Cafe 4 problems final exam

 

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Problem 1 – Café Xaragua’s Second Year

 

Rob Lehnert and his partners decided to proceed with their plans and opened Café Xaragua. During the first year, the business performed almost exactly as they expected. During the second year of operations, their newly hired manager made some changes, which resulted in a revenue increase of a little over 21%, but a decrease in gross margin. The partners hired a consultant who prepared the schedule that appears on the following page. After preparing the schedule, the consultant disappeared, so the partners have hired you to help them interpret the schedule. Here are their questions:

 

  1. Wow! Total revenues increased a lot! Are we selling more of each product than we thought we would? How has each product affected total revenues?

 

  1. When the new manager came on board, he messed around with selling prices. What was the effect of the price changes on the increase in revenues for each product?

 

  1. It looks like our customers purchased a different mix of product than we expected. Which product was the most different from what we expected?

 

  1. We’re really happy about the big increase in revenues, but why is the gross margin percentage less than last year? Tell me howeach productcontributed to the overall decline in our expectedgross margin.

 

  1. What do you think we should do differently next year to increase our total gross margin? I’m counting on you to give me very specific guidance.

 

  1. Do your findings suggest that customers like our strategy of providing a unique blend of sustainable coffee produced in Haiti or do they regard us as just another coffee shop?

Budgeting and Management Control – LON

 

Module D – May 2015

FINAL EXAM

 

 

 

 

 

 

 

 

 

 

Café Xaragua – Year 2

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

 

Expected

Difference

 

 

 

 

 

 

Regular Coffee

$229,950

$150,563

 

$79,388

 

 

 

 

 

 

Spec Coffee

 

 

$123,188

$200,750

 

-$77,563

 

 

 

 

 

 

Baked Goods

 

 

$38,325

$125,469

 

-$87,144

 

 

 

 

 

 

Beans

 

 

$388,725

 

$165,619

 

$223,106

 

 

 

 

 

 

Total Revenue

$780,188

$642,400

 

 

 

 

 

 

 

 

Regular Coffee

$42,158

$30,113

 

$12,045

 

 

 

 

 

 

Spec Coffee

 

 

$39,420

$40,150

 

-$730

 

 

 

 

 

 

Baked Goods

 

 

$35,040

$62,734

 

-$27,694

 

 

 

 

 

 

Beans

 

 

$175,200

 

$66,248

 

$108,953

 

 

 

 

 

 

Total CGS

 

 

$291,818

$199,244

 

 

 

 

 

 

 

 

Gross Profit

 

 

$488,370

$443,156

 

 

 

 

 

 

 

 

Gross Profit %

 

 

63%

 

 

 

69%

 

 

 

 

 

 

 

Quantity

 

 

 

Price

 

 

 

 

 

 

 

Variance Analysis

 

 

 

Revenue

Expected

Actual

Expected

Actual

 

 

Actual Q x

Price

Actual Q x

Usage

Expected Q x

 

 

 

Actual P

Variance

Expected P

Variance

Expected P

 

 

 

 

 

 

 

 

 

 

 

 

 

egular Coffee

50,188

76,650

 

 

$3.00

$3.00

 

$229,950

$0

$229,950

 

$79,388

$150,563

 

pec Coffee

50,188

32,850

 

 

$4.00

$3.75

 

$123,188

($8,213)

$131,400

 

($69,350)

$200,750

 

aked Goods

50,188

21,900

 

 

$2.50

$1.75

 

$38,325

($16,425)

$54,750

 

($70,719)

$125,469

 

eans

10,038

21,900

 

 

$16.50

$17.75

 

$388,725

$27,375

$361,350

 

$195,731

$165,619

 

 

Quantity

 

 

 

Cost

 

 

 

 

 

 

 

Variance Analysis

 

 

 

Expenses

Expected

Actual

Expected

Actual

 

 

Actual Q x

Price

Actual Q x

Usage

Expected Q x

 

 

 

Actual P

Variance

Expected P

Variance

Expected P

 

 

 

 

 

 

 

 

 

 

 

 

 

egular Coffee

50,188

76,650

 

 

$0.60

$0.55

 

$42,158

$3,833

$45,990

 

($15,878)

$30,113

 

pec Coffee

50,188

32,850

 

 

$0.80

$1.20

 

$39,420

($13,140)

$26,280

 

$13,870

$40,150

 

aked Goods

50,188

21,900

 

 

$1.25

$1.60

 

$35,040

($7,665)

$27,375

 

$35,359

$62,734

 

eans

10,038

21,900

 

 

$6.60

$8.00

 

$175,200

($30,660)

$144,540

 

($78,293)

$66,248

 

 

 

 

Gross Profit

 

Expected

Actual

Regular Coffee

$120,450

$187,793

Spec Coffee

$160,600

$83,768

Baked Goods

$62,734

$3,285

Beans

$99,371

$213,525

 

 

Problem 2 – Activity-Based Costing

 

Using the information below, answer the questions that follow.

