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The Clayton Company produces and sells a single product. A standard cost card for the
variable costs for the product follows:
The company manufactured and sold 18,000 units of product during the year. A total of
70,200 yards of material was purchased during the year at a cost of $3.75 per yard. The
company records shows no beginning or ending inventory for the year.
The company worked 29,250 direct labor hours during the year at a cost of $7.80 per
hour. Overhead cost is applied to products on the basis of direct labor hours. Actual
variable overhead costs were $61,425.
Requirement:
1. Compute the direct material price and quantity variances for the year.
2. Compute the direct labor rate and efficiency variances for the year.
3. Compute the variable overhead spending and efficiency variances for the year.
Part IV (30 Points)
Cascade, Inc. is considering the introduction of a new product. The Planning and
Budgeting Department of Cascade has assembled the estimates show below relating to
the new product. These estimates are based on a 5-year period, at the end of which the
new equipment would be sold, working capital would be returned and revert to other uses
in the company, and the product would be discontinued. In its capital budgeting
decisions Cascade uses a discount rate of return of 18%.
Would you advise Cascade to introduce the new product? Fully support your
answer.
Tranter, Inc. is considering a project that would have a ten-year life and would require a
$1,200,000 investment in equipment. At the end of ten years, the project would terminate
and the equipment would have no salvage value. The project would provide net
operating income each year as follows:
Sales $1,700,000
Less variable expenses 1,200,000
Contribution margin 500,000
Less fixed expenses:
Fixed out-of-pocket cash expenses $200,000
Depreciation 120,000
Net operating income $ 180,000
All of the above items, except for depreciation, represents cash flow. The companys
required rate of return is 12%.