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INSTITUTE OF MANAGEMENT SCIENCES

Managerial Accounting
Final Assignments

Submitted by:
Abdul Wadood (Leader)
Danyal Naeem
Asif Ahmed
Abdul Khaliq

Submitted to:
Respected Sir Naveed Paracha

1/24/2016

In this Assignment Financial Problems and Numerical have been solved such as direct labor rate and
efficiency variance and direct material price and quantity variance as well as one question of Special
Offer and Make and Buy plus solved a comprehensive annual Master budget of country store company
[MANAGERIAL ACCOUNTING ] Numerical Solutions

Table of Contents of Assignment


Chapter: Time Value Problems ..................................................................................................................... 2
Problem 5 .................................................................................................................................................. 2
Problem 6 .................................................................................................................................................. 5
Problem 7 .................................................................................................................................................. 5
Problem 8 .................................................................................................................................................. 6
Chapter: Risk and Return .............................................................................................................................. 7
Problem 5 .................................................................................................................................................. 7
Problem 6 .................................................................................................................................................. 9
Problem 7 ................................................................................................................................................ 10
Problem 8 ................................................................................................................................................ 11
Chapter: Working Capital and Current Asset Management ....................................................................... 12
Problem 1 ................................................................................................................................................ 12
Problem 2 ................................................................................................................................................ 13
Problem 3 ................................................................................................................................................ 14
Problem 4 ................................................................................................................................................ 15
Chapter: Current Liabilities Management .................................................................................................. 17
Problem 1 ................................................................................................................................................ 17
Problem 2 ................................................................................................................................................ 17
Problem 3 ................................................................................................................................................ 18
Problem 4 ................................................................................................................................................ 19

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Chapter: Time Value Problems

Problem 5: You have $1,500 to invest today at 7% interest compounded annually.


A) Find how much you will have accumulated in the account at the end of
(1) 3 years, (2) 6 years and (3) 9 years.
B) Use your findings in part a to calculate the amount of interest earned in
(1) The first 3 years (years 1 to 3), (2) the second 3 years (years 4 to 6), and
(3) The third 3 years (years 7 to 9).
C) Compare and contrast your findings in part (b). Explain why the amount of interest earned
increases in each succeeding 3-year period.

Q.5 Answer:
Using Single Amount Cash Flow
Future Value Formula:
Calculator Formula: FV = PV x (1+i)n

Table Formula: FV = PV x (FVIFi%,n)

A) 1. FV = PV x (FVIF7%,3)

FV = $1,500 x (1.225)

FV = $1,837.50

2. FV = PV x (FVIF7%,6)

FV = $1,500 x (1.501)

FV = $2,251.50

3. FV = PV x (FVIF7%,9)

FV = $1,500 x (1.838)

FV = $2,757.00

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

B) 1. Interest earned = FV3 - PV

Interest earned = $1,837.50

-$1,500.00

The first 3 years (years 1 to 3) Interest = $ 337.50

2. Interest earned = FV6 – FV3

Interest earned = $2,251.50

-$1,837.50

The second 3 years (years 4 to 6) = $ 414.00

3. Interest earned = FV9 – FV6

Interest earned = $2,757.00

-$2,251.50

The third 3 years (years 7 to 9) = $ 505.50

C) The longer the investment period is, the larger the total amount of interest collected
will be. The incremental interest earned per 3-year period increases with each
subsequent 3 year period. The total interest for the first 3 years is $337.50;
increasing change in interest earned is due to compounding, the earning of interest on
previous interest earned. The greater the previous interest earned, the greater the
impact of compounding.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 6: As part of your financial planning, you wish to purchase a new car exactly 5 years
from today. The car you wish to purchase costs $14,000 today, and your research indicates that
its price will increase by 2% to 4 per year over the next 5 years.

A. Estimate the price of the car at the end of 5 years if inflation is (1) 2% per year, and (2) 4%
per year.

B. How much more expensive will the car be if the rate of inflation is 4% rather
than 2%?

Q6. Answer:
Using Single Amount Cash Flow
Future Value Formula:
Calculator Formula: FVn = PV x (1+i)n

Table Formula: FVn = PV x (FVIFi%,n)

A). 1. FV5 = PV x (FVIF2%,5)

FV5 = $14,000 x (1.104)

FV5 = $15,456.00

2. FV5 = PV x (FVIF4%,5)

FV5 = $14,000 x (1.217)

FV5 = $17,038.00

B) The car will cost $1,582 more with a 4% inflation rate than an inflation rate of 2%. This
increase is 10.2% more ($1,582  $15,456) than would be paid with only a 2% rate of
inflation.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 7: You can deposit $10,000 into an account paying 9% annual interest either today
or exactly 10 years from today. How much better off will you be at the end of 40 years if you
decide to make the initial deposit today rather than 10 years from today?

Q.7 Answer:
Using Single Amount Cash Flow
Future Value Formula:
Calculator Formula: FV = PV x (1+i)n

Table Formula: FV = PV x (FVIFi%,n)

Deposit now:

FV = PV x FVIF9%,40

FV = $10,000 x (1.09)40

FV = $10,000 x (31.409)

FV = $314,090.00

Deposit in 10 years:

FV = PV10 x (FVIF9%,30)

FV = PV10 x (1.09)30

FV = $10,000 x (13.268)

FV = $132,680.00

You would be better off by $181,410 ($314,090 - $132,680) by investing the $10,000 now
instead of waiting for 10 years to make the investment.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 8: Misty needs to have $15,000 at the end of 5 years in order to fulfill her goal of
purchasing a small sailboat. She is willing to invest the funds as a single amount today but
wonders what sort of investment return she will need to earn. Use your calculator or the time
value tables to figure out the approximate annually compounded rate of return needed in each
of these cases:
a) Misty can invest $10,200 today.
b) Misty can invest $8,150 today.
c) Misty can invest $7,150 today.

Q.8 Answer:
Using Single Amount Cash Flow
Future Value Formula:
Calculator Formula: FV = PV x (1+i)n

Table Formula: FV = PV x (FVIFi%,n)

a) $15,000 = $10,200 x FVIFi%,5

FVIFi%,5 = $15,000  $10,200 = 1.471

Interest = 8%

b) $15,000 = $8,150 x FVIFi%,5

FVIFi%,5 = $15,000  $8,150 = 1.840

Interest = 12%

c) $15,000 = $7,150 x FVIFi%,5

FVIFi%,5 = $15,000  $7,150 = 2.098

Interest = 15%

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Chapter: Risk and Return

Problem 5: Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R
and S. Both should provide benefits over a 10-year period, and each requires an initial
investment of $4,000. Management has constructed the following table of estimates of rates of
return and probabilities for pessimistic, most likely and optimistic results:

Camera R Camera S
Amount Probability Amount Probability
Initial investment $4,000 1.00 $4,000
Annual rate of return
Pessimistic 20% .25 15% .2O
Most likely 25% .50 25% .55
Optimistic 30% .25 35% .25

A) Determine the range for the rate of return for each of the two cameras.
B) Determine the expected value of return for each camera.
C) Purchase of which camera is riskier? Why?

Q.5 Answer:

a) Camera Range

R 30% - 20% = 10%

S 35% - 15% = 20%

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

b) Possible Probability Expected Return Weighted

Outcomes Pri ki Value (%)

(ki x Pri)

Camera R Pessimistic 0.25 20 5.00

Most likely 0.50 25 12.50

Optimistic 0.25 30 7.50

1.00 Expected Return 25.00

Camera S Pessimistic 0.20 15 3.00

Most likely 0.55 25 13.75

Optimistic 0.25 35 8.75

1.00 Expected Return 25.50

c) Camera S is considered more risky than Camera R because it has a much broader range
of outcomes. The risk-return trade-off is present because Camera S is more risky and
also provides a higher return than Camera R.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 6: Katherine Wilson is wondering how much risk she must undertake in order to
generate an acceptable return on her portfolio. The risk-free return currently is 5%. The return
on the average stock (market return) is 16%. Use the CAPM to calculate the beta coefficient
associated with each of the following portfolio returns.
a) 10%
b) 15%
c) 18%
d) 20%
e) Katherine is risk-averse. What is the highest return she can expect if she is unwilling to take
more than an average risk?

Q.6 Answer:
To solve this problem you must take the CAPM and solve for beta. The resulting model is:

k  RF
Beta 
km  R F

10%  5% 5%
a) Beta    .4545
16%  5% 11%

15%  5% 10%
b) Beta    .9091
16%  5% 11%

18%  5% 13%
c) Beta    1.1818
16%  5% 11%

20%  5% 15%
d) Beta    1.3636
16%  5% 11%

e) If Katherine is willing to take a maximum of average risk then she will be ab1le to have
an expected return of only 16%. (k = 5% + 1.0(16% - 5%) = 16%.)

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 7: Metal Manufacturing has isolated four alternatives for meeting its need for
increased production capacity. The data gathered relative to each of these alternatives is
summarized in the following table.
Alternative Expected return Standard deviation of return
A 20% 7.0%
B 22 9.5
C 19 6.0
D 16 5.5

a. Calculate the coefficient of variation for each alternative.


b. If the firm wishes to minimize risk, which alternative do you recommend? Why?

Q.7 Answer:
k
Formula of Coefficient of Variation: CV 
k

7%
a) A CVA   .3500
20%

9.5%
B CVB   .4318
22%

6%
C CVC   .3158
19%

5.5%
D CVD   .3438
16%

b) Asset C has the lowest coefficient of variation and is the least risky relative to the other
choices.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 8: Greengage, Inc., a successful nursery, is considering several expansion projects.


All of the alternatives promise to produce an acceptable return. The owners are extremely risk-
averse; therefore, they will choose the least risky of the alternatives. Data on four possible
projects follow.
Project Expected return Range Standard deviation
A 12.0% .040 .029
B 12.5 .050 .032
C 13.0 .060 .035
D 12.8 .045 .030

a) Which project is least risky, judging on the basis of range?


b) Which project has the lowest standard deviation? Explain why standard deviation is not an
appropriate measure of risk for purposes of this comparison.
c) Calculate the coefficient of variation for each project. Which project will Greengage’s owners
choose? Explain why this may be the best measure of risk for comparing this set of
opportunities.

Q.8 Answer:
a) Project A is least risky based on range with a value of .04.

b) Project A is least risky based on standard deviation with a value of .029. Standard
deviation is not the appropriate measure of risk since the projects have different
returns.

.029 .035
c) A CVA   .2417 C CVC   .2692
.12 .13

.032 .030
B CVB   .2560 D CVD   .2344
.125 .128

In this case project A is the best alternative since it provides the least amount of risk for each
percent of return earned. CV is probably the best measure in this instance since it provides a
standardized method of measuring the risk investments with differing returns.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Chapter: Working Capital and Current Asset


Management
Problem 1: American Products is concerned about managing cash efficiently. On the average,
inventories have an age of 90 days, and accounts receivable are collected in 60 days. Accounts
payable are paid approximately 30 days after they arise. The firm has annual sales of about $30
million. Assume there is no difference in the investment per dollar of sales in inventory,
receivables, and payables; and a 365-day year.
a) Calculate the firm’s operating cycle.
b) Calculate the firm’s cash conversion cycle.
c) Calculate the amount of resources needed to support the firm’s cash conversion cycle.
d) Discuss how management might be able to reduce the cash conversion cycle.

Q.1 Answer: deposit $10


a) Operating cycle = Average age of inventories + Average collection period
= 90 days + 60 days
OC = 150 days

b) Cash Conversion Cycle = Operating cycle - Average payment period


CCC = 150 days - 30 days
CCC = 120 days

c) Resources needed = (total annual outlays  360 days) x CCC


= [$30,000,000  360] x 120
= $10,000,000

d) Shortening either the average age of inventory or the average collection period,
lengthening the average payment period, or a combination of these can reduce the cash
conversion cycle.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 2: Camp Manufacturing turn over its inventory 8 times each year, has an average
payment period of 35 days, and has an average collection period of 60 days. The firm’s annual
sales are $3.5 million. Assume there is no difference in the investment per dollar of sales in
inventory, receivables, and payables; and a 365-day year.
a) Calculate the firm’s operating cycle and cash conversion cycle.
b) Calculate the firm’s daily cash operating expenditure. How much in resources must be
invested to support its cash conversion cycle?
c) If the firm pays 14% for these resources, by how much would it increase its annual profits by
favorably changing its current cash conversion cycle by 20 days?
Q.2 Answer:
a) AAI = 360 days  8 times inventory = 45 days
Operating Cycle = AAl + ACP
= 45 days + 60 days
OC = 105 days

Cash Conversion Cycle = OC - APP


CCC = 105 days - 35 days = 70 days

b) Daily Cash Operating Expenditure = Total outlays  360 days


= $3,500,000  360
= $9,722

Resources needed = Daily Expenditure x CCC


= $9,722 x 70
= $680,540

c. Additional profit = (Daily expenditure x reduction in CC)


= ($9,722 x 20) x .14
= $27,222

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 3: Garrett Industries turns over its inventory 6 times each year; it has an average
collection period of 45 days and an average payment period of 30 days. The firm’s annual sales are
$3 million. Assume there is no difference in the investment per dollar of sales in inventory,
receivables, and payables; and a 365-day year.
a) Calculate the firm’s cash conversion cycle, its daily cash operating expenditure, and the amount
of resources needed to support its cash conversion cycle.
b) Find the firm’s cash conversion cycle and resource investment requirement if it makes the
following changes simultaneously.
(1) Shortens the average age of inventory by 5 days. (2) Speeds the collection of accounts
receivable by an average of 10 days. (3) Extends the average payment period by 10 days.
c) If the firm pays 13% for its resource investment, by how much, if anything, could it increase its
annual profit as a result of the changes in part b? d) If the annual cost of achieving the profit in part
c is $35,000, what action would you recommend to the firm? Why?
Q.3 Answer:
a. AAI = 360  6 times inventory = 60 days
OC = AAI + ACP
= 60 days + 45 days
= 105 days
CCC = OC - APP
= 105 days - 30 days
= 75 days
Daily Financing = $3,000,000  360
= $8,333
Resources needed = Daily financing x CCC
= $8,333 x 75
= $624,975
b. OC = 55 days + 35 days
= 90 days
CCC = 90 days - 40 days
= 50 days
Resources needed = $8,333 x 50
= $416,650
c. Additional profit = (Daily expenditure x reduction in CCC)
x financing rate
= ($8,333 x 25) x .13
= $27,082
d. Reject the proposed techniques because costs ($35,000) exceed savings ($27,082).

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 4: Dynabase Tool has forecast its total funds requirements for the coming year as
shown in the following table.
Month Amount Month Amount
January $2,000,000 July $12,000,000
February 2,000,000 August 14,000,000
March 2,000,000 September 9,000,000
April 4,000,000 October 5,000,000
May 6,000,000 November 4,000,000
June 9,000,000 December 3,000,000

a) Divide the firm’s monthly funds requirement into (1) a permanent component and (2) a
seasonal component, and find the monthly average for each of these components.
b) Describe the amount of long-term and short-term financing used to meet the total funds
requirement under (1) an aggressive funding strategy and (2) a conservative funding strategy.
Assume that under the aggressive strategy, long-term funds finance permanent needs and
short-term funds are used to finance seasonal needs.
c) Assuming that short-term funds cost 12% annually and that the cost of long-term funds is
17% annually, use the averages found in part a to calculate the total cost of each of the
strategies described in part b.
d) Discuss the profitability–risk tradeoffs associated with the aggressive strategy and those
associated with the conservative strategy.
Q.4 Answer:
Aggressive versus Conservative Seasonal Funding Strategy
a)

Total Funds Permanent Seasonal


Month Requirements Requirements Requirements
January $2,000,000 $2,000,000 $ 0
February 2,000,000 2,000,000 0
March 2,000,000 2,000,000 0
April 4,000,000 2,000,000 2,000,000
May 6,000,000 2,000,000 4,000,000
June 9,000,000 2,000,000 7,000,000
July 12,000,000 2,000,000 10,000,000

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

August 14,000,000 2,000,000 12,000,000


September 9,000,000 2,000,000 7,000,000
October 5,000,000 2,000,000 3,000,000
November 4,000,000 2,000,000 2,000,000
December 3,000,000 2,000,000 1,000,000

Average permanent requirement = $2,000,000


Average seasonal requirement = $48,000,000  12
= $4,000,000

b) 1. Under an aggressive strategy, the firm would borrow from $1,000,000 to $12,000,000
according to the seasonal requirement schedule shown in a. at the prevailing short-term
rate. The firm would borrow $2,000,000, or the permanent portion of its requirements, at
the prevailing long-term rate.

