Bo Vonderweidt, the production manager for Sportway Corporation, had requested to have lunch with the company president. Vonderweidt wanted to put forward his suggestion to add a new product line. As they finished lunch, Meg Thomas, the company president, said, “I’ll give your proposal some serious thought, Bo. I think you’re right about the increasing demand for skateboards. What I’m not sure about is whether the skateboard line will be better for us than our tackle boxes. Those have been our bread and butter the past few years.” Vonderweidt responded with, “Let me get together with one of the controller’s people. We’ll run a few numbers on this skateboard idea that I think will demonstrate the line’s potential.” Sportway is a wholesale distributor supplying a wide range of moderately priced sports equipment to large chain stores. About 60 percent of Sportway’s products are purchased from other companies while the remainder of the products are manufactured by Sportway. The company has a Plastics Depart-ment that is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct-labor capacity at available work stations. The selling price and costs associated with Sportway’s tackle boxes are as follows: Selling price per box ………………………………………………………………………………………………………$86.00Costs per box: Molded plastic …………………………………………………………………………………………………………$ 8.00 Hinges, latches, handle ……………………………………………………………………………………………..9.00 Direct labor ($15.00 per hour) …………………………………………………………………………………….18.75 Manufacturing overhead …………………………………………………………………………………………….12.50 Selling and administrative cost ……………………………………………………………………………………. 17.00 65.25Profit per box ……………………………………………………………………………………………………………….$20.75 Because Sportway’s sales manager believes the firm could sell 12,000 tackle boxes if it had suffi-cient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68.00 per box delivered to Sportway’s facility. Bo Vonderweidt, Sportway’s production manager, has come to the conclusion that the company could make better use of its Plastics Department by manufacturing skateboards. Vonderweidt has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Vonderweidt believes that Sportway could expect to sell 17,500 skateboards annually at a price of $45.00 per skateboard. After his lunch with the company president, Vonderweidt worked out the following estimates with the assistant controller. Selling price per skateboard ……………………………………………………………………………………………….$45.00Costs per skateboard: Molded plastic ……………………………………………………………………………………………………………$5.50 Wheels, hardware ……………………………………………………………………………………………………….7.00 Direct labor ($15.00 per hour) ……………………………………………………………………………………….7.50 Manufacturing overhead ……………………………………………………………………………………………….5.00 Selling and administrative cost ………………………………………………………………………………………. 9.00 34.00Profit per skateboard …………………………………………………………………………………………………………$11.00 In the Plastics Department, Sportway uses direct-labor hours as the application base for manufac-turing overhead. Included in the manufacturing overhead for the current year is $50,000 of factorywide, fixed manufacturing overhead that has been allocated to the Plastics Department. For each unit of prod-uct that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, there is an allocated $6.00 fixed overhead cost per unit for distribution that is included in the selling and administrative cost for all products. Total selling and administrative costs for the purchased tackle boxes would be $10.00 per unit. 640 Chapter 14 Decision Making: Relevant Costs and Benefits Required: In order to maximize the company’s profitability, prepare an analysis that will show which product or products Sportway Corporation should manufacture or purchase. 1. First determine which of Sportway’s options makes the best use of its scarce resources. How many skateboards and tackle boxes should be manufactured? How many tackle boxes should be purchased? 2. Calculate the improvement in Sportway’s total contribution margin if it adopts the optimal strategy rather than continuing with the status quo. (CMA, adapted)

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Case study on work

Tim is the vice president of western operations for Maroon Oil Company and is stationed in San Francisco. He is required to live in an employer-owned home, which is three blocks from his company office. The company-provided home is equipped with high-speed internet access and several telephone lines. Tim receives telephone calls and e-mails that require immediate attention any time of day or night, the company’s business is spread all over the world. A full-time administrative assistant resides in the house to assist Tim with the urgent business matters. Tim often uses the home for entertaining customers, suppliers, and employees. The fair market value of comparable housing is $9,000 per month. Tim is also provided with free parking at his company’s office. The value of the parking is $350 per month.

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Direct Materials and Direct Labor Budgets Willison Company produces stuffed toy animals; one of these is Betty Rabbit. Each rabbit takes 0.2 yards of fabric and six ounces of polyfiberfill. Fabric costs $3.50 per yard, and polyfiberfill is $0.05 per ounce. Willison has budgeted production of stuffed rabbits for the next four months as follows:

Inventory policy requires that sufficient fabric be in ending monthly inventory to satisfy 15 percent of the following month’s production needs and sufficient poly fiberfill be in inventory to satisfy 30 percent of the following month’s production needs. Inventory of fabric and poly fiberfill at the beginning of October equals exactly the amount needed to satisfy the inventory policy. Each rabbit produced requires (on average) 0.10 direct labor per hour. The average cost of direct labor is $15.50 per hour. Required:

1. Prepare a direct materials purchases budget of fabric for the last quarter of the year, showing purchases in units and in dollars for each month and for the quarter in total.

2. Prepare a direct materials purchases budget of poly fiberfill for the last quarter of the year, showing purchases in units and in dollars for each month and for the quarter in total.

