Martinez Company

Martinez Company has decided to introduce a new product. The new product can be manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.

Capital-Intensive Labor-Intensive
Direct materials $5 per unit $5.50 per unit
Direct labor $6 per unit $8.00 per unit
Variable overhead $3 per unit $4.50 per unit
Fixed manufacturing costs $2,508,000 $1,538,000

Martinez’s market research department has recommended an introductory unit sales price of $30. The incremental selling expenses are estimated to be $502,000 annually plus $2 for each unit sold, regardless of manufacturing method.


With the class divided into groups, answer the following.

(a) Calculate the estimated break-even point in annual unit sales of the new product if Martinez Company uses the:
(1) Capital-intensive manufacturing method.
(2) Labor-intensive manufacturing method.

(b) Determine the annual unit sales volume at which Martinez Company would be indifferent between the two manufacturing methods.

(c) Explain the circumstance under which Martinez should employ each of the two manufacturing methods.

Multiple Choice Answers

1.  For next year, Flemingl Company has budgeted sales of 40,000 units, target beginning finished goods inventory of 2,000 units, and an ending finished goods inventory of 1,200 units.  .  How many units should be produced?
a. 39,200 units
b. 40,000 units
c. 40,800 units
d. 42,800 units
2. The direct materials usage budget is based on
a. the units to be produced during a period.
b. budgeted sales dollars.
c. the predetermined factory overhead rate.
d. the amount of labor hours worked
none of the above
3. Aspen Inc., manufactures 10,000 computer chips.  Currently, the costs per unit are as follows:
Direct materials    $ 1.00
Direct labor      10.00
Variable overhead       5.00
Fixed overhead       8.00
Total     $24.00
Link, Corp., has contacted Aspen with an offer to sell 10,000 of the chips for $22.00 per chip.  If Aspen accepts the proposal, $30,000 of fixed overhead will be eliminated.
Should Aspen make or buy the chips?  What is the difference between the two alternatives?
a. Buy; savings = $20,000.
b. Buy; savings = $50,000.
c. Make; savings = $30,000.
d. Make; savings = $10,000.
e.  None of the above
Use the following information to answer questions 4 through 6
Wolf Co. manufactures three sizes of dog carriers: small, medium, and large. Potential sales include 100 units of small, 120 units of medium, and 100 units of large per month. The barrier in reaching the sales level revolves around the maximum machine hours available, 600 per month. Product information is provided below.
Unit    Small  Medium  Large
Selling price     $30  $50   $100
Variable     18    30       46
Fixed       8   10       24
Machine Hours per Unit     2    4     10
4. What is the contribution margin per machine-hour for small units?
a. $10.00.
b. $ 6.00.
c. $ 5.40.
d. $ 3.60
5. If management incorporates a short-run profit maximizing strategy, which of the three product models should be produced first?
a. Small.
b. Medium.
c. Large.
d. Either medium or large.
6. Using the short-run strategy, how many of each product should be produced per month?
Small  Medium Large
a.   0   120    12
b.  100     0    40
c.  100   100     0
d.  100    20    40
e. None of the above
Teledine makes and sells portable televisions.  Each television regularly sells for $210.  The following cost data per television is based on a full capacity of 10,000 televisions produced each period.
Direct materials     $80
Direct labor       60
Factory overhead (70% variable
and 30% unavoidable fixed)    40
7. A special order has been received by Teledine for a sale of 2,000 televisions to an overseas customer. Teledine is now selling 6,000 televisions through regular channels each period.  What should be the minimum selling price (no profit) per television in negotiating a price for this special order?
a. $174.
b. $168.
c. $210.
d. $180.
e. None of the above

