

(a) Should Dragon’s Lair accept this one time only special order? Support your answer with calculations.
(b) Why is knowing that Dragon’s Lair has excess capacity important?

(6) Lolly Water Company makes lemonade. Lolly Water Company normally sells 34,000 bottles of lemonade for $4 per bottle. The cost to manufacture the lemonade is $1.50 per bottle. Management of Lolly Water Company have undertaken some research and have determined that further processing of the lemonade could convert the product into raspberry-lemonade flavor. Lolly Water Company could sell the raspberry-lemonade for $5.50 per bottle and would incur variable processing costs to convert the lemonade to raspberry-lemonade of $1.50 per bottle. Variable selling costs for lemonade are $1.00 per bottle, but for the raspberry-lemonade would be $0.80 per bottle.

Based on this information, assuming Lolly Water Company can sell 34,000 bottles of raspberry/lemonade:

(a) Should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations.
(b) If the selling price of the raspberry-lemonade dropped to $5.00 per bottle, should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations.
(c) Describe relevant revenues and relevant costs. Provide management of Lolly Water Company with a list of relevant revenues and relevant expenses for this decision. Identify any revenues and/or expenses that would not be relevant for this decision.

[Ayush Nair]

(1) Footy fever purchases football jerseys for $55 and sells them for $65. Sales of football jerseys (in units) for the first quarter of 2018 are expected to be as follows: Jan 5,000; Feb 5,500; Mar 6,000 and 7,000 for April 2018. The business expects inventory of 1,250 units on hand at 1st January 2018 and has a target finished inventory of 25% of the following month’s sales units. Actual sales for November and December 2017 were 9,000 and 7,500 jerseys respectively. Sales are 80% cash, and 20% credit. Credit customers pay 40% in the month following the sale and 60% two months following. Payment for purchases is made in the month following the purchase. The budgeted cash balance on 1 January 2018 is $1,000. Required: a) Prepare a sales budget for the quarter January – March 2018 (note 1) b) Prepare a purchases budget for the quarter January – March 2018 (note 1) c) Prepare a schedule of receipts from accounts receivable for quarter January – March 2018 (note 1) d) Prepare a cash budget for the quarter January – March 2018 (note 1) e) Comment on the cash position of Footy Fever for each month (2) NRG Ltd has a current breakeven point of 43,000 units. Which of the following would result in a decrease to the breakeven point? a. a decrease in the variable costs per unit b. an increase in the contribution margin per unit c. a decrease in the selling price per unit d. an increase in the fixed costs (3) Zen Ltd has 13,000 units in inventory that cost $2.75 per unit to produce. Due to changing technology, the sales department is having difficulty selling this product. It will cost $4,300 to scrap the units and Zen Ltd needs to clear the warehouse to make room for new stock. A customer has approached Zen Ltd and is willing to take all 13,000 units. However, as this is old technology, they are not willing to pay for this item. Should Zen Ltd simply give these units away? If not, what is the minimum price for which Zen Ltd should sell these units? (4) Kendo Ltd has fixed costs of $149,000 and variable costs are 75% of the selling price. To realize profits of $741,000 from sales of 35,600 units, what must the selling price be per unit? (5) Dragon’s Lair makes small gadgets. The manufacturing costs per unit to produce a gadget are as follows: Direct Materials $65 Direct Labor $25 Variable Manufacturing Overhead $15 Fixed Manufacturing Overhead $95 Total Manufacturing Costs $200 Variable selling costs to obtain and fill orders normally average $5 per unit when Dragon’s Lair sells gadgets locally. Dragon’s Lair has recently paid $48,000 to advertise in an international magazine. Dragon’s Lair has just received an order from a German Company for 400 gadgets for a total offering price of $45,000. The German Company will pay all shipping charges except the initial packaging costs which are expected to be $2.75 per gadget. Dragon’s Lair has excess capacity. (a) Should Dragon’s Lair accept this one time only special order? Support your answer with calculations. (b) Why is knowing that Dragon’s Lair has excess capacity important? (6) Lolly Water Company makes lemonade. Lolly Water Company normally sells 34,000 bottles of lemonade for $4 per bottle. The cost to manufacture the lemonade is $1.50 per bottle. Management of Lolly Water Company have undertaken some research and have determined that further processing of the lemonade could convert the product into raspberry-lemonade flavor. Lolly Water Company could sell the raspberry-lemonade for $5.50 per bottle and would incur variable processing costs to convert the lemonade to raspberry-lemonade of $1.50 per bottle. Variable selling costs for lemonade are $1.00 per bottle, but for the raspberry-lemonade would be $0.80 per bottle. Based on this information, assuming Lolly Water Company can sell 34,000 bottles of raspberry/lemonade: (a) Should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations. (b) If the selling price of the raspberry-lemonade dropped to $5.00 per bottle, should Lolly Water Company process the lemonade further into raspberry-lemonade? Support your answer with calculations. (c) Describe relevant revenues and relevant costs. Provide management of Lolly Water Company with a list of relevant revenues and relevant expenses for this decision. Identify any revenues and/or expenses that would not be relevant for this decision.

