## (solution) Hello Asmalhotra, I recall receiving a response but I'm unable to

Hello Asmalhotra,

I recall receiving a response but I'm unable to locate the file.  Could you please resend to me?  Thank you so much!

I see that you assisted on the Memories, Inc. case.  I reviewed the attachment that you posted however I did not see any solutions for Part,8, 9, or 10.  Could you please assist with all 3 Parts:  Part 8 all, part 9 all, and part 10 all.

Here are the questions:

Part Eight (Variances)
In December of Year 2 operations (month 24), Memories, Inc. actually produced and sold 32,675
figurines, consisting of 30,570 dolls and 2,105 replicas. The budgeted sales price for dolls was \$5.00, and
\$5.25 for replicas. The estimated production and sales during December was 31,678 dolls and 2,595
replicas.
Required:

A. Compute the price and volume variances for sales, assuming that MI sold all figurines produced
for \$137,565 (dolls) and \$9,051 (replicas). What might explain these variances?

B. Compute the price and quantity variances for direct materials for each type of figurine. MI paid
\$29,093 to purchase 32,325 units of raw materials for dolls and \$1,453 to purchase 2,401 units
of raw materials for replicas. (A unit consists of plastic, molds, varnish, paint, and packaging
materials.) From the materials purchased, 30,995 units were used to produce the dolls and
2,149 were used to produce the replicas. How would these variances be interpreted? What
might have caused them? Would you consider them large enough to be important?

C. Compute the labor rate and efficiency variances for each type of figurine. MI paid \$71,350 in
labor costs for 7,150 direct labor hours for dolls and \$6,425 in labor costs for 650 direct labor
hours for replicas. How would these variances be interpreted? What might have caused
them? Would you consider them large enough to be important?

D. Assuming MI used a predetermined overhead rate of \$2.13 per DLH, compute the variable
overhead rate and efficiency variances. MI actually paid \$20,852 in total overhead costs,
consisting of \$17,002 of variable overhead and \$3,850 of fixed overhead. How would these
variances be interpreted? What might have caused them? Would you consider them large
enough to be important?

E. How might MI extend its variance analysis to be compatible with activity-based costing if
they decided to switch to that method?

Part Nine (Transfer Pricing)
Memories, Inc. has decided to create a wholly owned subsidiary, Memories Boutique, Inc., (MBI) to sell
the figurines directly to the public. In the store dolls will sell for \$10.00 each and replicas for \$11.50. The
intent is for the boutique to buy the figurines directly from Memories, Inc. at the wholesale prices.
Assume that MI has excess capacity and can supply the figurines to MBI without impacting their current
sales.
The manager of MBI has now found an unrelated supplier that will provide dolls for
\$4.55 and replicas for \$5.75.
Required:

A. Using estimated cost data for Year 3 (given in Part Eight), at what minimum price should MI
agree to transfer dolls and replicas to MBI?

B. What is the maximum price that MBI should be willing to pay MI for the figurines?
C. If MBI purchases figurines from MI, what is the ideal transfer price? Why?
D. Should MBI buy figurines from MI or from the outside supplier? (Don't forget that MBI is a
wholly owned subsidiary.) What qualitative factors should be considered in making this
decision?

E. Answer questions A through D again assuming MI is operating at full capacity.

Part Ten (NPV)
Memories, Inc. currently leases its equipment from Quality Materials, Inc. for \$2,500 per month. Two
years of their contracted five-year lease term remain. MI may terminate the lease at any time by paying
a penalty of \$10,000. They are considering purchasing the equipment from Quality Materials, Inc. to
replace the leased equipment. MI must purchase 10 units of each piece of equipment. Memories, Inc.
can purchase equipment at the following prices:
Equipment
Heater
Injection molder
Sealer
Cardboard cutter
Label installer

Price per unit
\$ 2,100
\$ 5,450
\$ 4,100
\$ 2,695
\$ 1,000

Required:
A. Using NPV analysis, compare the present value of the least payments with the cost of buying
the equipment. Assume a discount rate of 10 percent (ignore tax.) Which option is preferable?

B. MI has the option of purchasing equipment from another supplier at a total cost of \$190,000.
The supplier promises that the new equipment will reduce operating costs by \$1,000 per
month over the life of the equipment. Assume a 10 percent discount rate (ignore tax.) Which
option is preferable?

C. Calculate the after-tax NPV for each option in A and B assuming a 30 percent tax rate. If
purchased, all equipment will be depreciated over five years, using straight-line depreciation,
and will have no salvage value. Which of the three options is preferable now? (Lease Purchase
from Quality Materials, Purchase for \$190,000)

D. What factors other than cost savings should MI consider in these decisions?

Hello Asmalhotra,

I see that you assisted on the Memories, Inc. case.  I reviewed the attachment that you posted however I did not see any solutions for Part,8, 9, or 10.  Could you please assist with all 3 Parts:  Part 8 all, part 9 all, and part 10 all.

Here are the questions:

Part Eight (Variances)
In December of Year 2 operations (month 24), Memories, Inc. actually produced and sold 32,675
figurines, consisting of 30,570 dolls and 2,105 replicas. The budgeted sales price for dolls was \$5.00, and
\$5.25 for replicas. The estimated production and sales during December was 31,678 dolls and 2,595
replicas.
Required:

A. Compute the price and volume variances for sales, assuming that MI sold all figurines produced
for \$137,565 (dolls) and \$9,051 (replicas). What might explain these variances?

B. Compute the price and quantity variances for direct materials for each type of figurine. MI paid
\$29,093 to purchase 32,325 units of raw materials for dolls and \$1,453 to purchase 2,401 units
of raw materials for replicas. (A unit consists of plastic, molds, varnish, paint, and packaging
materials.) From the materials purchased, 30,995 units were used to produce the dolls and
2,149 were used to produce the replicas. How would these variances be interpreted? What
might have caused them? Would you consider them large enough to be important?

C. Compute the labor rate and efficiency variances for each type of figurine. MI paid \$71,350 in
labor costs for 7,150 direct labor hours for dolls and \$6,425 in labor costs for 650 direct labor
hours for replicas. How would these variances be interpreted? What might have caused
them? Would you consider them large enough to be important?

D. Assuming MI used a predetermined overhead rate of \$2.13 per DLH, compute the variable
overhead rate and efficiency variances. MI actually paid \$20,852 in total overhead costs,
consisting of \$17,002 of variable overhead and \$3,850 of fixed overhead. How would these
variances be interpreted? What might have caused them? Would you consider them large
enough to be important?

E. How might MI extend its variance analysis to be compatible with activity-based costing if
they decided to switch to that method?

Part Nine (Transfer Pricing)
Memories, Inc. has decided to create a wholly owned subsidiary, Memories Boutique, Inc., (MBI) to sell
the figurines directly to the public. In the store dolls will sell for \$10.00 each and replicas for \$11.50. The
intent is for the boutique to buy the figurines directly from Memories, Inc. at the wholesale prices.
Assume that MI has excess capacity and can supply the figurines to MBI without impacting their current
sales.
The manager of MBI has now found an unrelated supplier that will provide dolls for
\$4.55 and replicas for \$5.75.
Required:

A. Using estimated cost data for Year 3 (given in Part Eight), at what minimum price should MI
agree to transfer dolls and replicas to MBI?

B. What is the maximum price that MBI should be willing to pay MI for the figurines?
C. If MBI purchases figurines from MI, what is the ideal transfer price? Why?
D. Should MBI buy figurines from MI or from the outside supplier? (Don't forget that MBI is a
wholly owned subsidiary.) What qualitative factors should be considered in making this
decision?

E. Answer questions A through D again assuming MI is operating at full capacity.

Part Ten (NPV)
Memories, Inc. currently leases its equipment from Quality Materials, Inc. for \$2,500 per month. Two
years of their contracted five-year lease term remain. MI may terminate the lease at any time by paying
a penalty of \$10,000. They are considering purchasing the equipment from Quality Materials, Inc. to
replace the leased equipment. MI must purchase 10 units of each piece of equipment. Memories, Inc.
can purchase equipment at the following prices:
Equipment
Heater
Injection molder
Sealer
Cardboard cutter
Label installer

Price per unit
\$ 2,100
\$ 5,450
\$ 4,100
\$ 2,695
\$ 1,000

Required:
A. Using NPV analysis, compare the present value of the least payments with the cost of buying
the equipment. Assume a discount rate of 10 percent (ignore tax.) Which option is preferable?

B. MI has the option of purchasing equipment from another supplier at a total cost of \$190,000.
The supplier promises that the new equipment will reduce operating costs by \$1,000 per
month over the life of the equipment. Assume a 10 percent discount rate (ignore tax.) Which
option is preferable?

C. Calculate the after-tax NPV for each option in A and B assuming a 30 percent tax rate. If
purchased, all equipment will be depreciated over five years, using straight-line depreciation,
and will have no salvage value. Which of the three options is preferable now? (Lease Purchase
from Quality Materials, Purchase for \$190,000)

D. What factors other than cost savings should MI consider in these decisions?

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