# ACCT 346 Week 6 Quiz

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ACCT 346 Week 6 Quiz

Question 1.1. (TCO 7) Elliot’s Escargots sells commercial and home snail extraction tools and serving pieces. Currently, the Serving Pieces Section takes up approximately 50% of the company’s retail floor space. The CEO of Elliot’s wants to decide if the company should continue offering Serving Pieces or focus only on Snail Extraction Tools. If the Serving Pieces are dropped, salaries and other direct fixed costs can be avoided and Snail Extraction sales would increase by 13%. Allocated fixed costs are assigned based on relative sales.

Question 2.2. (TCO 4) Paschal’s Parasailing Enterprises has estimated that fixed costs per month are \$110,500 and variable cost per dollar of sales is \$0.45 (6 points).

What is the break-even point per month in sales?
What level of sales is needed for a monthly profit of \$80,000?
For the month of August, Paschal’s anticipates sales of \$450,000. What is the expected level of profit? (Points : 6)

Question 3.3. (TCO 6) Princess Cruise Lines has the following service departments: concierge, valet, and maintenance. Expenses for these departments are allocated to Mediterranean and transatlantic cruises. Expenses for the departments are totaled (both variable and fixed components are combined) and as follows.
……………………… ALL Included !!!!

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ACCT 346 Week 6 Quiz,

Incremental analysis [If Serving Pieces dropped]: Table 1
Snail Extraction Serving Total
Tools Pieces
Sales [\$1,200,000 * 1.13] \$1,356,000 \$1,356,000
Less: Cost of goods sold [500,000/1,200,000 * 1,356,000] \$565,000 \$565,000
Contribution margin \$791,000 \$791,000
Less: Avoidable direct fixed costs:
Salaries \$175,000 \$175,000
Other \$60,000 \$60,000
Less: Unavoidable allocated fixed costs:
Rent \$24,000 \$24,000
Insurance \$6,000 \$6,000
Cleaning \$7,000 \$7,000
Executive salary \$130,000 \$130,000
Other \$12,000 \$12,000
Total costs \$414,000 \$414,000
Net Income \$377,000 \$377,000

Cost of goods sold are totally direct and variable. So, if serving pieces is droped, there would be no fixed cost of goods sold to be absorbed by Snail.

Incremental analysis : Table 2
Serving Serving Pieces Incremental
Pieces Dropped Effect
Retained
Sales \$2,000,000 \$1,356,000 \$(644,000)
Less: Cost of goods sold 1,200,000 \$565,000 \$635,000
Contribution margin \$800,000 \$791,000 \$(9,000)
Less: Avoidable direct fixed costs:
Salaries 350,000 \$175,000 \$175,000
Other 120,000 \$60,000 \$60,000
Less: Unavoidable allocated fixed costs:
Rent 24,000 \$24,000
Insurance 6,000 \$6,000
Cleaning 7,000 \$7,000
Executive salary 130,000 \$130,000
Other 12,000 \$12,000
Total costs 649,000 \$414,000 \$235,000
Net Income \$151,000 \$377,000 \$226,000

Question 4.4. (TCO 9) Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center his lot. The building and equipment are estimated to cost \$1,200,000, and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munster’s required rate of return for this project is 12%. Net income related to each year of the investment is as follows.

 Revenue \$450,000 Less: Material Cost \$60,000 Labor 100,000 Depreciation 120,000 Other 10,000 290,000 Income before taxes 160,000 Taxes at 40% 64,000 Net Income \$96,000

(A) Determine the net present value of the investment in the service center. Should Munster invest in the service center?
(B) Calculate the internal rate of return of the investment to the nearest 0.5%.
(C) Calculate the payback period of the investment.
(D) Calculate the accounting rate of return. (Points : 10)

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