(1) Footy Fever Budgets:

a) Sales Budget for the quarter January – March 2018:

sql
+-----------+--------+-------+-------+-------+|Month| Jan | Feb | Mar | Apr |+-----------+--------+-------+-------+-------+| Sales |5,000|5,500|6,000|7,000|+-----------+--------+-------+-------+-------+| Total |23,500||||+-----------+--------+-------+-------+-------+

b) Purchases Budget for the quarter January – March 2018:

sql
+-----------+--------+-------+-------+-------+|Month| Jan | Feb | Mar | Apr |+-----------+--------+-------+-------+-------+| Sales |5,000|5,500|6,000|7,000|+-----------+--------+-------+-------+-------+|Add: EI |1,250|1,375|1,500|1,750|+-----------+--------+-------+-------+-------+| Total |6,250||||+-----------+--------+-------+-------+-------+

c) Schedule of Receipts from Accounts Receivable for the quarter January – March 2018:

sql
+-----------+--------+-------+-------+-------+|Month| Jan | Feb | Mar | Apr |+-----------+--------+-------+-------+-------+| Sales |5,000|5,500|6,000|7,000|+-----------+--------+-------+-------+-------+| Cash |4,000|4,400|4,800|5,600|+-----------+--------+-------+-------+-------+| Credit |1,000|1,100|1,200|1,400|+-----------+--------+-------+-------+-------+

Note: 80% of sales are cash and 20% are credit. Of the credit sales, 40% will be received in the following month and 60% in the second month following the sale.

d) Cash Budget for the quarter January – March 2018:

scss
+-----------+--------+--------+--------+ | Month | Jan | Feb | Mar | +-----------+--------+--------+--------+ | Receipts | 5,000 | 5,500 | 6,000 | +-----------+--------+--------+--------+ | Payments | 6,250 | 6,250 | 6,250 | +-----------+--------+--------+--------+ | Net Cash | (1,250)| (750) | (250) | +-----------+--------+--------+--------+ | Bal. B/F | 1,000 | (250) | (1,000)| +-----------+--------+--------+--------+ | Bal. C/F | (250) | (1,000)| (1,250)| +-----------+--------+--------+--------+

Note: The cash balance on January 1, 2018, is $1,000. The net cash for each month is calculated as receipts minus payments. The closing balance is the beginning balance of the next month.

e) Comment on the cash position of Footy Fever for each month:

• January: The company will experience a cash shortfall of $250.
• February: The company will experience a cash shortfall of $1,000.
• March: The company will experience a cash shortfall of $1,250.

(2) NRG Ltd’s Breakeven Point: a. a decrease in the variable costs per unit – This would result in a decrease in the breakeven point. Lower variable costs mean that each unit contributes more towards covering fixed costs, requiring fewer units to break even.

b. an increase in the contribution margin per unit – This would result in a decrease in the breakeven point. A higher contribution margin means that each unit contributes more towards covering fixed costs, requiring fewer units to break even.

c. a decrease in the selling price per unit – This would increase the breakeven point. With a lower selling price, more units need to be sold to cover the fixed costs.

d. an increase in the fixed costs – This would increase the breakeven point. Higher fixed costs mean that more units need to be sold to cover the increased fixed costs.

