# Bahrain Manufacturing Using Straight Line Depreciation

Question 1:

In 2017, Ahmad & Sons, a small environmental-testing firm, performed 12,200 radon tests for \$290 each and 16,400 lead tests for \$240 each. Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by 10% next year. However, awareness of radon-related health hazards is expected to result in a 6% increase in radon-test volume each year in the near future. Jim Rouse feels that if he lowers his price for lead testing to \$230 per test, he will have to face only a 7% decline in lead-test sales in 2018.

Instructions:

1. Prepare a 2018 sales budget for Ahmad & Sons assuming that Rouse holds prices at 2017 levels.
2. Prepare a 2018 sales budget for Ahmad & Sons assuming that Rouse lowers the price of a lead test to \$230. Should Rouse lower the price of a lead test in 2018 if the company’s goal is to maximize sales revenue?

Question 2:

Ahlia Arts is a manufacturer of designer vases. The cost of each vase is the sum of three variable costs (direct material costs, direct manufacturing labor costs, and manufacturing overhead costs) and one fixed-cost category (manufacturing overhead costs). Variable manufacturing overhead cost is allocated to each vase on the basis of budgeted direct manufacturing labor-hours per vase. For June 2017, each vase is budgeted to take 4 labor-hours. Budgeted variable manufacturing overhead cost per labor-hour is \$14. The budgeted number of vases to be manufactured in June 2017 is 1,100.

Actual variable manufacturing costs in June 2017 were \$65,205 for 1,150 vases started and completed. There were no beginning inventories or ending inventories for the vases. Actual direct manufacturing labor-hours for June were 4,830.

Instructions:

1. Compute the flexible-budget variance, the spending variance, and the efficiency variance for variable manufacturing overhead.
2. Comment on the results.

Question 3:

Part A:

Ahlia Computers makes 5,200 units of a circuit board, CB76, at a cost of \$280 each. Variable cost per unit is \$190 and fixed cost per unit is \$90. Zain   Electronics offers to supply 5,200 units of CB76 for \$260. If Ahlia buys from Zain, it will be able to save \$10 per unit in fixed costs but continue to incur the remaining \$80 per unit. Should Ahlia accept Zain ’s offer? Explain.

Part B:

Bahrain Manufacturing is deciding whether to keep or replace an old machine. It obtains the following information:

 Old Machine New Machine Original cost \$10,700 \$9,000 Useful life 10 years 3 years Current age 7 years 0 years Remaining useful life 3 years 3 years Accumulated depreciation \$7,490 Not acquired yet Book value \$3,210 Not acquired yet Current disposal value (in cash) \$2,200 Not acquired yet Terminal disposal value (3 years from now) \$0 \$0 Annual cash operating costs \$17,500 \$15,500

Bahrain Manufacturing uses straight-line depreciation. Ignore the time value of money and income taxes. Should Bahrain Manufacturing replace the old machine? Explain.