Assignment Exercise 6–1: Allocating Indirect Costs Study Table 6–1, Example of Radiology Departments Direct and Indirect Cost Totals, and Table 6–2, Example of Indirect Costs Allocated to Radiology Departments, and review the chapter text describing how the indirect cost is allocated. This assignment will change the allocation bases: A) Volumes, B) Direct Costs, and C) Number of Films. Required Compute the costs allocated to cost centers #557, 558, 559, 560, and 561 using the new allocation bases shown below. Use a worksheet replicating the set up in Table 6–2. Total the new results. 1.  The new allocation bases are: 
                               2. A) Volumes 3. 120,000 4. 130,000 5. 70,000 6. 110,000 7.  70,000   8.  500,000   9. B) Direct costs 10. $1,100,000 11. $700,000 12. $1,300,000 13. $1,600,000 14. $1,300,000 15. $6,000,000 16. C) No. of films 17. 400,000 18. 20,000 19. 55,000 20. 25,000 21. 20,000 22. 520,000 23.    Using a worksheet replicating the set up in Table 6–1, enter the new direct cost and the new totals for indirect costs resulting from your work. Total the new results. Assignment Practice Exercise 7–I: Analyzing Mixed Costs The Metropolis Health System has a system-wide training course for nurse aides. The course requires a packet of materials that MHS calls the training pack. Due to turnover and because the course is system-wide, there is a monthly demand for new packs. In addition the local community college also obtains the training packs used in their credit courses from MHS. The Education Coordinator needs to know how much of the cost is fixed and how much of the cost is variable for these training packs. She decides to use the high-low method of computation. Required Using the monthly utilization information presented below, find the fixed and variable portion of costs through the high-low method. Month Number of Training Packs Cost January 1,000 $6,200 February 200 1,820 March 250 2,350 April 400 3,440 May 700 4,900 June 300 2,730 July 150 1,470 August 100 1,010 September 1,100 7,150 October 300 2,850 November 250 2,300 December 100 1,010 Assignment Exercise 7–1: Analyzing Mixed Costs The Education Coordinator decides that the Community College packs may be unduly influencing the high-low computation. She decides to re-run the results omitting the Community College volume. Required 24. Using the monthly utilization information presented below, and omitting the Community College training packs, find the fixed and variable portion of costs through the high-low method. Note that the college only acquires packs in three months of the year: January, May, and September. These dates coincide with the start dates of their semesters and summer school. 25. The reason the Education Coordinator needs to know how much of the cost is fixed is because she is supposed to collect the appropriate variable cost from the Community College for their packs. For her purposes, which computation do you believe is better? Why? Month ...

1. Assignment Exercise 6–1: Allocating Indirect Costs
Study Table 6–1, Example of Radiology Departments Direct and
Indirect Cost Totals, and Table 6–2, Example of Indirect Costs
Allocated to Radiology Departments, and review the chapter
text describing how the indirect cost is allocated. This
assignment will change the allocation bases: A) Volumes, B)
Direct Costs, and C) Number of Films.
Required
Compute the costs allocated to cost centers #557, 558, 559, 560,
and 561 using the new allocation bases shown below. Use a
worksheet replicating the set up in Table 6–2. Total the new
results.
1. The new allocation bases are:
2. A) Volumes
3. 120,000
4. 130,000
5. 70,000
6. 110,000
7. 70,000
8. 500,000
9. B) Direct costs
10. $1,100,000
11. $700,000
12. $1,300,000
13. $1,600,000
14. $1,300,000
15. $6,000,000
16. C) No. of films
17. 400,000

