Mid-Term Exam #2 Summary Only Material Covered After Exam #1 Chapters 6, 7, 8, 13, 14, 15, 17, & 18 April 5 th 7-9 PM - FA 015 April 7 th 7-9 PM - BU 223

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Exam Overview 15 multiple choice problems 5 Short answer (Comparable to last exam fewer multiple choice problems – more computations in short answer) MAKE SURE YOU WORK EFFICIENTLY ON EXAM 3

Cost Volume Profit ( break even, contribution margin ratio, before tax income, margin of safety, weighted average contribution margin, operating leverage, decision making uncertainty, etc.) Cost Estimation – (High-Low Method, Regression Analysis - Interpretation of outputs, Forecast using outputs, and Confidence intervals (Model and Coefficient) Budgeting Process (Cash Budget, Purchases Budget, Inventory etc.)

Performance Measurement - ROI, Residual Income, EVA [Formula & Interpretation, underinvestment problem, measurement of assets (i.e., net book value, replacement costs, intangibles.)] Use this simplified EVA Formula* * This differs from in class problems which used ending assets. Don’t need to know how to calculate WACC – I will provide

Flexible Budgeting Variances, Journal Entries, and explanations of Variances –Purchase Price and Materials Quantity (Usage) Var. –Labor Rate and Efficiency Var. –Variable Overhead Var. –Fixed Overhead Var. –Selling Price Var. –Sales Volume (Quantity + Mix) Var. (Cont. Margin) –Sales Quantity (Market Size + Market Share) Var. (Cont. Margin)

Units Transfer Pricing (Decisions on buy internally vs. externally & Tax Effects) Variable and Absorption Costing

Uncertainty Example 0.5 Probability Cash Inflow ($000,000) Expected value = (0.1*$300,000) + (.2*$350,000) + (.4*$400,000) + (0.2*$450,000) + (0.1*$500,000) = $400,000 Projected Sales Revenue Alternative Example 20% - 1,000,000 80% - 500,000 EV= 600,000

Material Variances - (AQ*AP-SQ*SP) Price Variance AQ*(AP-SP) (AQ is purchases) Usage Variance SP*(AQ-SQ) (AQ is actual usage) AQ Purchase normally not equal to AQ Usage

Formula Sheet I will provide 3 Exhibits (one page – Front and back) Exhibit 14-7 Exhibit 15-9 Exhibit You will only be able to use the version that I pass out in class (don’t bring your own)

Practice Exam Questions are meant to give you practice with exam questions, but will not be the same questions with the numbers changed The coverage on the practice exam is not meant to be comprehensive. You need to go back through notes, in class problems, and homework to be successful.

Review Sessions Saturday April 3 rd BU 109 (1-3PM) Tuesday April 6 th (Regular Scheduled Class) Primarily a question and answer session – We will primarily go over practice exam in the review session so you need to complete prior to class. 12

Additional Problems (not comprehensive) Chapter 14 Manufacturing Overhead Problems –Carhartt Boots Variable M/O –Carhartt Boots Fixed M/O Chapter 15 Sales Variance –Transpacific Airlines –Varner Performing Arts Center Chapter 17 Variable & Absorption Costing (below) –Fitzpatrick Inc.

Waldorf Company has two sources of funds: long-term debt with a market and book value of $10 million issued at an interest rate of 12%, and equity capital that has a market value of $8 million (book value of $4 million). Waldorf Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%. What is Waldorf’s & EVA ® for the St. Louis Division assuming a WACC of 10.33% ?

EVA® for St. Louis ($960,000 x (1 –.25)) – [ x ($4,000,000)] = $720,000 – $413,200 = $306,800

Assume Waldorf had intangible assets with a beginning after tax value of $600,000 and an ending after tax value of $1,000,000. What impact would this have on the EVA® calculation? 16

EVA® for St. Louis ($960,000 x (1 –.25))+400,000 – [ x ($4,000, ,000)] = $1,120,000 – $495,840 = 624,160

1.Determine Fitzpatrick Inc.’s operating income using full costing. 2.Determine Fitzpatrick Inc.’s operating income using variable costing. 3.Reconcile the difference between the operating incomes in requirements 1 and 2. Fitzpatrick Inc. planned and manufactured 500,000 units of its single product in 2007, its first year of operations. Variable manufacturing costs were $40 per unit of production. Planned fixed manufacturing costs were $1,200,000. Marketing and administrative costs (all fixed) were $500,000 in Fitzpatrick sold 450,000 units of products in 2007 at $50 per unit. Fitzpatrick Inc.