Workout questions

1. A Company’s standard labor cost of producing one unit of a product is 4 hours at the rate of $12

per hour. During August, 40,800 hours of labor are incurred at a cost of $12.10 per hour to produce

10,000 units of a product.

Required:

a. Compute the labor price and quantity variances.

b. Repeat (a), assuming the standard is 4.2 hours of direct labor at $12.25 per hour.

2. Rosy Inc. which produces a single product has prepared the following standard cost sheet for one

unit of the product.

Direct materials (8 pounds at $2.50 per pound) ………… $20

Direct labor (3 hours at $12.00 per hour) ……………….. $36

During the month of April, the company manufactures 230 units and incurs the following actual

costs.

Direct materials purchased and used (1,900 pounds) …… $4,940

Direct labor (700 hours) ……………………………….…. $8,120

Required: Compute the price and quantity variances for materials and labor. 3 | P a g e

3. Real Company is currently manufacturing a Spare Part, producing 15,000 units annually. The part

is used in the production of several products made by Real Company. The cost per unit for a Spare

Part is as follows:

Direct materials $70.00

Direct labor 20.00

Variable overhead 3.00

Fixed overhead 1.50

Total $ 94.50

Of the total fixed overhead assigned to a Spare Part, $12,000 is direct fixed overhead (the annual
lease cost of machinery used to manufacture a Spare Part and the remainder is common fixed

overhead. An outside supplier has offered to sell the part to Real Company for $94. There is no

alternative use for the facilities currently used to produce the part. No significant non-unit-based

overhead costs are incurred.

Required: Should Real Company make or buy a Spare Part?

1. Assume that interest rate parity holds. In the spot market 1 Japanese yen $0 008055,

while in the 90-day forward market 1 Japanese yen $0 008065. In Japan, 90-day risk-free

securities yield 2%. What is the yield on 90-day risk-free securities in the United States?

2. In the spot market, 15.4 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc

costs $8 in the United States. If purchasing power parity (PPP) holds, what should be the

price of the same disc in Mexico?

3. PROJECT AND RISK ANALYSIS As a financial analyst, you must evaluate a proposed project

to produce printer cartridges. The equipment would cost $55,000, plus $10,000 for

installation. Annual sales would be 4,000 units at a price of $50 per cartridge, and the

project’s life would be 3 years. Current assets would increase by $5,000 and payables by

$3,000. At the end of 3 years, the equipment could be sold for $10,000. Depreciation

would be based on the MACRS 3-year class, so the applicable rates would be 33%, 45%,

15%, and 7%. Variable costs would be 70% of sales revenues; fixed costs excluding

depreciation would be $30,000 per year; the marginal tax rate is 40%; and the corporate

WACC is 11%.

a. What is the required investment, that is, the Year 0 project cash flow?

b. What are the annual depreciation charges?

c. What are the project’s annual cash flows?

d. If the project is of average risk, what is its NPV? Should it be accepted?

be if unit sales turned out to be 20% below forecast, but other inputs were as

forecasted? Would this change the decision? Explain.

1. Consider ABC real estate Commission Agent plc with Tin (00051919400) located at Addis Ababa Lideta
sub-city

Woreda (n.a) Kebele 03/15) House No (441) Telephone No (+251-115-511625) and fax No (+251-115-
511868). During

the tax year 2010, ABC real estate commission Agent plc has leased a building from a lessor (PLC) with
TIN

(000ABC9124) located at Addis Ababa Bole sub-city Woreda (n.a) Kebele (26) House No (356) Telephone

No(+251116-XXXXX9) and Fax No(+251-116-181216).

The building has 105 m2 of rentable spaces (3 equal size rooms) on each floor including the ground
floor. As per their

agreement the sub-lessor leased each m2 of rentable space on the ground floor at Br 100, 1st floor at Br
90, 2nd floor at

Br 80, and so forth per month that is it declines by Br 10 for each m2 of rentable space from one floor to
the next upper

as we go upstairs till the 5th floor. Land lease cost will be borne by the lessor. Land lease cost amounted
Br 15,000. The

building was constructed at Br 4 million. The sub-lessor has agreed to pay the cost of repairs and
maintenance of the

building. All other costs related to generating rental income from lessees will also be borne by the sub-
lessor as

per the lease term. The sub-lessor has withheld the withholding tax required by the law from rental
payment to the

lessor.
The sub-lessor leased the building to numerous small and medium Size businesses at the following rates:
each m2 of

rentable space on the ground floor at Br 280, 1st floor at Br 270, 2nd floor at Br 260, 3rd floor at Br 250
and so forth per

month that is the rental income decreases by Br 10 from the lower floor to the next upper floor as we go
upstairs to the

5th floor. The spaces (the rooms) were occupied throughout the tax year 2010 and the sub-lessor (ABC
Real Estate

Commission Agent plc) incurs the following expenses per annum:

o Administrative salary expenses………………………………….Br25,000

o General expense……………………………………………………27,000

o Advertising expenses……………………………..………………..78,000

o Cost of repair and maintenance…………………………………….20,000

Sub-lessees withhold tax from rental payment to the sub-lessor as required by law. All sub-lessees are
PLCs except

those at the fourth and fifth floor, which are all sole trading.

Required:

A. Determine withholding tax on payments of rental income to lessor and sub-lessor.

B. Determine Taxable Rental income, Rental Income Tax liability and Net Rental income for both the
lessor and sublessor for tax year 2010

C. Complete Rental income tax Declaration (ERCA form 1201) for tax year 2010 for the lessor

D. Complete Rental Income Tax declaration (ERCA form 1201) for tax year 2010 for the sub-lessor

E. Complete Rental Income Tax lessees Details Declaration (ERCA form 1202and 1203) for tax year 2010
both for the

lessor and sub-lessor

2. Consider DMX plc with TIN(0000014909)VAT Registration No (456871)located at Addis Ababa Gulelie
sub-city

Woreda (01) Kebele (09/15) house No (433)Telephone No (+251-111-273810)Fax No (+251-111-271433)

Branch is engaged in the manufacturing of Leather products and the third Branch is engaged in Coffee
Export. During

the month of Tahisas 2010 the sales and purchases were as follows:

1. Br 700,000 coffee was purchased from VAT registered coffee traders and birr 300,000 from non-
registered traders

2. Raw Materials purchased and imported to manufacture drugs was birr 100,000 and 250,000
respectively from VAT

registered traders

3. Raw Material for leather products purchased from local VAT registered tannery was birr 150,000

4. Repair and Maintenance Expense of Birr 30,000 Telephone Expense Br 1,200 and stationery Materials
of Br 20,000

were incurred during the month. Telephone expense is subject to VAT but others not.

5. The Business exported Br2,000,000 coffee during the month

6. DMX sold Br 500,000 drug during the month

7. DMX sold Br 1, 200,000 leather products during the month

Required: Complete VAT Return (ERCA form 3001) for the month of Tahsas assuming Ethiopian Standard
Vat Rate

and a Vat credit Carried forward from previous month Br 9,000. Assume the monetary figures given
above are exclusive

of VAT.