2. 18. 20,000
19. 55,000
20. 25,000
21. 20,000
22. 520,000
23.
Using a worksheet replicating the set up in Table 6–1, enter the
new direct cost and the new totals for indirect costs resulting
from your work. Total the new results.
Assignment Practice Exercise 7–I: Analyzing Mixed Costs
The Metropolis Health System has a system-wide training
course for nurse aides. The course requires a packet of materials
that MHS calls the training pack. Due to turnover and because
the course is system-wide, there is a monthly demand for new
packs. In addition the local community college also obtains the
training packs used in their credit courses from MHS.
The Education Coordinator needs to know how much of the cost
is fixed and how much of the cost is variable for these training
packs. She decides to use the high-low method of computation.
Required
Using the monthly utilization information presented below, find
the fixed and variable portion of costs through the high-low
method.
Month
Number of Training Packs
Cost
January
1,000
$6,200
February
200
1,820
March
250
2,350

3. April
400
3,440
May
700
4,900
June
300
2,730
July
150
1,470
August
100
1,010
September
1,100
7,150
October
300
2,850
November
250
2,300
December
100
1,010
Assignment Exercise 7–1: Analyzing Mixed Costs
The Education Coordinator decides that the Community College
packs may be unduly influencing the high-low computation. She
decides to re-run the results omitting the Community College
volume.
Required
24. Using the monthly utilization information presented below,
and omitting the Community College training packs, find the
fixed and variable portion of costs through the high-low

4. method. Note that the college only acquires packs in three
months of the year: January, May, and September. These dates
coincide with the start dates of their semesters and summer
school.
25. The reason the Education Coordinator needs to know how
much of the cost is fixed is because she is supposed to collect
the appropriate variable cost from the Community College for
their packs. For her purposes, which computation do you
believe is better? Why?
Month
Total Number of Training Packs
TotalCost
Community College Number Packs
Community College Cost
January
1,000
$6,200
200
$1,240
February
200
1,820
March
250
2,350
April
400
3,440
May

5. 700
4,900
300
2,100
June
300
2,730
July
150
1,470
August
100
1,010
September
1,100
7,150
300
1,950
October
300
2,850
November
250
2,300
December
100

6. 1,010
Assignment Exercise 7–2: Calculating the Contribution Margin
The Mental Health program for the Community Center has just
completed its fiscal year end. The Program Director determines
that his program has revenue for the year of $1,210,000. He
believes his variable expense amounts to $205,000 and he
knows his fixed expense amounts to $1,100,000.
Required
1. Compute the contribution margin for the Community Center
Mental Health program.
2. What does the result tell you about the program?
Assignment Exercise 7–3: Calculating the PV Ratio and the
CVP Ratio
Use the same assumptions for the Greenside Clinic as in
Practice Exercise 7–II. One more assumption will be added: the
Clinic had 35,000 visits.
Required
1. In addition to the contribution margin figures already
computed, now compute the PV Ratio (also known as CM
Ratio).
2. Add another column to your worksheet and compute the
clinic’s per-visit revenue and costs.
Create a Cost-Volume-Profit chart. Refer to the chapter text
along with Figure 7–6.
184/11/10Chapter 16.
Solution

7. to Ch16 P18 Build a ModelInput DataCollections during month
of sale10%Collections during month after sale75%Collections
during second month after sale15%Lease payments$9,000Target
cash balance$90,000General and administrative
salaries$27,000Depreciation charges$36,000Income tax
payments (Sep & Dec)$63,000Miscellaneous
expenses$2,700New design studio payment (Oct)$180,000Cash
on hand July 1$132,000Sales, labor, and RM adjustment
factor0%a. Prepare a monthly cash budget for the last six
months of the
year.MayJuneJulyAugustSeptemberOctoberNovemberDecemberJ
anuaryOriginal sales
estimates$180,000$180,000$360,000$540,000$720,000$360,000
$360,000$90,000$180,000Original labor and raw mat.
estimates$90,000$90,000$126,000$882,000$306,000$234,000$1
62,000$90,000Forecasted SalesSales
(gross)$180,000$180,000CollectionsDuring month of
saleDuring 1st month after sale135000During 2nd month after
sale27000Total collections$162,000PurchasesLabor and raw
materials$90,000$90,000Payments for labor and raw
materialsPaymentsPayments for labor and raw
materials000000General and administrative salariesLease
paymentsMiscellaneous expensesIncome tax paymentsDesign
studio payment180,000Total payments$180,000Net Cash
FlowsCash on hand at start of forecast period$132,000Net cash

