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Elden [556K]
2 years ago
15

Channing Corporation makes two products (A1 and B2) that require direct materials, direct labor, and overhead. The following dat

a refer to operations expected for next month. A1 B2 Total Revenue $ 170,000 $ 510,000 $ 680,000 Direct material 65,000 130,000 195,000 Direct labor 54,000 128,250 182,250 Overhead: Direct-material related 42,900 Direct-labor related 40,095 Required: Channing uses a two-stage cost allocation system, It uses direct-material costs to allocate direct-materials related overhead and direct-labor costs to allocate direct-labor related overhead costs. a. Compute the direct-material related overhead rate for next month. b. Compute the direct-labor related overhead rate for next month. c. What is the total overhead allocated to product A1 next month
Business
1 answer:
castortr0y [4]2 years ago
8 0

Answer:

Channing Corporation

a. The direct-material related overhead rate = $0.22

b. The direct-labor related overhead rate = $0.22

c. The total overhead allocated to product A1 next month = $26,100

Explanation:

a) Data and Calculations:

Products                          A1             B2     Total

Total Revenue      $ 170,000 $ 510,000   $ 680,000

Direct material           65,000   130,000        195,000

Direct labor                54,000   128,250        182,250

Overhead:

Direct-material related                                   42,900

Direct-labor related                                        40,095

Total overhead                                             $82,995

a. Direct-material related overhead rate:

Overhead = $42,900

Total direct materials costs = $195,000

Overhead rate = $42,900/$195,000 = $0.22

b. Direct-labor related overhead rate:

Overhead = $40,095

Total direct labor costs = $182,250

Overhead rate = $40,095/$182,250 = $0.22

c. Total overhead allocated to product A1:

Direct materials related overhead = $14,300 ($0.22 * $65,000)

Direct labor related overhead =           11,800 ($0.22 * $54,000)

Total overhead allocated =               $26,100

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Answer:

Turnbull’s weighted average cost of capital (WACC) will be higher by 0.64% if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings.

Explanation:

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Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. If its current tax rate is 40%, how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to two decimal places.)

The explanation to the answer is now given as follows:

Step 1: Calculation of WACC when all of its equity capital is raised from retained earnings

This can be calculated using WACC formula as follows:

WACCR = (WS * CE) + (WP * CP) + (WD * CD * (1 - T)) ………………… (1)

Where;

WACCR = Weighted average cost of capital when all of its equity capital is raised from retained earnings = ?

WS = Weight of common equity = 36%, or 0.36

WP = Weight of preferred stock = 6%, or 0.06

WD = Weight of debt = 58%, or 0.58

CE = Cost of equity = 12.4%, or 0.124

CP = Cost of preferred stock = 9.3%, 0.093

CD = Before-tax cost of debt = 8.2%, or 0.082

T = Tax rate = 40%, or 0.40

Substituting the values into equation (1), we have:

WACCR = (0.36 * 0.124) + (0.06 * 0.093) + (0.58 * 0.082 * (1 - 0.40))

WACCR = 0.078756, or 7.8756%

Rounding to 2 decimal places, we have:

WACCR = 7.88%

Step 2: Calculation of WACC if it raises new common equity

This can also be calculated using WACC formula as follows:

WACCE = (WS * CE) + (WP * CP) + (WD * CD * (1 - T)) ………………… (2)

Where;

WACCE = Weighted average cost of capital if it raises new common equity = ?

WS = Weight of common equity = 36%, or 0.36

WP = Weight of preferred stock = 6%, or 0.06

WD = Weight of debt = 58%, or 0.58

CE = Cost of equity = 14.2%, or 0.142 (Note: This is the only thing that has changed compared to what we have in Step 1 above.)

CP = Cost of preferred stock = 9.3%, 0.093

CD = Before-tax cost of debt = 8.2%, or 0.082

T = Tax rate = 40%, or 0.40

Substituting the values into equation (2), we have:

WACCE = (0.36 * 0.142) + (0.06 * 0.093) + (0.58 * 0.082 * (1 - 0.40))

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Rounding to 2 decimal places, we have:

WACCE = 8.52%

Step 3: Caculation of how much higher will Turnbull’s weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings.

This can be calculated as follows:

Percentage by which WACC is higher = WACCE - WACCR

Percentage by which WACC is higher = 8.52% - 7.88%

Percentage by which WACC is higher = 0.64%

Therefore, Turnbull’s weighted average cost of capital (WACC) will be higher by 0.64% if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings.

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Answer:

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t+$0.95=$2.10

t=$2.10-0.95

t=$1.15

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3 years ago
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