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Answered: - Performance Report Based on Actual Production Ladan Suriman,


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Performance Report Based on Actual Production

 

Ladan Suriman, controller for Healthy Pet Company, has been instructed to develop a flexible budget

 

for overhead costs. The company produces two types of dog food. BasicDiet is a standard mixture for

 

healthy dogs. SpecialDiet is a reduced protein formulation for older dogs with health problems. The

 

two dog foods use common raw materials in different proportions. The company expects to produce

 

80,000 bags of each product during the coming year. BasicDiet requires 0.20 direct labor hours per

 

bag, and SpecialDiet requires 0.30 direct labor hours per bag. Ladan has developed the following fixed

 

and variable costs for each of the four overhead items:

 


 

Overhead Item

 

Maintenance

 


 

Variable Rate per

 


 

Fixed Cost

 


 

Direct Labor Hour

 


 

$57,250

 


 

$0.50

 


 

Power

 


 

0.40

 


 

Indirect labor

 


 

43,500

 


 

Rent

 


 

2.10

 


 

39,000

 


 

Assume that Healthy Pet actually produced 100,000 bags of BasicDiet and 90,000 bags of SpecialDiet.

 

The actual overhead costs incurred were as follows:

 


 

Maintenance

 

Power

 


 

$81,300

 

18,700

 


 

Indirect labor

 


 

$143,600

 


 

Rent

 


 

39,000

 


 

1. Calculate the number of direct labor hours budgeted for actual production of the two products.

 

direct labor hours

 


 

2. Prepare a performance report for the period based on actual production. In the variance type

 

column, select "F" for favorable and "U" for unfavorable. If the variance is zero, enter ("0") in the

 

variance amount column and "N" for neither in the variance type column.

 

Healthy Pet Company

 

Performance Report

 


 

For the Current Year

 

Actual

 


 

Budgeted

 


 

Variance

 


 

$

 


 

$

 


 

$

 


 

$

 


 

$

 


 

Variance

 

Type (F

 

or U or

 

N)

 


 

$

 


 

Units

 

produced

 

Production

 

unit:

 

Maintenance

 

Power

 

Indirect

 

labor

 

Rent

 

Total costs

 


 

Residual Income

 

Washington Company has two divisions: the Adams Division and the Jefferson Division. The following

 

information pertains to last year's results:

 


 

Adams Division

 


 

Jefferson Division

 


 

Net (after-tax) income

 


 

$611,050

 


 

$374,850

 


 

Total capital employed

 


 

4,440,000

 


 

3,282,500

 


 

In addition, Washington Company's top management has set a minimum acceptable rate of return

 

equal to 9%.

 

Required:

 

Enter negative values as negative numbers.

 

1. Calculate the residual income for the Adams Division.

 

$

 


 

2. Calculate the residual income for the Jefferson Division.

 

$

 


 

Return on Investment, Margin, Turnover

 

Ready Electronics is facing stiff competition from imported goods. Its operating income margin has

 

been declining steadily for the past several years. The company has been forced to lower prices so

 

that it can maintain its market share. The operating results for the past 3 years are as follows:

 


 

Year 1

 

Sales

 


 

Year 2

 


 

Year 3

 


 

$13,500,000

 


 

Operating income

 

Average assets

 


 

$ 9,500,000

 


 

$ 9,000,000

 


 

1,200,000

 


 

1,145,000

 


 

945,000

 


 

15,000,000

 


 

15,000,000

 


 

16,250,000

 


 

For the coming year, Ready's president plans to install a JIT purchasing and manufacturing system. She

 

estimates that inventories will be reduced by 70% during the first year of operations, producing a 20%

 

reduction in the average operating assets of the company, which would remain unchanged without the

 

JIT system. She also estimates that sales and operating income will be restored to Year 1 levels

 

because of simultaneous reductions in operating expenses and selling prices. Lower selling prices will

 

allow Ready to expand its market share.

 

(Note: Round all numbers to two decimal places.)

 

Required:

 

1. Compute the ROI, margin, and turnover for Years 1, 2, and 3.

 


 

Year 1

 


 

Year 2

 


 

Year 3

 


 

%

 


 

%

 


 

%

 


 

%

 


 

%

 


 

%

 


 

ROI

 

Margin

 

Turnover

 


 

2. Conceptual Connection: Suppose that in Year 4 the sales and operating income were achieved as

 

expected, but inventories remained at the same level as in Year 3. Compute the expected ROI, margin,

 

and turnover.

 

%

 

ROI

 

%

 

Margin

 

Turnover

 


 

Why did the ROI increase over the Year 3 level?

 


 


 


 

The ROI increased because expenses increased and assets turned over at a lower rate (sales

 

decreased).

 

The ROI increased because expenses decreased and assets turned over at a higher rate (sales

 


 


 


 

increased).

 


 

3. Conceptual Connection: Suppose that the sales and net operating income for Year 4 remained the

 

same as in Year 3 but inventory reductions were achieved as projected. Compute the ROI, margin, and

 

turnover.

 

%

 

ROI

 

%

 

Margin

 

Turnover

 


 


 


 

Why did the ROI exceed the Year 3 level?

 

The ROI increased because assets decreased.

 


 


 


 

The ROI increased because assets increased.

 


 

4. Conceptual Connection: Assume that all expectations for Year 4 were realized. Compute the

 

expected ROI, margin, and turnover.

 

%

 

ROI

 

%

 

Margin

 

Turnover

 


 


 


 

Why did the ROI increase over the Year 3 level?

 


 

The ROI increased because expenses decreased and assets turned over at a higher rate.

 


 


 

The ROI increased because expenses increased and assets turned over at a higher rate.

 


 


 


 

The ROI increased because expenses decreased and assets turned over at a lower rate.

 


 


 


 

The ROI increased because expenses increased and assets turned over at a lower rate.

 


 

 


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