Accounting and Financial Management
Lucky Luke Inc. combines its operating expenses for budget purposes in a selling and administrative
expenses budget. For the first six months of 2014, the following data are available:
1. Sales: 55,000 units in Quarter1; 68,000 units in Quarter 2
2. Variable costs per dollar of sales; sales commissions 5.5%; delivery expenses 6%; and advertising
3. Fixed costs per quarter: sales salaries $13,500; office salaries $5,500; depreciation $7,700;
insurance $1,200; utilities $750, and repairs $950
4. Unit selling price; $26
Prepare a selling and administrative expenses budget by quarters for the first six months of 2014.
Lucky Luke Ltd. is considering three long-term capital investment proposals. Each investment has a
useful life of five years. Relevant data on each project are as follows:
Project 1 Project 2 Project 3
Capital Investment $125,000 $175,000 $189,000
Annual Net Income
Year 1 $12,000 $15,000 $22,000
Year 2 $12,000 $12,000 $12,000
Year 3 $12,000 $14,000 $21,000
Year 4 $12,000 $16,000 $15,000
Year 5 $12,000 $11,000 $13,000
Total $60,000 $68,000 $83,000
Depreciation is calculated by the straight-line method and there is no salvage value. The company’s cost
of capital is 15%. (Use average net annual cash flows in your calculations)
1. Calculate the cash payback period for each project.
2. Calculate the net present value for each project.
3. Calculate the annual rate of return for each project.
Perma Inc. sells a single product for $50. Its management estimates the following revenues and costs
for the year 2014:
Net Sales $600,000 Selling expenses – Variable $20,000
Direct Materials 80,000 Selling expenses – Fixed 15,000
Direct Labour 70,000 Admin expenses –
Mfg Overhead – Variable 30,000 Admin expenses - Fixed 4,000
Mfg Overhead - Fixed 20,000
1. Assuming fixed costs and net sales are spread evenly throughout the year, determine Perma’s
monthly break-even point in (a) units and (b) dollars.
2. Calculate the contribution margin ratio, the annual margin of safety ratio, and the annual profit
3. Determine the percentage increase of annual profits if Perma Inc. increases its selling price by
20% and all other factors (including demand) remain constant.
4. Assume the price remains at $50 per unit and variable costs remain the same per unit, but fixed
costs increase by 20% annually. Calculate the percentage increase in unit sales required to
achieve the same level of annual profit calculated in required # 2
5. Determine the sales required to earn an operating income of $345,000 after tax. Perma Inc.’s
income tax is 35%.
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