Answer and Explanation:
The Preparation of an analysis on a per unit basis is shown below:-
Particulars Sell unfinished Sell finished Increase/Decrease
bookcases bookcases in income
Sale price per
unit $57 $70 $13
Less: variable cost
per unit $37 $43 $6
($37 + $6)
Les: fixed cost per
unit $10 $10 $0
Total cost per
unit $47 $53 $6
Net income per
unit $10 $17 $7
Therefore, Unfinished bookcases are further processed, as net profit per unit increases further by processing by $7
Despite the theoretical elegance of this hypothesis, empirical studies have come to the opposite conclusion. Despite the favorable effect of international diversification of cash flows, bankruptcy risk was only about the same for MNEs as for domestic firms. However, MNEs faced higher costs for each of the following EXCEPT:
A) agency costs.
B) political risk.
C) asymmetric information.
D) In fact, each of these costs were higher for the MNE than for the domestic firm.
Answer:
D) In fact, each of these costs were higher for the MNE than for the domestic firm.
Explanation:
It has been concluded through empirical studies, that Multinational Enterprises, MNEs encounters various factors leading to lower debt ratios and a higher cost of long-term debt, such as greater agency costs, political risk, asymmetric information, and foreign exchange risk,
Hence, given the question above, the right answer is option D "In fact, each of these costs was higher for the MNE than for the domestic firm."
Break-Even Sales Under Present and Proposed Conditions Portmann Company, operating at full capacity, sold 1,000,000 units at a price of $188 per unit during the current year. Its income statement is as follows:
Sales $188,000,000
Cost of goods sold (100,000,000)
Gross profit $88,000,000
Expenses:
Selling expenses $16,000,000
Administrative expenses 12,000,000
Total expenses (28,000,000)
Operating income $60,000,000
The division of costs between variable and fixed is as follows:
Variable Fixed
Cost of goods sold 70% 30%
Selling expenses 75% 25%
Administrative expenses 50% 50%
Management is considering a plant expansion program for the following year that will permit an increase of $11,280,000 in yearly sales. The expansion will increase fixed costs by $5,000,000 but will not affect the relationship between sales and variable costs.
Required:
1. Determine the total variable costs and the total fixed costs for the current year.
2. Determine (a) the unit variable cost and (b) the unit contribution margin for the current year.
3. Compute the break-even sales (units) for the current year.
4. Compute the break-even sales (units) under the proposed program for the following year.
5. Determine the amount of sales (units) that would be necessary under the proposed program to realize the $60,000,000 of operating income that was earned in the current year.
6. Determine the maximum operating income possible with the expanded plant.
7. If the proposal is accepted and sales remain at the current level, what will the operating income or loss be for the following year?
8. Based on the data given, would you recommend accepting the proposal?
A. In favor of the proposal because of the reduction in break-even point.
B. In favor of the proposal because of the possibility of increasing income from operations.
C. In favor of the proposal because of the increase in break-even point.
D. Reject the proposal because if future sales remain at the current level, the income from operations will increase.
E. Reject the proposal because the sales necessary to maintain the current income from operations would be below the current year sales.
Answer:
1. Variable Fixed
Cost of goods sold 70,000,000 30,000,000
Selling Expenses 12,000,000 4,000,000
Administrative Exp. 6,000,000 6,000,000
Total 88,000,000 40,000,000
Note:
Cost of goods sold 70% 30% on 10,000,000 for variable and Fixed respectively
Selling expenses 75% 25% on $16,000,000 for variable and Fixed respectively
Administrative expenses 50% 50% on $12,000,000 for variable and Fixed respectively
2. Unit Variable cost = Total variable cost / Units produced
Total Variable cost 88,000,000
Unit produced 1,000,000
Unit variable cost 88
Unit Contribution margin = Selling Price - Variable cost per unit
Selling Price $188
- Variable cost per unit $88
Unit Contribution margin $100
3. Break even Point (Units) = Fixed cost / Contribution margin per unit
Fixed cost 40,000,000
Contribution margin per Unit 100
Break even Point (Units) 400,000
4. Break even point (units) = Fixed cost / Contribution margin per unit
Fixed cost 40,000,000
Increased Fixed cost 5,000,000
Total New fixed cost 45,000,000
Contribution margin per unit 100
Break even point (units) 450,000
5. Determined sales units = (New fixed cost + Desired Income) / Contribution margin
New Fixed Cost 45,000,000
Desired Income 60,000,000
105,000,000
Contribution margin 100
per unit
Determined sales units 1,050,000
6. Maximum Income from operation = Total New sales - Total New variable cost - Total Fixed cost
Sales 188,000,000
Increased sales 11,280,000
Total New sales 199,289,000
Variable cost 88,000,000
New Variable cost 5,280,000
Total New Variable cost 93,280,000
Total New Fixed cost 45,000,000
Maximum Income from 61,000,000
operation
Number of units = Increase in sales / Price per unit
New variable cost = Number of units * Unit variable cost
Increased sales 11,280,000
Price per unit 188
Number of units 60,000
Unit variable cost x 88.00
New Variable cost 5,280,000
7. Net income = Sales - Variable cost - New fixed cost
Sales 188,000,000
Less: Variable cost 88,000,000
Less: New fixed cost 45,000,000
Net Income 55,000,000
8. Option b. In favour of the proposal because of the possibility of increasing income from operation.
1. The total variable costs are $88,000,000.
Total fixed costs for the current year are $40,000,000.
2.a. The unit variable cost is $88 ($88,000,000/1,000,000)
b. The unit contribution margin is $100 ($188 - $88).
