Managerial Accounting

The President of EEC recently called a meeting to announce that one of the firm’s largest suppliers of component parts has approached EEC about a possible purchase of the supplier. The President has requested that you and your staff analyze the feasibility of acquiring this supplier.

Discuss the following:What information is needed to analyze this investment opportunity?

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What will be your decision-making process?

All future costs are relevant in decision making. Do you agree? Why?

Capital budgeting decisions fall into 2 broad categories: screening decisions and preference decisions. Discuss this.

Which do you think EEC should use—screening decisions or preference decisions? Why?

Journal Entry

Eddison Electronic Company
Journal Entries 2005
“000” Omitted
Activity
1 Sales not on account $29,440
2 Sales on account 28,060
3 Selling Expense 3,220
4 Administrative Expense 6,210
5 Supplies Factory 3,450
6 Insurance Factory 920
7 Indirect Labor 6,900
8 Factory Salaries 288
9 Factory Property Tax 173
10 Maintenance Expense Factory 2,001
11 Depreciation Expense Factory 3,726
12 Utilities Factory 828
13 Purchases of Raw Materials 17,250
14 Direct Labor Factory 3,450
15 Raw Material Inventory, January 1 2,070
16 Raw Material Inventory, December 31 1,380
17 Work in Process Inventory, January 1 4,140
18 Work in Process Inventory, December 31 2,300
19 Finished Goods Inventory, January 1 5,980
20 Finished Goods Inventory, December 31 4,830
21 Bad Debt Expense 276
22 Accounts Receivable, net 9,430
23 Prepaid Expenses 840
24 Land 2,760
25 Plant and Equipment 37,950
26 Cash 1/1/05 4,646
27 Accounts Payable 14,410
28 Interest Expense 28
29 Notes Payable, 10% 2,070
30 Bonds Payable 8% 8,510
31 Stockholders’ Equity 31,510
32 Retained Earnings 6,670
33 Income tax rate 30%

Actual & Plan Results

Eddison Electronics Company
1.5GB Chip Project – USA
Plan Actual 2005 Difference
Investment in Equipment $5,000,000 $5,000,000 $0
Income
Sales $5,250,000 $6,000,000 $750,000
Variable Expenses 2,500,000 2,800,000 $300,000
Contribution Margin $2,750,000 $3,200,000 $450,000
Less Fixed Expenses:
Costs 900,000 950,000 $50,000
Depreciation 500,000 500,000 $0
Net Operating Income $1,350,000 $1,750,000 $400,000
Cash Flow
Sales $5,250,000 $6,000,000 $750,000
Less Variable Expenses 2,500,000 2,800,000 300,000
Contribution Margin 2,750,000 3,200,000 450,000
Less Costs 900,000 950,000 $50,000
Net Annual Cash Inflow $1,850,000 $2,250,000 $400,000