8. Central Medical Supply, Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment.  The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000;  the market value would then be $136,000.  However, Tripac offered to purchase the obsolete equipment as is for $88,000.
Which alternative should Central  select?
scrap the inventory at no additional cost
b. rework the inventory at an additional  loss of $304,000
c. rework the inventory and improve profits by$69,000
d. sell the inventory to Tripac
J. J. Johnson has decided to supplement his income by selling beehives. He expects to sell 25,000 hives in 20×9. He ended 20×8 with 2,500 completed hives in inventory and would like to complete operations in 20×9 with at least 2,800 completed hives in inventory. There is no ending work in process inventory. One beehive holds about 250 bees. The bees are purchased for $4.00 per 1,000 bees. The hives sell for $15.00 each.
9. How many beehives would the 20×9 production budget identify as needing to be produced?
A)  25,300
B)  25,000
C)  30,300
D)  24,700
E) None of the above
10. What would be the total of the 20×9 period sales budget?
A)  $378,000
B)  $375,000
C)  $379,500
D)  $376,500
E) none of the above
11. What would be the yearly total on the direct materials purchases budget for bee purchases? (Assume for this question that 40,000 beehives will be produced.)
A)  $44,000
B)  $16,000
C)  $64,000
D)  $40,000
E) none of the above
12. Friden Company has budgeted sales and production over the next quarter as follows:

The company has 20,000 units of product on hand at April 1. A minimum of 20% of the next month’s sales needs in units must be on hand at the end of each month. July sales are expected to be 140,000 units. Budgeted sales for June would be (in units):
A. 188,000
B. 160,000
C. 128,000
D. 184,000
E. none of the above
Layne Cedar manufactures cedar chests.  The estimated number of chests for the first three months of 20×4 are as follows:
Month                            Sales
—–                                  —–
January                           10,000
February                          14,000
March                              13,000
Finished goods inventory at the end of December is 4,000 units.  Ending finished goods are equal to 40 percent of next month’s sales.  April 20×4 sales are expected to total 16,000 units.
13. What will be the number of chests produced in February 20×4?
a. 15,600 chests
b. 14,000 chests
c. 11,600 chests
d.  8,400 chests
none of the above
14. Two products, TD and IB, emerge from a joint process. Product TD has been allocated $31,200 of the total joint costs of $48,000. A total of 5,000 units of product TD are produced from the joint process. Product TD can be sold at the split-off point for $24 per unit, or it can be processed further for an additional total cost of $15,000 and then sold for $26 per unit. If product TD is processed further and sold, what would be the effect on the overall profit of the company compared with sale in its unprocessed form directly after the split-off point?
A. $5,000 less profit
B. $115,000 more profit
C. $36,200 less profit
D. $26,200 more profit
E. None of the above
The Holmes Division recorded operating data as follows for the past year:

15. For the past year, the return on investment was:
A. 15.75%
B. 20.50%
C. 25.00%
D. 31.25%
16. For the past year, the margin was:
A. 12.50%
B. 13.00%
C. 14.75%
D. 15.00%
17. For the past year, the turnover was:
A. 25
B. 10
C. 4
D. 2
18. For the past year, the minimum required rate of return was:
A. 11%
B. 12%
C. 13%
D. 14%
19. The management of Austin Corporation is considering dropping product R97C. Data from the company’s accounting system appear below:

In the company’s accounting system all fixed expenses of the company are fully allocated to products. Further investigation has revealed that $34,000 of the fixed manufacturing expenses and $20,000 of the fixed selling and administrative expenses are avoidable if product R97C is discontinued. What would be the effect on the company’s overall net operating income if product R97C were dropped?
A. Overall net operating income would increase by $20,000.
B. Overall net operating income would increase by $10,000.
C. Overall net operating income would decrease by $20,000.
D. Overall net operating income would decrease by $10,000.
E. None of the above
20. Division P of Turbo Corporation has the capacity for making 75,000 wheel sets per year and regularly sells 60,000 each year on the outside market. The regular sales price is $100 per wheel set, and the variable production cost per unit is $65. Division Q of Turbo Corporation currently buys 30,000 wheel sets (of the kind made by Division P) yearly from an outside supplier at a price of $90 per wheel set. If Division Q were to buy the 30,000 wheel sets it needs annually from Division P at $87 per wheel set, the change in annual net operating income for the company as a whole, compared to what it is currently, would be:
A. $600,000
B. $225,000
C. $750,000
D. $135,000
E. None of the above

Stock Manufacturing Corporation has prepared the following overhead budget for next month.