2. Under a conservative strategy, the firm would borrow at the peak need level of
$14,000,000 at the prevailing long-term rate.

c) Aggressive = ($2,000,000 x .17) + ($4,000,000 x .12)


= $340,000 + $480,000
= $820,000
Conservative = ($14,000,000 x .17)
= $2,380,000

d) In this case, the large difference in financing costs makes the aggressive strategy more
attractive. Possibly the higher returns warrant higher risks. In general, since the conservative
strategy requires the firm to pay interest on unneeded funds, its cost is higher. Thus, the
aggressive strategy is more profitable but also more risky.

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Chapter: Current Liabilities Management


Problem 1: Determine when a firm must pay for purchases made and invoices dated on
November 25 under each of the following credit terms.
a) Net 30 date of invoice c) net 45 date of invoice
b) Net 30 EOM d) net 60 EOM

Q.1 Answer:
Payment Dates

a) December 25 b) December 30

c) January 9 d) January 30

Problem 2: Cost of giving up cash discounts Determine the cost of giving up cash discounts
under each of the following terms of sale.
a) 2/10 net 30 e) 1/10 net 60
b) 1/10 net 30 f) 3/10 net 30
c) 2/10 net 45 g) 4/10 net 180
d) 3/10 net 45

Q.2 Answer:
CD 360
Formula for Cost of giving up cash discount  
100% - CD N
a) (.02  .98) x (360  20) = 36.73%

b) (.01  .99) x (360  20) = 18.18%

c) (.02  .98) x (360  35) = 20.99%

d) (.03  .97) x (360  35) = 31.81%

e) (.01  .99) x (360  50) = 7.27%

f) (.03  .97) x (360  20) = 55.67%

g. (.04  .96) x (360  170) = 8.82%

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

Problem 3: Purchases made on credit are due in full by the end of the billing period. Many
firms extend a discount for payment made in the first part of the billing period. The original
invoice contains a type of “short-hand” notation that explains the credit terms that apply.
a) Write the short-hand expression of credit terms for each of the following.
Cash discount CD period Credit period Beginning of Credit
period
1% 15 days 45 days date of invoice
2 10 30 end of month
2 7 28 date of invoice
1 10 60 end of month

b) For each of the sets of credit terms in part a, calculate the number of days until full payment is
due for invoices dated March 12.
c) For each of the sets of credit terms, calculate the cost of giving up the cash discount.
d) If the firm’s cost of short-term financing is 8%, what would you recommend in regard to
taking the discount or giving it up in each case?

Q.3 Answer:
a) 1/15 net 45 date of invoice

2/10 net 30 EOM

2/7 net 28 date of invoice

1/10 net 60 EOM

b) 45 days

50 days

28 days

80 days

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[MANAGERIAL ACCOUNTING ] Numerical Solutions

CD 360
c) Cost of giving up cash discount  
100% - CD N

1% 360
Cost of giving up cash discount  
100% - 1% 30
Cost of giving up cash discount  .0101 12  .1212  12.12%

2% 360
Cost of giving up cash discount  
100% - 2% 20
Cost of giving up cash discount  .0204  18  .1836  36.72%

2% 360
Cost of giving up cash discount  
100% - 2% 21
Cost of giving up cash discount  .0204  17.14  .3497  34.97%

1% 360
Cost of giving up cash discount  
100% - 1% 50
Cost of giving up cash discount  .0204  7.2  .1049  14.69%

d) In all four cases the firm would be better off to borrow the funds and take the discount.
The annual cost of not taking the discount is greater than the firm's 8% cost of capital.

Problem 4: Erica Stone works in an accounts payable department. She has attempted to
convince her boss to take the discount on the 3/10 net 45 credit terms most suppliers offer, but
her boss argues that giving up the 3% discount is less costly than a short-term loan at 14%.
Prove to whoever is wrong that the other is correct.

Q.4 Answer:
CD 360
Formula of Cost of giving up cash discount  
100% - CD N
Cost of giving up cash discount = (.03  .97) x (360  35) = 31.81%

Since the cost of giving up the discount is higher than the cost of borrowing for a short-term
loan, Erica is correct; her boss is incorrect.

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