Reference no: EM133004788
Question - Part A - Asco Company has a relevant range of production between 15,000 and 30,000 units. The following cost data represents average variable costs per unit for 25,000 units of production.
Average Cost per unit
Direct materials $13
Direct labor 8
Fixed manufacturing overhead 6
Variable manufacturing overhead 3
Required -
a) If 25,000 units are produced, what is the variable cost per unit?
b) If 16,000 units are produced, what is the variable cost per unit?
c) Comment briefly on your answers to (a) and (b).
d) If 18,000 units are produced, what are the total variable costs?
Part B - GEM Ltd leases a photocopy machine with terms that include a fixed fee each month plus a charge for each photocopy made. GEM made 5,000 copies and paid a total of $600 in January. In April, they paid $400 for 3,000 copies.
Required -
a) What is the variable cost per copy if GEM uses the high-low method to analyze costs?
b) How much would GEM Ltd pay if it made 7,500 copies? (Hint: Need to solve for Fixed cost)
Part C - The income statement for Forklift Electrical Ltd for two years are shown below:
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Forklift Electrical Ltd Income Statement Comparison
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Current year
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Prior Year
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(amounts in thousands)
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Sales
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$33,750
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$24,750
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Cost of goods sold
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21,938
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16,830
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Gross profit
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$11,812
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$7,920
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Wages
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$8,775
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$6,188
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Utilities
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675
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250
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Repairs
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169
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325
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Selling
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506
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200
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Total expenses
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$10,125
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$6,963
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Total assets (investment base)
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$4,500
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$1,500
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Required -
a) Determine the operating income (loss) (dollars) for each year.
b) The company made a strategic decision to invest in additional assets in the current year. These amounts are provided. Using the amounts of the total assets as the investment base, calculate the return on investment.
c) Was the decision to invest additional assets in the company successful? Explain.
d) Assuming an 8% cost of capital, calculate the residual income for each year.
e) Would the management of Forklift Electrical Ltd have been more likely to accept the investment opportunity if the residual income had been used as a performance measure instead of ROI? Explain your answer.