The company’s variable overhead costs are driven by machine-hours.
21.  What would be the total budgeted overhead cost for next month if the activity level is 6,600 machine-hours rather than 6,900 machine-hours?
A. $84,321.00
B. $87,590.00
C. $84,860.00
D. $83,781.74
E. None of the above
The Porter Company has a standard cost system. In July the company purchased and used 22,500 pounds of direct material at an actual cost of $53,000; the materials quantity variance was $1,875 Unfavorable; and the standard quantity of materials allowed for July production was 21,750 pounds. The materials price variance for July was:
A. $2,725 F
B. $2,725 U
C. $3,250 F
D. $3,250 U

Division X makes a part with the following characteristics:

Division Y of the same company would like to purchase 10,000 units each period from Division X. Division Y now purchases the part from an outside supplier at a price of $17 each.
Suppose Division X has ample excess capacity to handle all of Division Y’s needs without any increase in fixed costs and without cutting into sales to outside customers. If Division X refuses to accept the $17 price internally and Division Y continues to buy from the outside supplier, the company as a whole will be:
A. worse off by $70,000 each period.
B. better off by $10,000 each period.
C. worse off by $60,000 each period.
D. worse off by $20,000 each period.
24. Suppose that Division X is operating at capacity and can sell all of its output to outside customers. If Division X sells the parts to Division Y at $17 per unit, the company as a whole will be:
A. better off by $10,000 each period.
B. worse off by $20,000 each period.
C. worse off by $10,000 each period.
D. There will be no change in the status of the company as a whole.

Expert Answers

Cost of Preferred Stock with Flotation Costs
Burnwood Tech plans to issue some $60 par preferred stock with a 6% dividend. A similar stock is selling on the market for $73. Burnwood must pay flotation costs of 7% of the issue price. What is the cost of the preferred stock? Round your answer to two decimal places.

David Ortiz Motors has a target capital structure of 45% debt and 55% equity. The yield to maturity on the company’s outstanding bonds is 11%, and the company’s tax rate is 40%. Ortiz’s

Bond Yield and After-Tax Cost of Debt
A company’s 8% coupon rate, semiannual payment, $1,000 par value bond that matures in 20 years sells at a price of $678.22. The company’s federal-plus-state tax rate is 30%. What is the firm’s after-tax component cost of debt for purposes of calculating the WACC? (Hint: Base your answer on the nominal rate.) Round your answer to two decimal places.

Cost of Equity
Radon Homes’s current EPS is $6.43. It was $3.60 5 years ago. The company pays out 40% of its earnings as dividends, and the stock sells for $34.
1. Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period.) Round your answer to two decimal places.

2. Calculate the next expected dividend per share, D1 (Hint: D0 = 0.40($6.43) = $2.57). Assume that the past growth rate will continue. Round your answer to the nearest cent.

3. What is Radon’s cost of equity, rs? Round your answer to two decimal places.

Calculation of g and EPS
Spencer Supplies’s stock is currently selling for $60 a share. The firm is expected to earn $5.70 per share this year and to pay a year-end dividend of $2.90.
1. If investors require a 9.5% return, what rate of growth must be expected for Spencer? Round your answer to two decimal places.

2. If Spencer reinvests earnings in projects with average returns equal to the stock’s expected rate of return, then what will be next year’s EPS? (Hint: g = ROE × Retention ratio.) Round your answer to the nearest cent.

The Cost of Equity and Flotation Costs
Messman Manufacturing will issue common stock to the public for $25. The expected dividend and growth in dividends are $2.75 per share and 6%, respectively. If the flotation cost is 8% of the issue’s gross proceeds, what is the cost of external equity, re? Round your answer to two decimal places.

