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.