8. flow (NCF): Total collections – Total
payments$162,000Cumulative NCF: Prior month cumulative +
this month's NCF$294,000Cash Surplus (or Loan
Requirement)Target cash balance$90,000Surplus cash or loan
needed: Cum NCF – Target cash$204,000Max. Loanb. How
much must Bowers borrow each month to maintain the target
cash balance?Answer. Look at the "Surplus cash or loan
needed" line at the bottom of the cash budget.c. Would the cash
budget be accurate if inflows came in all during the month but
outflows were bunchedearly in the month?d. If the company
produces on a seasonal basis, how would this affect the current
ratio and the debt ratio?e. If its customers began to pay late,
this would slow down collections and thus increase the required
loan amount. Also, if
sales dropped off, this would have an effect on the required
loan. Do a sensitivity analysis that shows the effects of these
two factors on the max loan requirement. Assume the
purchases of labor and raw material also vary by the sales
adjustment factor.Answer:The "Sales adjustment factor" can
be used to cause sales to vary from the base levels. Similarly,
wecan change the percentage of late paying customers. Here is
the relevant data table:ChangeMaximum Loan Requiredin
Sales% Collections in 2nd
month$00%15%30%45%60%75%90%-100%-75%-50%-
25%0%25%50%75%100%

9. Assumed constant: Do not change.
This is a formula: do not change.
For problem e: Allow this to change to reflect slower
collections.
Original sales estimate times 1 plus the sales adjustment factor.
Original labor and RM estimates times 1 plus the sales
adjustment factor.
Payments this month are for last months Labor and raw
materials.
Use Excels MIN function for row 54 with a minus sign in front.
Put the max loan for the base case hear.
Note: When the percent collected during the second month after
sale is changed, the percent for collections during month after
sale is automatically changed so that 100% of sales are
collected during the three-month period.
9Terms2 over 10net 40days to discount10Gross sales$
4,562,500receivables averaged$ 437,500half customers paid
in10daysdisccount customers in percent0.5daily sales$
12,500averagediscount salesIf paid in 10 daysTotal
receivables$ 437,500less discounted customers$
437,500Receivables / daily sales DSO35.0050% of discount
daysNon discount days within the 40 days termActual payment
period considering discount0nominal rate ( 2/98 x 365 / 60-
10)2/980.0204081633periods in the year (365/50)7.3effective
cost

10. 12total sales$ 150,000daily salesuse a 365 day year for the daily
averageTotal receivables$ 0Net profit6%total profit$
9,000Inventory turnover7.5times in a yearcost of goods sold$
121,667COGS/sales81.1%16,222.27Days payable40daysFixed
assets total$ 35,000Days receivables36.5daysDays
inventoryInventory to salesInventory valueQuestion aCash
cycleaccounts payable + inventories - receivablesQuestion
b:Asset turnoverTotal assetsInventory$ 0Receivables$ 0Fixed
Assets$ 35,000Asset turnoverMargin6%ROAQuestion
cInventory turnover9timesInventory daysInventory amountCash
cycleTotal assetss$ 0.00Asset turnoverROA
13Sales increase$ 2millionFixed Assets$ 1millionDebt ratio
(debt/total assets)0.6interest rate8%Tax rate40%Alt 1Current
assets/sales45%Alt 2Moderate policy of current
asset/sales50%Alt 3current /sales60%EBIT12%of salesBalance
SheetIn millionAlternative 1Alt 2Alt 3variable ratio of current
assets to sales0.450.50.6Current Assets (ratio x sales)Fixed
Assets$ 1$ 1$ 1Total AssetsTotal Debt (debt ratio x total
assets)Total EquityTotal debt plus equity$ 0.00$ 0.00$
0.00Income StatementSales$ 2$ 2$ 2EBIT (12% of
sales)Interest payment (interest rate x total debt)Earnings before
TaxesTax paidNet income$ 0.00$ 0.00$ 0.00ROE (net income /
total equity)ROA (net inome / total assets)
16Actual sales$ 1.50Future sales$ 2.00Increase$ 0.50Increase in
current assets$ 0.30Actual purchase terms2 over

