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Financial Questions Solutions On Lalchlan Company

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Lachlan Company wants to reallocate the existing overhead costs to products using the more detailed data collected with respect to key activities and activity cost drivers. Compute the amount of overhead cost allocated to each product using an activity-based costing approach.  Show your calculations and justify any assumptions you make. Should Berlin Enterprises adopt an activity-based costing system for this Division?

Computation of amount of overhead cost

Particulars Total costs Cost drivers iSports Watch iWatch Standard
Activity costs
Set up production line  $  18,000.00 Setup hours  $     12,960,000.00  $      5,040,000.00
Repair Machines  $     8,000.00 Number of setup hours  $       5,333,333.33  $      2,666,666.67
Batch Assembly of components  $  35,000.00 Number of production runs  $             25,200.00  $              9,800.00
Total overhead cost  $     18,318,533.33  $      7,716,466.67

Assumption of the activity based costing calculations:

  1. As per the activity based costing concept, it is assumed that the activities consume the resources of an manufacturing concept, and therefore, the researcher has considered this assumption for the purpose of above calculation,
  2. For this calculation, the researcher has assumed that the variable cost is the base of the overhead cost as per the general assumption of the ABC costing.

    Assume that at the end of 2018 Lachlan Company is considering eliminating production of either the iSportsWatch or the iWatch-Standard.  Explain three important factors that Lachlan Company should consider in a decision to eliminate either one of these products.  Note:

    • One of the three factors you cite should refer to the concept of the “Death Spiral” and what it means.
    • One of the three factors you cite shouldinclude an explicit statement of the type of costs that are relevant for the decision to eliminate a product
    • Your answer does not require any calculations.
    • Lachlan Company should stop the manufacturing of the 64GB flash memory isports watch because of the following reasons-
      • The 64GB flash memory sports watch is not so much low priced as compared to the 128GB variant.
      • The 64 GB isports watch is not so much good and does not have good specifications as compared to standard 128 GB sports watch. The cost of the watch is higher as compared to the facilities provided by the company.
      • People are less interested to buy the 64GB variant.


    • QUESTION 3: REFER TO CASE INFORMATION ON AMIGOS.COM (12 points)Q3.1    An outside contractor makes the following offer: If Amigos.com will supply the contractor with 10,000 ounces of mixture, the contractor will manufacture 19,500 pills (allowing for the normal 2.5% wastage during the pill-making process) at $0.12 per pill. Should Amigos.com accept the contractor’s offer?  (3 points)
    • Q3.2       Amigos.com’s engineers have devised a method that would improve quality in the pill-making operation.  They estimate that the 10,000 pills currently being lost per month would be saved. The modification would cost $7,000 per month. Should Amigos.com implement the new method?  (3 points)
    • Q3.3    Assume that Amigos.com also loses 10,000 ounces of mixture in its mixing operation.  These losses can be reduced to zero if the company is willing to spend $9,000 per month in quality-improvement methods. Should Amigos.com adopt the quality improvement method?  (3 points)
    • Q3.4       What are the benefits of improving quality at the mixing operation compared with the benefits of improving quality at the pill-making operation?  (3 points)
    • QUESTION 4: REFER TO CASE INFORMATION ON ARMADILLO CO. (15 points)Q4.1       Assume Armadillo’s cost of capital is 15%. Ignoring tax effects, prepare a schedule that computes the Return on Investment (ROI) and Economic Value Added (EVA® ) for both the Compact Disc and Video Cassette divisions, for the next three years.   (10 points)
    • Q4.2       Make and justify recommendations to the management of Armadillo Co regarding:

      • whether ROI or EVA® should be used as the financial measure for evaluating divisional performance. (3 points)
      • whether both divisions should continue to operate. (2 points)
      • QUESTION 5:  REFER TO CASE INFORMATION ON ARMADILLO CO. (12 points)Armadillo Co will be introducing a new incentive scheme to motivate divisional managers to work hard at ensuring that customers are satisfied, the employees they manage are satisfied and that their financial performance is sound. The proposed scheme is structured as follows:

        Where:                   a = Any positive number so that [a * (b + c + d)]  Wage

        b = (actual employee satisfaction index – target employee satisfaction index)

        c = (actual customer satisfaction index – target customer satisfaction index)

        d = (actual financial performance measure – target financial performance measure)

        Should the proposed incentive scheme be modified?  If so, why? If not, why not?

      • QUESTION 6: REFER TO CASE INFORMATION ON FIVE-SPURS COMPANY (12 points)Q6.1       Explain whether or not transfers should be made to Assembly if there is no excess capacity in Machining?  (4 points)
      • Q6.2       Assume that Machining’s maximum capacity for this product is 1,000 units per month and sales to the intermediate market are now 800 units. Should 200 units be transferred to Assembly? At what transfer price? (You should assume that Machining will maintain the $200 selling price indefinitely, that is, Machining is not considering lowering the price even if idle capacity exists).  (4 points)
      • Q6.3       Suppose Machining quoted a transfer price of $150 for up to 200 units.  What would be the contribution to the company as a whole if the transfer was made?  As manager of the Assembly Division, explain whether or not you would be inclined to buy at $150. (4 points)

        Q7.1       Present below a variance analysis showing price and efficiency variances for both Wine Inputs and Direct Labor.(10 points)

      • Q7.2       Briefly explain how a favorable efficiency variance (i.e., where the actual costs are below the budgeted costs) might ultimately have negative economic consequences for the company.(2 points)
        Q8.1       Explain two actions that employees likely were motivated to take at the time the independent consultant was establishing standards.  (4 points)
      • Q8.2       Describe two ways in which Sixers.com might use information from the Benchmark Clearing House when evaluating the variances in the variance analysis.    (4 points)
      • Q8.3       Describe two disadvantages of Sixers.com using the Benchmarking Clearing House information. (4 points).