Name__________________________

MBA 631
Fall 2022
Take Home Mid-Term 3

Part 1
Part 1 of the mid-term will be available on Canvas at 8:00pm on Tuesday. The online test is
worth 63 points and should consist of 21 questions. The questions will be a mix of concept
question and computational questions. You will need a calculator for the exam. You will have
75 minutes to complete the exam. A timer may not be displayed so you may have to keep track
of the time yourself. Therefore, use your time wisely.

Part 2
Take home exam. This is an exam and you must do your own work. It is worth 37 points. This
part is due at noon on Tuesday. For the problems, you must show your work. You may submit
your answers using a Word. Make sure you label your answers. Submit your answers through
Canvas.

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 1. (12 points)
Terrific Threads is an upscale boutique that operates various stores throughout Florida. The
company, which has three divisions (Miami, Naples, and Tampa), reported the following information
for the year just ended (in thousands):

Miami Naples Tampa

Sales revenue $26,000 $23,000 $33,104
Divisional contribution margin 14,900 12,900 12,000
Profit margin controllable by division manager 10,000 10,400 9,500
Divisional profit margin 9,500 2,400 1,900

Terrific Threads also reported $2,300 of common fixed expenses that top management wants to
allocate to the divisions on the basis of sales revenue. As the company's chief executive officer
notes, "Each division helped to incur a portion of these costs and, as a result, each should absorb its
fair share." The firm has adopted various responsibility accounting procedures to evaluate division
personnel.

Required:
A. Compute the company's total sales revenue.
B. Calculate the amount of variable operating expense incurred by the Naples Division.
C. Calculate the fixed costs controllable by Miami's management.
D. Calculate the fixed costs traceable to the Tampa Division but controllable by others.
E. Terrific Threads desires to promote a division manager to the corporate office to oversee selected
operations. In determining which individual to promote, should Terrific Threads’ top management
focus on the profit margin controllable by the division manager or the overall divisional profit margin?
Briefly explain.
F. If the company follows the desires of top management, how much of the common fixed expenses
would be allocated to the Tampa Division?
G. Do cost allocations such as those in part "F" typically appear on a segmented income statement?

2. (12 Points)
Second Time Around sells clothing, shoes, and accessories at a suburban location near Dallas.
Information for the just concluded calendar year follows.

Clothing Shoes Accessories

Sales $850,000 $320,000 $150,000
Less: Variable costs $510,000 $270,000 $82,500
Fixed costs 290,000 70,000 42,000
Total costs $800,000 $340,000 $124,500
Operating income (loss) $50,000 $(20,000) $25,500

Management is considering closing the shoe operation because of the loss and expanding the space
that is currently devoted to accessories sales. A salaried salesperson in the shoe department who
earns $45,000 will be terminated; however, all other departmental fixed costs will continue to be
incurred. Second Time Around will spend $16,000 on remodeling costs and anticipates that
accessories sales will increase by $70,000. This additional sales revenue is expected to generate a

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 35% contribution margin for the firm. Finally, because clothing customers often purchased shoes and
feel strongly about "one-stop shopping," clothing sales are expected to fall by 15% if the shoe
department is closed.

Required:
Determine whether the shoe department should be closed.

3. (7 Points)
Kansas Corporation is reviewing an investment proposal that has an initial cost of $55,500. An
estimate of the investment's end-of-year book value, the yearly after-tax net cash inflows, and the
yearly net income are presented in the schedule below. Yearly after-tax net cash inflows include
savings from the depreciation tax shield. The investment's salvage value at the end of each year is
equal to book value, and there will be no salvage value at the end of the investment's life.

Initial Cost and Yearly After-Tax Net Yearly Net

Year Book Value cash Inflows Income
1 $36,000 $21,000 $ 3,500
2 22,000 18,500 4,500
3 11,500 16,000 5,500
4 4,500 13,500 6,500
5 0 11,000 7,500
$80,000 $27,500

Kansas uses a 14% after-tax target rate of return for new investment proposals.

FV of $1 at FV of an ordinary annuity at PV of $1 at PV of an ordinary annuity at

Year 14% 14% 14% 14%
1 1.140 1.000 0.877 0.877
2 1.300 2.140 0.769 1.647
3 1.482 3.440 0.675 2.322
4 1.689 4.921 0.592 2.914
5 1.925 6.610 0.519 3.433
6 2.195 8.536 0.456 3.889

Required:
A. Calculate the project's payback period.
B. Calculate the accounting rate of return on the initial investment.
C. Calculate the proposal's net present value. Round to the nearest dollar.

4. (6 points)
Randi Corp. is considering the replacement of some machinery that has zero book value and a
current market value of $4,200. One possible alternative is to invest in new machinery that costs
$31,400. The new equipment has a four-year service life and an estimated salvage value of $4,900,
will produce annual cash operating savings of $10,800, and will require a $3,600 overhaul in year 3.
The company uses straight-line depreciation.

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 FV of $1 at FV of an PV of $1 at PV of an
Year 8% ordinary annuity at 8% 8% ordinary annuity at 8%
1 1.080 1.000 0.926 0.926
2 1.166 2.080 0.857 1.783
3 1.260 3.246 0.794 2.577
4 1.360 4.506 0.735 3.312
5 1.469 5.867 0.681 3.993
6 1.587 7.336 0.630 4.623

Required:
Prepare a net-present-value analysis of Randi’s replacement decision, assuming an 8% hurdle rate
and no income taxes. Should the machinery be acquired?

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