The Cost of Equity and Flotation Costs
Suppose a company will issue new 25-year debt with a par value of $1,000 and a coupon rate of 8%, paid annually. The tax rate is 40%. If the flotation cost is 3% of the issue proceeds, then what is the after-tax cost of debt? Disregard the tax shield from the amortization of flotation costs. Round your answer to two decimal places.

WACC Estimation
On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $25 million in new projects. The firm’s present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt.
Debt $30,000,000
Common equity 30,000,000
Total capital $60,000,000
New bonds will have an 6% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders’ required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 35%.

1. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000.

2. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places.

Market Value Capital Structure
Suppose the Schoof Company has this book value balance sheet:
Current assets $30,000,000 Current liabilities $10,000,000
Fixed assets 50,000,000 Long-term debt 30,000,000
Common stock
(1 million shares) 1,000,000
Retained earnings 39,000,000
Total assets $80,000,000 Total claims $80,000,000
The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 9%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company’s permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 8%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $68 per share. Calculate the firm’s market value capital structure. Round your answers to two decimal places.


ECET 450

Part A:


This exercise involves normalizing a small part of a DB.  The steps to complete this exercise include getting the data items into 1NF, 2NF, and 3NF.  The final step is to generate the ERD for the table or tables that are in the dependency diagram in 3NF.


Some small business wants to keep track of office furniture, computers, printers, etc.  A sample of the ITEM records is shown below:

ITEM_ID D1342245 D1453356 D1365779
ITEM_DESCRIPTION IQ Deskjet 683P IQ Toner DT Photocopier
ROOM_NUMBER 227 227 342
BLDG_NAME Science Science Electronics Technology
BLDG_MANAGER A. B. Jones A. B. Jones R. S. Smith

Draw the dependency diagram using the data in the table.  Make sure to label the transitive and partial dependencies.

  1. Using the dependency diagram developed in step 1, create a set of dependency diagrams that meet 3rd Normal Form requirements.  Rename attributes to meet the naming conventions.  Create new entities and attributes as necessary.
  2. Draw the crow’s foot ERD with the VISIO drawing tool using the results of step 2.

Part B:


This laboratory provides practice in the creation of realistic tables and their relationships using Oracle SQL*Plus and introduces writing SQL*Plus script files.  This laboratory exercise creates a relatively simple invoice system using SQL statements.  This DB schema is used throughout the next several weeks of laboratory exercises.  The final product is an SQL script that makes it possible to initially create and re-create, if need be, the DB schema in order to do to the later laboratory exercises.


Using your assigned user name, password, and host string, log in to Oracle SQL*Plus.  Record your dialog with a spool file.

Following the four requirements below, create the 5 tables shown later in this laboratory exercise, and enter all data as shown.  Be sure to record your interactions with SQL*Plus using the spool command.

  1. Use table names, attribute names, and data exactly as shown. The one exception is that you will omit the dollar sign and comma separators in the money amounts.  Accurately enter the data as you will need these tables in future laboratory assignments.
  1. Save all of your commands in a single script file for printing and submission. This file should each contain a minimum of your name and the date in comments at the beginning of the file, and any other comments you feel add to the understanding of the script file.  Copy and edit your spool file to create the load_tablesXXX.sql file where XXX are your initials.  The only items that should be in this load_tablesXXX.sql file are your comments and the SQL statements that drop tables, create tables, insert data values, and display table.  Be sure to remove all incorrect commands and the Oracle responses to the correct commands from the file.  Save this file for the future in case you have to rebuild these tables.  Be sure to include a printout of this file in your report.
  1. The second submission requirement is a printout of each of the 5 tables completely loaded with the specified data.  Use the SET LINESIZE command to avoid line wrap around of your table data.  Print your list file in landscape mode.
  1. All primary key and foreign key constraints should be named according to the method presented in the classroom.  If you have any questions about which attributes are primary and/or foreign keys, please ask about them.
  1. The ultimate test is the execution of this SQL script file in the following form:     @ <path_name>/load_tablesXXX.sql