Question

Responsibility Report: Peak Outdoors produces and sells hiking gear. The production department reported the following information regarding its unique line of backpacks. Included are the static budget and actual results for the most recent year Static Budget Actual Results Units Pruduced 24,000 units 27,000 units $144,000 $174,500 Direct Materials Direct Labor 216,000 236,250 Manufacturing OH- Variable 36,000 34,000 $396,000 $444,750 Total Variable Costs Manufacturing OH- Fixed 90,000 98,000 Total Manufacturing Cost $486,000 $542,750 Prepare a Flexible Budget for Peak based on the information above. To do so, you must first determine the cost per unit data of the Static Budget: Static Budget / Budgeted Units Per Unit $144,000 24,000 units $ Direct Materials 24,000 units Direct Labor 216,000 Manufacturing OH- Variable /24,000 units 36,000 Remember that Total Fixed Manufacturing Overhead does not fluctuate with units produced, so the difference in the Static and Actual amounts is purely a Spending Variance. Now, use the per unit budgeted amounts to prepare a Flexible Budget (Actual units X Budget per unit) and calculate variances (Responsibility Report). Be sure to interpret each variance as either Favorable (F) or Unfavorable (U). Flexible Budget Responsibility Report Calculations Actual Results Variances Direct Materials Direct Labor Manufacturing Overhead- Variable Total Variable Costs Manufacturing Overhead- Fixed Total Manufacturing Cost

Its all one question with multiple steps. Please help. No handwriting please.

Answer 1

Per Unit Static Budget Budgeted Units 24,000 24,000 24,000 Direct Material $ 144,000 6.00 Direct labour $ 216,000 9.00 Manufacturing OH (Variable) $ 36,000 1.50 Responsibility Report Actual Budget Variance Flexible Budget Caluculations Direct Material (6*27,000) (9*27000) (1.5*27000) (12,500) 162,000 174,500 Direct labour 243,000 236,250 6,750 Manufacturing OH (Variable) 34,000 444,750 98,000 40,500 445,500 90,000 6,500 Total Variable Costs 750 Manufacturing OH (Fixed) Total Manufacturing Cost (8,000) (7,250) 535,500 542,750

Using the expanded ROI formula: ROI Operating Income X Sales Operating Assets Sales 35% 210,000 .227 1,54 925,000 ROI X х 925,000 600,000 (Operating assets x Desired ROI) Residual Income Operating Income Calculate the Residual Income for the backpack division before investing the $300,000: Operating Income Operating Assets X Desired ROI Residual Income $60,000 600,000 210,000 Next, calculate the new overall ROI for the backpack division if the $300,000 is invested: Expected Increase in Previous Op. New Op. New Assets Invested X + ROI Op. Income Income Income X $300,000 $90,000 210,000 30 300,000 25

Now, calculate the new operating assets if the $300,000 is invested: New Assets Invested Previous Assets New Op. Assets + $300,000 $600,000 $900,000 Calculate the new ROI: $300,000 33.33 % Operating Income Operating Assets ROI $900,000 Investing in the new line would lower the backpack divisions ROI. However, the company should focus on Residual Incom e in making this decision: Residual Income New Operating Income Operating Assets X Desired ROI $ 300,000 $0 300,000 900,000 33.3 No Should the backpack division adopt the new line of backpacks, Yes or No?

Suppose that Peak's management has some doubts that the manager of the backpack division can actually earn a 30% ROI on the new line of backpacks and also that the invested assets need ed to produce the new backpacks would actually be $350,000. Go back to the original assumptions but revise the expected ROI from 30% to 279% and the invested assets from $300,000 to $350,000. Would these new estimates change the company's decision about producing the new line? Calculate the new overall ROI for the backpack division if the $350,000 is invested: Increase in Op. Previous Op. New Assets X Expected New Op. Income Invested ROI Income Income $ 350,000 X $304,500 $94,500 $210,000 27 Now, calculate the new operating assets if the $350,000 is invested: New Op New Assets Invested Previous + Assets Assets $350,000 $950,000 600,000 Calculate the new overall ROI: $ 304,500 32,05 Operating Income Operating Assets ROI $9 50,000

Next, calculate the Residual Income: New Operating Income Operating Assets X Desired ROI Residual Income $256,500 $ 48,000 $ 304,500 $950,000 27 Yes Should the backpack division adopt the new line of backpacks, Yes or No?