Create a Cost-Volume-Profit chart. Refer to the chapter text along with Figure 7–6.

Required

  • 1. In addition to the contribution margin figures already computed, now compute the PV ratio (also known as the CM ratio).
  • 2. Add another column to your worksheet and compute the clinic’s per-visit revenue and costs.
  • 3. Create a Cost-Volume-Profit chart. Refer to the chapter text along with Figure 7–6.

CHAPTER 8

Assignment Exercise 8–1: FIFO and LIFO Inventory

Study the FIFO and LIFO explanations in the chapter.

Required

  • a1. Use the format in Exhibit 8–1 to compute the ending FIFO inventory and the cost of goods sold, assuming $90,000 in sales; beginning inventory 500 units @ $50; purchases of 400 units @ $50; 100 units @ $65; 400 units @ $80.
  • a2. Also compute the cost of goods sold percentage of sales.
  • b1. Use the format in Exhibit 8–2 to compute the ending LIFO inventory and the cost of goods sold, using same assumptions.
  • b2. Also compute the cost of goods sold percentage of sales.
  • c. Comment on the difference in outcomes.

Assignment Exercise 8–2: Inventory Turnover

Study the “Calculating Inventory Turnover” portion of the chapter closely, whereby the cost of goods sold divided by the average inventory equals the inventory turnover.

Required

Compute two inventory turnover calculations as follows:

  • 1. Use the LIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.
  • 2. Use the FIFO information in the previous assignment to first compute the average inventory and then to compute the inventory turnover.

Example 8A: Depreciation Concept

Assume that Metropolis Health System (MHS) purchased equipment for $200,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

Straight-line depreciation is a method that charges an equal amount of depreciation for each year the asset is in service. In the case of this purchase, straight-line depreciation would amount to $18,000 per year for 10 years. This amount is computed as follows:

  • Step 1. Compute the cost net of salvage or trade-in value: 200,000 less 10% salvage value or 20,000 equals 180,000.
  • Step 2. Divide the resulting figure by the expected life (also known as estimated useful life): 180,000 divided by 10 equals 18,000 depreciation per year for 10 years.

Accelerated depreciation represents methods that are speeded up, or accelerated. In other words a greater amount of depreciation is taken earlier in the life of the asset. One example of accelerated depreciation is the double-declining balance method. Unlike straight-line depreciation, trade-in or salvage value is not taken into account until the end of the depreciation schedule. This method uses book value, which is the net amount remaining when cumulative previous depreciation is deducted from the asset’s cost. The computation is as follows:

  • Step 1. Compute the straight-line rate: 1 divided by 10 equals 10%.
  • Step 2. Now double the rate (as in double-declining method): 10% times 2 equals 20%.
  • Step 3. Compute the first year’s depreciation expense: 200,000 times 20% equals 40,000.
  • Step 4. Compute the carry-forward book value at the beginning of the second year: 200,000 book value beginning Year 1 less Year 1 depreciation of 40,000 equals book value at the beginning of the second year of 160,000.
  • Step 5. Compute the second year’s depreciation expense: 160,000 times 20% equals 32,000.
  • Step 6. Compute the carry-forward book value at the beginning of the third year: 160,000 book value beginning Year 2 less Year 2 depreciation of 32,000 equals book value at the beginning of the third year of 128,000.
    • Continue until the asset’s salvage or trade-in value has been reached.
    • Do not depreciate beyond the salvage or trade-in value.

Practice Exercise 8–I: Depreciation Concept

Assume that MHS purchased equipment for $600,000 cash on April 1 (the first day of its fiscal year). This equipment has an expected life of 10 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

Required

  • 1. Compute the straight-line depreciation for this purchase.
  • 2. Compute the double-declining balance depreciation for this purchase.

Assignment Exercise 8–3: Depreciation Concept

Assume that MHS purchased two additional pieces of equipment on April 1 (the first day of its fiscal year), as follows:

  • 1. The laboratory equipment cost $300,000 and has an expected life of = years. The salvage value is 5% of cost. No equipment was traded in on this purchase.
  • 2. The radiology equipment cost $800,000 and has an expected life of 7 years. The salvage value is 10% of cost. No equipment was traded in on this purchase.

Required

For both pieces of equipment:

  • 1. Compute the straight-line depreciation.
  • 2. Compute the double-declining balance depreciation.

Example 8B: Depreciation

This example shows straight-line depreciation computed at a five-year useful life with no salvage value. Straight-line depreciation is the method commonly used for financing projections and funding proposals.

Depreciation Expense Computation: Straight Line

Five year useful life; no salvage value

Year # Annual Depreciation Remaining Balance
Beginning Balance = 60,000
1 12,000 48,000
2 12,000 36,000
3 12,000 24,000
4 12,000 12,000
5 12,000      -0-

Example 8C: Depreciation

This example shows straight-line depreciation computed at a five-year useful life with a remaining salvage value of $10,000. Note the difference in annual depreciation between Example 8B and Example 8C.

Depreciation Expense Computation: Straight Line

Five year useful life; $10,000 salvage value

Year # Annual Depreciation Remaining Balance
Beginning Balance = 60,000
1 10,000 50,000
2 10,000 40,000
3 10,000 30,000
4 10,000 20,000
5 10,000 10,000

Example 8D: Depreciation

This example shows double-declining depreciation computed at a five-year useful life with no salvage value. As is often the case with a five-year life, the double-declining method is used for the first three years and the straight-line method is used for the remaining two years. The double-declining method first computes what the straight-line percentage would be. In this case 100% divided by five years equals 20%. The 20% is then doubled. In this case 20% times 2 equals 40%. Then the 40% is multiplied by the remaining balance to be depreciated. Thus 60,000 times 40% for year one equals 24,000 depreciation, with a remaining balance of 36,000. Then 36,000 times 40% for year two equals 14,400 depreciation, and 36,000 minus 14,400 equals 21,600 remaining balance, and so on.

Now note the difference in annual depreciation between Example 8B, using straight-line for all five years, and Example 8D, using the combined double-declining and straight-line methods.

Depreciation Expense Computation: Double-Declining-Balance

Five year useful life; $10,000 salvage value

Year # Annual Depreciation Remaining Balance
Beginning Balance = 60,000
1 24,000* 36,000
2 14,400* 21,600
3   8,640* 12,960
4   6,480**   6,480
5   6,480**   6,480

*double-declining balance depreciation

**straight-line depreciation for remaining two years (12,960 divided by 2 = 6,480/yr)

Practice Exercise 8–II: Depreciation

Compute the straight-line depreciation for each year for equipment with a cost of $50,000, a five-year useful life, and a $5,000 salvage value.

Assignment Exercise 8–4: Depreciation

Set up a purchase scenario of your own and compute the depreciation with and without salvage value.

Assignment Exercise 8–5: Depreciation Computation: Units-of-Service

Study the “Units of Service” portion of the chapter closely.

Required

  • 1. Using the format in Table 8–A-5, compute units of service depreciation using the following assumptions:
    • Cost to be depreciated = $50,000
    • Salvage value = zero
    • Total units of service = 10,000
    • Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200
  • 2. Using the same format, compute units of service depreciation using adjusted assumptions as follows:
    • Cost to be depreciated = $50,000
    • Salvage value = $5,000
    • Total units of service = 10,000
    • Units of service per year: Year 1 = 2,200; Year 2 = 2,100; Year 3 = 2,300; Year 4 = 2,200; Year 5 = 200
Type of paper Academic level Subject area
Number of pages Paper urgency Cost per page:
 Total: