Exam 10: Setting Performance Expectations at the Entity Level

Brown Company estimates that monthly sales will be as follows: Historical trends indicate that 40% of sales is collected during the month of sale, 50% is collected in the month following the sale, and 10% is collected two months after the sale. Brown's accounts receivable balance as of December 31 totals $80,000 ($72,000 from December's sales and $8,000 from November's sales). The amount of cash Brown can expect to collect during the month of January is:

Top Cat Ventures, Inc., explores for natural gas. The company is considering a particular drilling site with a geological structure that has a 65% probability of yielding enough natural gas to produce revenue of $2 million. The probability is 35% that the site will yield zero revenue and result in a loss of $500,000. What is the expected value of drilling at this site?

In a scenario-planning exercise, the computation of an expected value assigns equal probabilities of occurrence to the outcomes of each of the scenarios.

The term "expected value" refers to:

A disparity that occurs when top management's performance desires exceed the performance figures in a plan prepared in bottom-up fashion is referred to as:

Carmen Products Incorporated plans to produce 5,000 units of product in the coming month. At an expected wage rate of $25 per hour, budgeted direct labor wages total $75,000. What amount of budgeted direct labor time is required per unit of output produced?

Johnson Software has developed a new software package. Johnson's sales manager has prepared the following probability distribution describing the relative likelihood of monthly sales levels and relative income (loss) for the company's new software package. If Johnson decides to market its new software package, the expected value of additional monthly income will be:

The sales manager of Serito Doll Company has suggested that an expanded advertising campaign costing $40,000 would increase the sales and profits of the company. He has developed the following probability distribution for the effect of the advertising campaign on company sales. The company sells the dolls at $5.20 each. The cost of each doll is $3.20. Serito's expected incremental profit, if the advertising campaign is adopted, would be:

A small organization is more likely to feature participation in planning and decision making by lower-level managers and employees.

ANNCO sells products on account and experiences the following collection schedule: On December 31, ANNCO reports accounts receivable of $211,500. Of that amount, $162,000 is due from December sales, and $49,500 from November sales. ANNCO is budgeting $170,000 of sales for January. If so, what amount of cash should be collected in January?

Because of their relative complexity, functional and divisional organizations experience more serious cash constraints than small organizations and must plan accordingly.

EP Products has 2,000 units of its product on hand at the beginning of January. Sales in January and February are forecast to be 16,000 units and 12,000 units, respectively. The company plans to end January with sufficient inventory to provide 25% of February's sales needs. What number of units must EP Products schedule for production in January?

Petersons Planters, Inc., budgeted the following amounts for the coming year: Overhead is estimated to be two times the amount of direct labor dollars. The amount that should be budgeted for direct labor for the coming year is:

Which type of business organization is most likely to suffer from significant cash flow constraints and therefore require careful cash planning?

Dougan Paint and Supply sells exclusively to building contractors on a credit basis. The company collects 75% of its credit sales in the month of sale and the remaining 25% in the month following sale. April's actual sales totaled $32,500 and the sales budget forecasts sales of $55,000 for May and another $60,000 for June. What amount of cash receipts will Dougan budget from May and June sales respectively?

Before any organization, whether small, divisional, or functional, can develop plans and budgets, the board of directors and key managers must agree on the organization's mission and objectives.

No matter the size or nature of an organization, the absolute prerequisite for successful planning and budgeting by management is:

Joe Foster and his wife, Monica, are both fabric artists. Joe has begun a small business to raise additional cash by producing and selling screen-printed T-shirts, decorated caps, and other accessories at local weekend regattas. He is considering expanding this venture and producing and selling similar merchandise at lacrosse tournaments in the same region. Joe has reasoned that the expanded venture only makes sense if weekend revenue at a lacrosse event is at least $10,000, and has begun planning scenarios to consider the feasibility of this level of success. Based on his experience at the regattas, and information regarding the size and demographics of the lacrosse population, he feels the most likely weekend sales will be $7,000 and that this will occur with a probability of 60%. Joe's estimate of the most pessimistic outcome is $3,000, but he is confident that this will only occur 10% of the time. Required. Given these above estimates, how large must Joe's most optimistic revenue outcome be to justify the lacrosse venture?

In developing a budget for a manufacturing firm with a functional organization, which of the following must be prepared first?

Madison Company produces a single product in a highly automated process. Virtually all of the company's manufacturing overhead costs are driven by its consumption of machine hours. Each unit of output requires 2.5 hours of machine time, and the company estimates that each hour of machine time requires $30 of variable overhead. Fixed overhead is budgeted at $600,000 annually and incurred evenly throughout the year. What amount of manufacturing overhead should the company budget for January when it plans to produce 200 units of product?