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Financial Distress and insolvency Course

1

The Assignment is out of 30 marks. Each question is worth L0 marks.

Question 1

The Book & Game Company has bookstores in two locations: Auntie's and authority Merlin's. Each locatio.t hrs a'manager who has a great deal of decision Horvevei, advertising, irarket research, acquisition of ,fr" individual stores. "".r , Iegal servicer, ,.rd oth", staff functiort it" handled by a central office. The Uook B;;a& 6r*" Company's current accounting system allocates all costs to the stores. Results for 2012 were: Merlin's

$3

ltem
Sales revenue

Total Compary
$700,000 450,000 2 50,000 61,000 45,000 60,000 15,000 60,000

Auntie's
$3

50,000

50,000

Cost of merchandise soid Gross margin Operating expenses:
Salaries and wages Supplies Rent and utilities

225,000
125,000 30,000

225,000
125,000
3

3,000

22,500
40,000 7,000 10,000 129,500

22,500
20,000 8,000 30,000 113,500 $ 11,500

Depreciation
Allocated staff costs Total operating expenses Operating income (loss)

-zrF00

s_zga

-q-8I99)

wages, supEach bookstore manager makes decisions that affect salaries and corpli"r, ,rrJ d.preciation. In c-onrrast, rent and utilities are beyond the managers' irol because'th" -r.rrg.rs did not choose the location or the size of the store' -- - -i"ppfies ,re ,arilble costs. Variable salaries and wages are equal to 8 percent a fixed cost' of th" .JJt of merchandise sold; the remainder of salaries and wages is costs are R.;;;jf,1il, ,"d d"pr".iation also are fixed costs. Allocated staffproportionunafof ,'t th. bookstores, but they are allocated as a fected by any event.

sales revenue.

that distin1. Using the contribution approach, prepare a performanceJeport that of the bookstore manager" g"irtrlr the performa.rce of erch bbokstore from 2. Evaluate the financial performance of each bookstore' 3. Evaluate the financial performance of each manager'

qr.rtio,

Talor Chemical Company is a highly diversified chemical processing company. The company manufactures swimming pool chemicals, chemicals for metal processing companies, specialized chemical Z compounds for other companies, and a full line ofpesticides and insecticides.

Currently, the Noorwood plant is producing two derivatives, RNA-I and RNA-2, from the chemicai compoundVDB, developed by Talor's research labs. Each week L2 million pounds ofVDB are processed, at a cost of $246,000, into 800,000 pounds ofRNA-l and 400,000 pounds ofRNA-2. The proportion of these two outputs is fixed. RNA-I has no market value until it is converted into a product with the trade name Fastkil. The cost to process RNA-I into Fastkil is $240,000 a week. Fastkil wholesales at $50 per 100 pounds. RNA-2 is sold as is for $80 per 100 pounds. However, Talor has discovered that RNA-2 can be converted into two new products through further processing, which would require the addition of 400,000 pounds ofcompound LST to the 400,000 pounds ofRNA-2. Thejoint process would yield 400,000 pounds each of DMZ-3 and Pestrol, the two new products. The additional raw material and related processing costs of this joint process would be $120,000 per week.DMZ-j and Pestrol would each be sold for $57.50 per 100 pounds. Talor management has decided not to process RNA-2 further, based on the analysis presented in the following schedule. Talor uses the physical weight method to allocate the common costs arising from joint processing.

Procesl Further
RNA_2

DMZ-I
400,000 $230,000

Pestrol
400,000

Total

Production in pounds
Revenue Costs

400,000
$320,000

$230,000
$

$460,000

VDB costs
Additional raw materials (LST) and processing

$

82,000

$ 61,s00

61,500
60,000

$123,000

ofRNA-2
Total costs Weekly gross profit

60,000

120,000 $243,000 $217,000

$

82,000

$ 121 $I

,500

$121,500

$238,000

08,500

$108,500

Critique Talor fompany's anaiysis and make any...
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