Ateneo de Zamboanga University

School of Management and Accountancy

ACCTG. 411: FINAL EXAM PROBLEM SET

INSTRUCTIONS: Answer the requirements per case. All computations, explanations and recommendations
should be neatly inputted and organized in ONE EXCEL FILE. Observe the following format and instructions:
Font style: Cambria
Font size: 12
Separate cases into different sheets (i.e. one case = one excel sheet within the Excel file)
File name: LASTNAME_FIRSTNAME_ACCTG411FINALEXAM
(ex. ADJARANI_JASPERANDREW_ACCTG411FINALEXAM)
Send to: jasper.andrew.adjarani@gmail.com
Due date: October 13, 2017 (Friday) for BSMA-IV / BSAT-IV students
October 15, 2017 (Sunday) for BSAC-V students

Submissions must be made INDIVIDUALLY. You may discuss your answers among yourselves. However, do
note that I have a way to check if you simply copied the excel file of your classmate and modified some of its
contents, so please be extremely careful if you are planning to do this. Failure to follow the above instructions
will invalidate your submission, resulting to a final examination grade of 0%.

Case 1: PROBABILITY ANALYSIS

The operator of an office building concession stand wishes to know how many doughnuts to stock each day.
The doughnuts cost P25 each and are sold for P35 each. Those unsold at the end of the day have no value. From
past experience, the following probability distribution has been calculated:
Possible No. of Donuts Sold Probability
40 25%
50 60%
60 15%
Assume that only the three quantities listed above are ever sold and that the occurrences are random events.

Required:
1. Using a probability-weighted approach, what is the average number of doughnuts sold per day?
2. If the operator stocked this average number of doughnuts each day, what would the expected daily
contribution margin be following the same probability distribution?

CASE 2: DECISION TREE ANALYSIS

The management of Korea Industries is trying to decide whether to build a large, medium, or small plant at a
new location. Demand for the company's product in the new area is uncertain, but the marketing manager has
assigned probabilities to three levels of demand. These probabilities, as well as the contribution margins (in
millions of pesos) for each plant size and demand level, are as follows:
Demand Level
Plant Size High Moderate Low
Large ................................................................................................................................. P7 P2 P(1)
Medium ............................................................................................................................ P6 P4 P 0
Small .................................................................................................................................. P5 P3 P 1
Probability ...................................................................................................................... 30% 50% 20%

Required:
1. Construct a decision tree for the above situation.
2. Provide a recommendation to the company based on your analysis.
CASE 3: LINEAR PROGRAMMING
A company wishes to manufacture three products TVs, stereos and speakers using five (5) common
inventory parts. Parts needed per product and inventory on hand are presented below:

Parts / Product Units on hand TV Set Stereo Speaker

CM/U* is P7,500 CM/U is P5,000 CM/U is P3,500
Chassis 450 units 1 unit 1 units -
Picture Tube 250 1 unit - -
Speaker Cone 800 2 units 2 units 1 unit
Power Supply 450 1 unit 1 unit -
Electronics 600 2 units 1 unit 1 unit
*CM/U = contribution margin per unit

Required:
1. Assuming demand is unlimited, prepare a linear programming model using excel solver and provide a
recommendation to the Company that would optimize its financial results.
2. Assuming maximum demand for TV sets, stereos and speakers are 100, 220 and 300, respectively, how
would the recommendation in #1 change?

CASE 4: RELEVANT COSTING (MAKE OR BUY)

The management of Kraken Industries has been evaluating whether the company should continue
manufacturing a component or buy it from an outside supplier. A P100 cost per component was determined as
follows:
Direct material P15
Direct labor 40
Variable manufacturing overhead 10
Fixed manufacturing overhead 35
P100
Kraken Industries uses 4,000 components per year. After Wil Corporation submitted a bid of P80 per
component, some members of management felt they could reduce costs by buying from outside and
discontinuing production of the component. If the component is obtained from Wil Corporation, Kraken
Industries' unused production facilities could be leased to another company for P50,000 per year.

Required:
1. Determine the maximum amount per unit Kraken Industries could pay an outside
supplier.
2. Indicate if the company should make or buy the component and the total dollar difference in favor of that
alternative.
3. Assume the company could eliminate one production supervisor with a salary of
P30,000 if the component is purchased from an outside supplier. Indicate if the company
should make or buy the component and the total dollar difference in favor of that
alternative.
CASE 5: RELEVANT COSTING (CONTINUE OF DISCONTINUE)
"It's close to a P40,000 loser and we ought to devote our efforts elsewhere," noted Ara Vee, after reviewing
financial reports of her company's attempt to offer a reduced-price daycare service to employees. The
daycare's financial figures for the year just ended follow.
Revenues P120,000
Variable costs 45,000
Traceable fixed costs 89,000
Allocated corporate overhead 24,000
If the daycare service/center is closed, 70% of the traceable fixed cost will be avoided. In addition, the company
will incur one-time closure costs of P6,800.
Required:
1. Show calculations that support Ara Vees belief that the daycare center lost almost P40,000.
2. Should the center be closed? Show calculations to support your answer.

CASE 6: CAPITAL BUDGETING (SINGLE PROJECT)

A company is considering purchasing a new equipment for P70,000. The purchase cost of the asset would be
depreciated over 5 years using the straight-line method with zero salvage value. The old equipment with a
current book value of P5,000 may be sold for P8,000. The new asset would generate marginal cash revenues of
P55,000 per year. Variable cash expenses are at 60%. The investment would require additional working capital
of P8,000, which would be released at the end of the equipments useful life. The company's tax rate is 40%.
The companys capital structure is as follows:
Capital composition After-tax cost
Debt 40% 12%
Ordinary shares 35% 5%
Preferred shares 25% 10%
*round-off the hurdle rate to the nearest whole percentage

Required: Compute for the (1) net initial investment and the (2) net present value of the investment.

CASE 7: CAPITAL BUDGETING (SENSITIVITY ANALYSIS)

Krill Corp. is thinking about opening a baseball camp in Florida. In order to start the camp, the company would
need to purchase land, build five baseball fields, and a dormitory-type sleeping and dining facility to house 100
players. Each year the camp would be run for 10 sessions of 1 week each. The company would hire college
baseball players as coaches. The camp attendees would be baseball players age 12-18. Property values in
Florida have enjoyed a steady increase in value. It is expected that after using the facility for 20 years, the
company can sell the property for more than it was originally purchased for. The following amounts have been
estimated:
Cost of land P 600,000
Cost to build dorm and dining facility 2,100,000
Annual cash inflows assuming 100 players and 10 weeks 2,520,000
Annual cash outflows 2,260,000
Estimated useful life 20 years
Salvage value 3,900,000
Hurdle rate 10%

Required:
1. Calculate the net present value of the project.
2. To gauge the sensitivity of the project to these estimates, assume that if only 80 campers attend each
week, annual cash inflows will be P2,085,000 and annual cash outflows will be P1,865,000. What is the
net present value using these alternative estimates? Discuss your findings.
3. Assuming the original facts, what is the net present value if the project is actually riskier than first
assumed, and a 12% discount rate is more appropriate?
CASE 8: CAPITAL BUDGETING (COMPARING DIFFERENT PROJECTS)
Sonny Company is considering purchasing one of two new machines. The following estimates are available for
each machine:
Machine 1 Machine 2
Initial cost P148,000 P165,000
Annual cash inflows 50,000 60,000
Annual cash outflows 15,000 20,000
Estimated useful life 6 years 6 years

The company's minimum required rate of return is 10%.

Required:
1. Compute the (1) net present value, (2) profitability index, and (3) internal rate of return (4) discounted
payback period (5) accounting rate of return for each machine.
2. Which machine should be purchased and why?