 

Plumbing Supply Company manufactures three products: Valves, Pumps and “Flowtrollers” (which is patented and only manufactured by Plumbing Supply). The most recent monthly statement of pre-tax operating income appears below:

Plumbing Supply Company

Pre-tax Operating Income – April 2013

Sales

$1,847,500

100%

Direct Labor Expense

$351,000

 

Direct Materials Expense

$458,000

 

Contribution Margin

$1,038,500

56%

Manufacturing Overhead

$654,600

35%

Gross Margin

$383,900

21%

Admin. Expenses

$350,000

19%

Operating Income (pre-tax)

$33,900

1.8%

 

 

 

 

       

 

Until recently, Plumbing Supply allocated manufacturing overhead to each product using 185% of direct labor costs:

Overhead Allocated as 185% * Direct Labor Cost

 

 

Valves

Pumps

Flowtrollers

Selling price

$79.00

$70.00

$95.00

Direct material cost (DM)

$16.00

$20.00

$22.00

Direct labor cost (DL)

$12.35

$16.25

$13.00

Manuf. OH (@185% * DL)

$22.85

$30.06

$24.05

Unit costs

$51.20

$66.31

$59.05

Gross margin

$27.80

$3.69

$35.95

Gross margin (%)

35%

5%

38%

 

The Company recently hired a Hult graduate who determined that an activity-based method for allocating overhead would provide a better estimate of each product’s costs and computed the following estimates:

 

Activity-Based Costing

 

 

Valves

Pumps

Flowtrollers

Selling price

$79.00

$70.00

$95.00

Direct material cost (DM)

$16.00

$20.00

$22.00

Direct labor cost (DL)

$12.35

$16.25

$13.00

Manuf. OH (ABC)

$16.87

$19.95

$63.42

Unit cost

$45.22

$56.20

$98.42

Gross margin

$33.78

$13.80

-$3.42

Gross margin (%)

43%

20%

-4%

 

  1. Under the previous method for allocating overhead (i.e., 185% of Direct Labor Costs), which product was most profitable? What is the basis for your answer?

 

Problem 3 – Cost Behavior and Break-even Analysis

 

Following the success of the Norgan Theatre in Minto, Ontario, owners of another troubled theatre located in Texas decided to renovate and re-open, hoping the enjoy the same success as Norgan. The owners of the Texas theatre put together the following information related to their expected costs of running the theatre:

 

Revenue

 

 

 

Theatre admission

 

 

 

Concession revenue

 

61.5% of theatre admission revenue

 

Total Revenue

 

 

 

Expenses  Film royalties

 

30% of theatre admission revenue

 

 

 

Concession booth supplies

 

45% of concession revenue

 

Booking service fees

 

5% of theatre admission revenue

 

Salary & wages

11,850

 

 

Benefits

1,200

 

 

Insurance

3,150

 

 

Hydro & water

2,950

 

 

Depreciation

1,750

 

 

Air conditioning

2,385

 

 

Advertising & promotion

800

 

 

Maintenance

1,750

 

 

Telephone

750

 

 

The owners are unsure about the single admission price they should charge (there is only one ticket price). One of the owners recalled having learned something about break-even analysis in graduate school, but didn’t remember the details. Please help out by answering the questions below.

 

  1. All the expenses with numbers above, which total $26,585, are fixed costs. What does that mean?

 

  1. Why is it necessary to know fixed costs in order to determine a break-even point?

 

  1. Contribution margin is defined as sales revenue less variable costs. Using the information above, write an equation for the theatre’s contribution margin where X=the revenue required for theatre admission.

 

  1. Solve for the break-even level of theatre admission revenue.

 

  1. The theatre owners are expecting 2,975 people to buy tickets. If the theatre owners want to charge a price that results in a profit of $5,000, how much should they charge for each ticket?

 

Problem 4 – Short Answer Questions

 

 

 

  1. Please answer the following questions:

 

    1. If a manufactured item has a cost of $75, and if the seller determines the price by applying a 25% markup over cost, what is the selling price. Show your work!

 

    1. What is the gross margin percentage at the price you computed above? Show your work!

 

    1. If the seller wishes to earn a gross margin percentage of 30%, what price should be charged for the same item? Show your work!

 

  1. Why do companies use predetermined overhead rates to apply overhead to jobs instead of assigning actual overhead to each job?

 

  1. We have seen examples of companies using direct labor hours, direct labor dollars or machine hours as drivers for assigning overhead. What factors should be considered when choosing a driver for applying overhead?

 

  1. Suppose a company purchases a raw material with a cost of $100. During week one, the material remains in the storeroom where it was placed after purchase. In week two, the material is used in the manufacture of a widget. The widget is incomplete at the end of week two. The widget is completed in week three and placed on a showroom shelf. A customer purchases the widget in week four. Explain where, in the financial statements, the $100 associated with that raw material would appear in the income statement and/or balance sheet in weeks one, two three and four, if financial statements were prepared at the end of each week.

 

  1. Suppose you were the project manager for advertising for a major international concert in a remote city. When the project stated, you projected total advertising revenue of $800 million from sponsors. When you priced the advertising, you expected the cost of providing the advertising to be $775 million; however, you have recently learned that the cost of broadcasting from a remote city will be more than you anticipated. If your pay was based on advertising profitability, what would you do about this new information?

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