BAC 1024 MANAGEMENT ACCOUNTING I
TRIMESTER I 2011/2012
GROUP ASSIGNMENT 1

Grouping

□ There should be between 4-5 students in a group. □ Group leader has to submit a list with group members’ name, student ID and contact number to your respective Lecturer latest during the 3rd Lecture slot on WEEK 3. □ The group members should be in the same LECTURE group.

Assignment write-up

□ All assignments must be typed on one side only, 1.5-spaced, using font 12(Times New Roman). □ The assignment must include: a) The cover page with group members’ name, student ID and contact number b) Assignment questions c) Answers □ There are 2 Questions in the Assignment 1. Students need to answer ALL the questions. □ Marks will only be given to those whose names are on the assignment cover. Please ensure that your name and student ID number is on it. Those whose names do not appear on the assignment will automatically be assumed to have not submitted the assignment. □ Please take note that if two assignments are very similar in content, both assignments will get automatic zero mark. □ No individual assignments will be accepted. □ Any act of plagiarism is a serious academic offence and you may get an F grade for your paper.

Submission

□ Due date for this assignment is on Week 10, Thursday 11/08/2011 by 05.00 P.M at your lecturer’s office. □ Late submissions will cause deduction of marks.

Grading

â–¡ The lecturer will examine the thoroughness of your work and the presentation of your assignment i.e. content, format, grammar, presentations, etc. â–¡ The total marks for this assignment is 100 and this contributes 20% towards the total grade of the course. Make sure you do it well.

Question 1 - Pittman Company

Pittman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% of selling price for all items sold.

Barbara Chaney, Pittman’s Controller, has just prepared the company’s budgeted income statement for next year. The statement as follows:

|Pittman Company |
|Budgeted Income Statement |
|For the Year Ended December 31 |
|Sales | | |$16,000,000 |
|Manufacturing Costs: | | | |
|Variable |$7,200,000 | |
|Fixed overhead | 2,340,000 |9,540,000 |
|Gross Margin | |6,460,000 |
|Selling and administrative costs: | | |
|Commissions to agents |2,400,000 | |
|Fixed marketing costs |120,000* | |
|Fixed administrative costs |1,800,000 |4,320,000 |
|Net operating income | |2,140,000 |
|Fixed interest cost | | 540,000 |
|Income before taxes | |1,600,000 |
|Income tax (30%) | | 480,000 |
|Net Income | |$1,120,000 |

*Primarily depreciated on storage facilities

As Barbara handed the statement to Karl Vecci, Pittman’s president, she commented, “I went ahead and used the agents’ 15% commission rate in completing these statements, but we’ve just learned that they refuse to handle our products next year unless we increase the commission rate to 20%.”

“That’s the last straw.” Karl replied angrily. “Those agents have been demanding more and more, and this time they’ve gone too far. How can they possibly defend a 20% commission rate?”

“They claim after paying for advertising, travel, and the other costs of promotion, there’s nothing left over the profit,” replied Barbara.

“I say its’ just plain robbery,” reported Karl. “And I also say its’ time we dumped those guys and got our own sales force. Can u get your people to work up some cost figures for us to look at?” Continued… “We’ve already worked with them up”, said Barbara. “Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to handle all promotion costs, too. We figure our fixed costs would increase by $2,400,000 per year, but that would be more than offset by the $3,200,000 (20% x $16,000,000) that we would avoid on agents’ commissions.

The breakdown of the $2,400,000 cost as follows:

|Salaries : | |
|Sales Manager |$100,000 |
|Sales persons |600,000 |
|Travel and entertainment |400,000 |
|Advertising | 1,300,000 |
|Total |$2,400,000 |

“Super,” replied Karl. “And I notice that the $2,400,000 is just what we’re paying the agents under the old 15% commission rate”.

“It’s even better than that,” explained Barbara. “We can actually save $75,000 a year because that’s what we’re having to pay the auditing firm now to check out the agents’ reports. So our overall administrative costs would be less”.

“Pull all of these numbers together and we’ll show them to the executive committee tomorrow”, said Karl. “With the approval of the committee, we can move on the matter immediately”.