So, option (b) – an increase in the contribution margin per unit would result in a decrease in the breakeven point.

(3) Zen Ltd’s Decision on Selling Old Inventory: If the customer is not willing to pay anything for the old units, giving them away for free would result in a total loss of the production cost, which is $2.75 per unit. Instead of giving the units away for free, Zen Ltd should sell them at any price higher than the production cost to minimize losses.

The minimum price at which Zen Ltd should sell these units is $2.75 per unit. Selling at this price would cover the production cost, and even though there would be no profit, it would prevent any additional losses.

(4) Kendo Ltd’s Selling Price Calculation: Let’s use the following variables: S = Selling Price per unit VC = Variable Costs per unit (given as 75% of the selling price) FC = Fixed Costs Q = Quantity of units sold (given as 35,600 units) P = Desired Profit (given as $741,000)

The profit formula is: Profit = (S – VC) * Q – FC

We want to find the selling price (S) that gives the desired profit: $741,000 = (S – 0.75S) * 35,600 – $149,000

$741,000 = 0.25S * 35,600 – $149,000

$741,000 + $149,000 = 0.25S * 35,600

$890,000 = 0.25S * 35,600

S * 35,600 = $890,000

S = $890,000 / 35,600

S ≈ $25

So, the selling price per unit should be approximately $25.

(5) Dragon’s Lair Special Order Decision:

(a) To determine if Dragon’s Lair should accept the special order, let’s calculate the relevant costs and revenues:

javascript
Revenuefrom the special order: $45,000DirectMaterials: $65 per unit DirectLabor: $25 per unit VariableManufacturingOverhead: $15 per unit VariableSellingCosts: $5 per unit AdditionalPackagingCosts: $2.75 per unit

Total Variable Cost per Unit = $65 + $25 + $15 + $5 + $2.75 = $112.75

Total Contribution Margin per Unit = Selling Price – Total Variable Cost = $45,000 / 400 – $112.75 = $32.25

Contribution Margin Ratio = Total Contribution Margin / Selling Price = $32.25 / ($45,000 / 400) = 0.36 or 36%

Since the contribution margin per unit is positive and greater than zero, accepting the special order would generate a positive contribution toward covering fixed costs and increasing overall profit.

(b) Knowing that Dragon’s Lair has excess capacity is important because it means the company can produce additional units without incurring additional fixed costs. Excess capacity allows Dragon’s Lair to accept the special order without negatively impacting its regular operations. As long as the special order’s contribution margin per unit is positive, accepting it will increase the overall profit without affecting regular sales.

(6) Lolly Water Company Decision on Processing Lemonade into Raspberry-Lemonade:

(a) To determine if Lolly Water Company should process the lemonade further into raspberry-lemonade, let’s calculate the relevant costs and revenues:

For Lemonade:

• Selling Price: $4 per bottle
• Total Manufacturing Costs: $1.50 per bottle
• Variable Selling Costs: $1 per bottle

For Raspberry-Lemonade:

• Selling Price: $5.50 per bottle
• Total Manufacturing Costs: $1.50 per bottle (additional variable processing cost)
• Variable Selling Costs: $0.80 per bottle

Total Relevant Revenue for Raspberry-Lemonade = $5.50 * 34,000

Total Relevant Cost for Raspberry-Lemonade = ($1.50 + $1.50) * 34,000

Total Relevant Selling Costs for Raspberry-Lemonade = $0.80 * 34,000

Total Relevant Profit for Raspberry-Lemonade = Total Relevant Revenue – Total Relevant Cost – Total Relevant Selling Costs

Compare this profit with the profit from selling the lemonade as is.

(b) If the selling price of raspberry-lemonade dropped to $5.00 per bottle, repeat the calculations with the new selling price and see if the relevant profit is still higher than selling lemonade as is.

(c) Relevant Revenues: Revenue from selling lemonade or raspberry-lemonade bottles. Relevant Costs: Total manufacturing costs for lemonade or additional variable processing costs for raspberry-lemonade. Relevant Selling Costs: Variable selling costs for both lemonade and raspberry-lemonade. Irrelevant Costs: Fixed manufacturing overhead costs (as they do not change with the decision) and any sunk costs (costs already incurred in producing the lemonade).

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