11. 10net30daysDiscount days 1010.00Additional days
delay35.00Total days to payEffective cost of tradingdiscount
percent2.00difference from 100%98.00actual days counted-
10.00nominal rateperiods in year of actual dayseffective cost
5Inventory net price per day$ 500,000credit terms2 per
15net40takes discunt but takes15days to pay billsAverage
accounts payable?
(16–12)
Working
Capital
Cash
Flow
Cycle
The Christie Corporation is trying to
determine the effect of its inventory turnover ratio and days
sales
outstanding (DSO) on its cash flow cycle. Christie's sales last
year (all on credit) were $150,000, and it
earned a net profit of 6%, or $9,000. It turned over its
inventory 7.5 times during the year, and its DSO
was 36.5 days. Its annual cost of goods sold was $121,667. The
firm had fixed assets totaling $35,000.
Christie's payables deferral period is 40 days.
a. Calculate

12. Christie's
cash
conversion
cycle.
b. Assuming Christie holds
negligible amounts of cash
and marketable securities,
calculate its total assets
turnover and ROA.
c. Suppose Christie's managers
believe the annual
inventory turnover can be raised to 9 times without
affecting sales. What would Christie's cash conversion
cycle, total assets turnover, and ROA have been if the
inventory turnover had been 9 for the year?
(16–5) Accounts Payable
A chain of appliance stores, APP Corporation, purchases
inventory with a net price of $500,000 each
day. The company purchases the inventory under the credit

13. terms of 2/15, net 40. APP always takes the
discount but takes the full 15 days to pay its bills. What is the
average accounts payable for APP?
16–9) Cost of Trade Credit
Grunewald Industries sells on terms of 2/10 , net 40. Gross sales
last year were $4,562,500 and accounts
receivable averaged $437,500. Half of Grunewald's customers
paid on the 10th day and took discounts.
What are the nominal and effective costs of trade credit to
Grunewald's nondiscount customers? (Hint:
Calculate sales/day based on a 365 -day year, then calculate
average receivables of discount customers,
and then find the DSO for the nondiscount customers.)
(16–13) Working Capital Policy
The Rentz Corporation is attempting to determine the optimal
level of current assets for
the coming year. Management expects sales to increase to
approximately $2 million as a
result of an asset expansion presently being undertaken. Fixed
assets total $1 million,
and the firm wishes to maintain a 60% debt ratio. Rentz's
interest cost is currently 8%

14. on both short-term and longer-term debt (both of which the firm
uses in its permanent
capital structure). Three alternatives regarding the projected
current asset level are
available to the firm: (1) a tight policy requiring current assets
of only 45% of projected
sales, (2) a moderate policy of 50% of sales in current assets,
and (3) a relaxed policy
requiring current assets of 60% of sales. The firm expects to
generate earnings before
interest and taxes at a rate of 12% on total sales.
a. What is the expected return on equity under each current
asset level? (Assume a 40%
effective federal-plus-state tax rate.)
b. In this problem, we have assumed that the level of expected
sales is independent of
current asset policy. Is this a valid assumption?
c. How would the overall riskiness of the firm vary under each
policy ?
(16–16) Trade Credit
The Thompson Corporation projects an increase in sales from
$1.5 million to $2 million,
but it needs an additional $300,000 of current assets to support
this expansion.

15. Thompson can finance the expansion by no longer taking
discounts, thus increasing
accounts payable. Thompson purchases under terms of 2/10, net
30, but it can dela y
payment for an additional 35 days —paying in 65 days and thus
becoming 35 days past
due—without a penalty because its suppliers currently have
excess capacity. What is the
effective, or equivalent, annual cost of the trade c redit?