Required:
|1. |Compute Pittman Company’s break-even point in sales dollars for next year assuming: |
| |a. |The agents’ commission rate remains unchanged at 15%. |
| |b. |The agents’ commission rate is increased to 20%. |
| |c. |The company employs its own sales force. (19 marks) |
| | | |
|2. |Assume that Pittman Company decides to continue selling through agents and pays the |
| |20% commission rate. Determine the volume of sales that would be required to |
| |generate the same net income as contained in the budgeted income statement for next |
| |year. (8 |
| |marks) |
|3. |Determine the volume of sales at which net income would be equal regardless of |
| |whether Pittman Company sells through agents (at a 20% commission rate) or employs |
| |its own sales force. (8 marks) |
|4. |Based on the date in (1) through (3) above, make a recommendation as to whether the |
| |company should continue to use sales agents (at a 20% commission rate) or employ its |
| |own sales force. Give the reason for your answer. (15 marks) |

Clue: Before proceeding with the solution, first restructure the data into contribution format for each of the three alternatives.
(Total = 50 marks) Continued…
Question 2 – QualSupport Corporation

QualSupport Corporation manufactures seats for automobiles, vans, trucks, and various recreational vehicles. The company has a number of plants around the world, including the Denver Cover Plant, which makes seat covers.

Ted Vosilo is the plant manager of the Denver Cover Plant, but also serves as the regional production manager for the company. His budget as the regional manager is charged to the Denver Cover Plant.

Vosilo has just heard that QualSupport has received a bid from an outside vendor to supply the equivalent of the entire annual output of the Denver Cover Plant for $35 million. Vosilo was astonished at the low outside bid because the budget for the Denver Cover Plant’s operating costs for the upcoming year was set at $52 million. If this bid is accepted, the Denver Cover Plant will be closed down.

The budget for Denver Cover’s operating costs for the coming year is presented below. Additional facts regarding the plant’s operations are as follows:

a) Due to Denver Cover’s commitment to use high-quality fabrics in all of its products, the Purchasing Department was instructed to place blanket purchase orders with major suppliers to ensure the receipt of sufficient materials for the coming year. If these orders are canceled as a consequence of the plant closing, termination charges would amount to 20% of the cost of direct materials.

b) Approximately 400 plant employees will lose their jobs if the plant is closed. This includes all of the direct laborers and supervisors as well as the plumbers, electricians, and other skilled workers classified as indirect plant workers. Some would be able to find new jobs while many others would have difficulty. All employees would have difficulty matching Denver Cover’s base pay of $18.80 per hour, which is the highest in the area. A clause in Denver Cover’s contract with the union may help some employees; the company must provide employment assistance to its former employees for 12 months after a plant closing. The estimated cost to administer this service would be $1.5 million for the year.

c) Some employees would probably choose early retirement because QualSupport has an excellent pension plan. In fact, $3 million of the annual pension expense would continue whether Denver Cover is open or not.

d) Vosilo and his staff would not be affected by the closing of Denver Cover. They would still be responsible for administering three other area plants.

e) If the Denver Cover Plant were closed, the company would realize about $3.2 million salvage value for the equipment and building. If the plant remains open, there are no plans to make any significant investments in new equipment or buildings. The old equipment is adequate and should last indefinitely.

Continued…
|Denver Cover Plant |
|Annual Budgeted for Operating Costs |
|Materials | | |$14,000,000 |
|Labor: | | | |
|Direct |$13,100,000 | |
|Supervision |900,000 | |
|Indirect Plant | 4,000,000 |18,000,000 |
| | | |
|Overhead: | | |
|Depreciation - Equipment |3,200,000 | |
|Depreciation - Building |7,000,000 | |
|Pension Expense |5,000,000 | |
|Plant Manager and Staff |800,000 | |
|Corporate Allocation |4,000,000 |20,000,000 |
|Total Budgeted Costs | |$52,000,000 |
| | | |
| | | |

Required:

1. Without regard to costs, identify the advantages to QualSupport Corporation of continuing to obtain covers from its own Denver Cover Plant. (8 marks)

2. QualSupport Corporation plans to prepare a financial analysis that will be used in deciding whether or not to close the Denver Cover Plant. Management has asked you to identify : a) The annual budgeted costs that are relevant to the decision regarding closing plant (show the dollar amounts). (9 marks) b) The annual budgeted costs that are not relevant to the decision regarding closing the plant and explain why they are not relevant (again show the dollar amounts). (13 marks) c) Any nonrecurring costs that would arise due to the closing of the plant, and explain how they would affect the decision (again show any dollar amounts). (6 marks)

3. Looking at the data you have prepared in (2) above, should the plant be closed? Show computations and explain your answer. (8 marks)

4. Identify any revenues or costs not specifically mentioned in the problem that QualSupport should consider before making a decision. (6 marks)

(Total = 50 marks)

End of assignment questions