3. Prepare a direct labor budget for the last quarter of the year, showing the hours needed and the direct labor cost for each month and for the quarter in total

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Preparation of a cash budget

Cash Budget The controller of Feinberg Company is gathering data to prepare the cash budget for July. He plans to develop the budget from the following information:

a. Of all sales, 40 percent are cash sales.

b. Of credit sales, 45 percent are collected within the month of sale. Half of the credit sales collected within the month receive a 2 percent cash discount (for accounts paid within 10 days). Thirty percent of credit sales are collected in the following month; remaining credit sales are collected the month thereafter. There are virtually no bad debts.

c. Sales for the second two quarters of the year follow.

d. The company sells all that it produces each month. The cost of raw materials equals 26 percent of each sales dollar. The company requires a monthly ending inventory of raw materials equal to the coming month’s production requirements. Of raw materials purchases, 50 percent are paid for in the month of purchase. The remaining 50 percent is paid for in the following month.

e. Wages total $105,000 each month and are paid in the month incurred.

f. Budgeted monthly operating expenses total $376,000, of which $45,000 is depreciation and $6,000 is expiration of prepaid insurance (the annual premium of $72,000 is paid on January 1).

g. Dividends of $130,000, declared on June 30, will be paid on July 15.

h. Old equipment will be sold for $25,200 on July 4.

i. On July 13, new equipment will be purchased for $173,000.

j. The company maintains a minimum cash balance of $20,000.

k. The cash balance on July 1 is $27,000.

Required:

Prepare a cash budget for July. Give a supporting schedule that details the cash collections from sales.

Budgetary Performance, Rewards, Ethical Behavior Linda Ellis, division manager, is evaluated and rewarded on the basis of budgetary performance. Linda, her assistants, and the plant managers are all eligible to receive a bonus if actual divisional profits are between budgeted profits and 120 percent of budgeted profits. The bonuses are based on a fixed percentage of actual profits. Profits above 120 percent of budgeted profits earn a bonus at the 120 percent level (in other words, there is an upper limit on possible bonus payments). If the actual profits are less than budgeted profits, no bonuses are awarded. Consider the following actions taken by Linda:

a. Linda tends to overestimate expenses and underestimate revenues. This approach facilitates the ability of the division to attain budgeted profits. Linda believes that the action is justified because it increases the likelihood of receiving bonuses and helps to keep the morale of the managers high.

b. Suppose that toward the end of the fiscal year, Linda saw that the division would not achieve budgeted profits. Accordingly, she instructed the sales department to defer the closing of a number of sales agreements to the following fiscal year. She also decided to write off some inventory that was nearly worthless. Deferring revenues to next year and writing off the inventory in a no-bonus year increased the chances of a bonus for next year.

c. Assume that toward the end of the year, Linda saw that actual profits would likely exceed the 120 percent limit and that she took actions similar to those described in Item b.

Required:

1. Comment on the ethics of Linda’s behavior. Are her actions right or wrong? What role does the company play in encouraging her actions?

2. Suppose that you are the marketing manager for the division, and you receive instructions to defer the closing of sales until the next fiscal year. What would you do?

3. Suppose that you are a plant manager, and you know that your budget has been padded by the division manager. Further, suppose that the padding is common knowledge among the plant managers, who support it because it increases the ability to achieve the budget and receive a bonus. What would you do?

4. Suppose that you are the division controller, and you receive instructions from the division manager to accelerate the recognition of some expenses that legitimately belong to a future period. What would you do?

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Case study on married couples

6.3 Probit regression: A panel study followed 25 married couples over a period of five years. One item of interest is the relationship between divorce rates and the various characteristics of the couples. For example, the researchers would like to model the probability of divorce as a function of 238 Exercises age differential, recorded as the man’s age minus the woman’s age. The data can be found in the file divorce.dat. We will model these data with probit regression, in which a binary variable Yi is described in terms of an explanatory variable xi via the following latent variable model: Zi = ßxi + i Yi = d(c,8)(Zi), where ß and c are unknown coefficients, 1, . . . , n ~ i.i.d. normal(0, 1) and d(c,8)(z) = 1 if z > c and equals zero otherwise. a) Assuming ß ~ normal(0, t 2 ß ) obtain the full conditional distribution p(ß|y, x, z, c). b) Assuming c ~ normal(0, t 2 c ), show that p(c|y, x, z, ß) is a constrained normal density, i.e. proportional to a normal density but constrained to lie in an interval. Similarly, show that p(zi |y, x, z-i , ß, c) is proportional to a normal density but constrained to be either above c or below c, depending on yi . c) Letting t 2 ß = t 2 c = 16 , implement a Gibbs sampling scheme that approximates the joint posterior distribution of Z, ß, and c (a method for sampling from constrained normal distributions is outlined in Section 12.1.1). Run the Gibbs sampler long enough so that the effective sample sizes of all unknown parameters are greater than 1,000 (including the Zi ’s). Compute the autocorrelation function of the parameters and discuss the mixing of the Markov chain. d) Obtain a 95% posterior confidence interval for ß, as well as Pr(ß > 0|y, x).

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