3. The break-even sales (units) for the current year = 400,000 units ($40,000,000/$100).
4. The break-even sales (units) for the proposed program = 450,000 units ($45,000,000/$100).
5. Sales units to realize $60,000,000 of operating income = 1,050,000 units ($45,000,000 + $60,000,000)/$100
6. The maximum operating income with the expanded plant is $61,000,000 ($199,280,000 - $93,280,000 - $45,000,000).
7. Operating income at current sales level = $49,720,000 (188,000,000 - $93,280,000 - $45,000,000).
8. I would recommend the acceptance of the proposal, B. In favor of the proposal because of the possibility of increasing income from operations.
Data and Calculations:
Sales unit at full capacity = 1,000,000 units
Selling price per unit= $188
Sales = $188,000,000
Cost of goods sold = $100,000,000
Variable cost of goods sold = $70,000,000 ($100,000,000 x 70%)
Fixed cost of goods sold = $30,000,000 ($100,000,000 x 30%)
Gross profit = $88,000,000
Expenses:
Selling expenses = $16,000,000
Variable cost of goods sold = $12,000,000 ($16,000,000 x 75%)
Fixed cost of goods sold = $4,000,000 ($16,000,000 x 25%)
Administrative expenses = 12,000,000
Variable cost of goods sold = $6,000,000 ($12,000,000 x 50%)
Fixed cost of goods sold = $6,000,000 ($12,000,000 x 50%)
Variable Fixed
Cost of goods sold 70% 30%
Selling expenses 75% 25%
Administrative expenses 50% 50%
Cost of goods sold $70,000,000 $30,000,000
Selling expenses 12,000,000 4,000,000
Administrative expenses 6,000,000 6,000,000
Total costs $88,000,000 $40,000,000
Selling price per unit = $188
Variable cost per unit 88
Contribution margin $100
Contribution ratio = 53.2% ($100/$188 x 100)
Fixed costs = $45,000,000 ($40,000,000 + $5,000,000)
Sales Revenue = $199,280,000 ($188,000,000 + $11,280,000)
Additional sales units = 60,000 ($11,280,000/$188)
Total sales units = 1,060,000 (1,000,000 + 60,000)
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Guardian Corporation has two major divisions-Healthcare Products and Pharmaceutical Products. It provides the following information for the year Pharmaceutical Division Healthcare Division $150,000 $47.000 $310,000 $1,000,000 $218,400 $5,660,000 13 0% sales ating income age assets Target rate of return 13 0% Calculate the residual income for the Healthcare Division.
a. $47 000
b. $6700
c. $27.500
d. $103,000
Answer:
Residual income =$6,700
Explanation:
Residual income is the excess of the controllable profit over the opportunity cost of capital invested.
It is used to evaluate the financial performance of a division or department.
The a positive residual value indicate a good performance, hence the higher the residual value the better
It is computed as follows:
Residual income = Controllable profit - (cost of capital× operating assets)
Controllable profit = 47,000
Interest on capital = × 13% × 310,000 = 40300
Residual income = 47,000 - 40,300 = 6700
Residual income =$6,700
What happens to consumption and investment spending when the Federal Reserve decreases the money supply
Answer: Consumption and investment spending decrease or falls.
Explanation:
When the Federal Reserve decreases the money supply, this will lead to a fall in the consumption and investment spending. This is a contractionary policy by the government which is typically used to curb inflation.
Since there's reduction in money supply, there'll be less money in circulation and hence, decrease in consumption and investment expenditure.
A modified DCF analysis is best for evaluating and selecting the optimal strategic alternative when a company has ___ goal(s) and ___ measure(s).
Answer: single; quantitative
Explanation:
The discounted cash flow analysis is a method that is used to determine the value of a project, security, or assets by using time value of money.
The discounted cash flow analysis is used in real estate, investment finance, patent valuation etc. A modified DCF analysis is best for evaluating and selecting the optimal strategic alternative when a company has single goal(s) and quantitative measures.
Answer:
Multiple; quantitative
Explanation:
A modified DCF analysis is best for evaluating and selecting the optimal strategic alternative when a company has ___ goal(s) and ___ measure(s).
The direct labor budget of Yuvwell Corporation for the upcoming fiscal year contains the following details concerning budgeted direct labor-hours:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Budgeted direct labor-hours 11,000 9,700 10,000 10,800
The company uses direct labor-hours as its overhead allocation base. The variable portion of its predetermined manufacturing overhead rate is $5.75 per direct labor-hour and its total fixed manufacturing overhead is $78,000 per quarter. The only noncash item included in fixed manufacturing overhead is depreciation, which is $19,500 per quarter.
Required:
a. Prepare the company’s manufacturing overhead budget for the upcoming fiscal year.
b. Compute the company’s predetermined overhead rate (including both variable and fixed manufacturing overhead) for the upcoming fiscal year.
Answer:
Manufacturing Overhead Budget
Quarter 1st 2nd 3rd 4th
Variable Overheads $63,250 $55,775 $57,500 $62,100
Fixed Overheads $78,000 $78,000 $78,000 $78,000
Total Overheads $141,250 $133,775 $135,500 $140,100
Explanation:
When Preparing the Manufacturing Overhead Budget Note the following :
The Manufacturing Overheads Include Both Fixed and Variable Overheads.Be careful to absorb the Variable overheads cost at the direct labor-hour.Fixed Overheads can Include both cash and non-cash items.Which of the following is true about the Fed?
A. it cannot directly affect the economy but it can influence institutions that can affect the economy
B. it has no real power since in the long run, money is neutral
C. it has more power to affect the economy than any other institution
D. it has a lot of power to affect the inflation rate, but not the unemployment rate
Answer:
C. it has more power to affect the economy than any other institution
Explanation:
The FED manages the monetary policy affecting the economy's money supply. This in turn affects interest rates directly. It also has an enormous indirect influence on economic growth (it can stimulate it or cool it), currency value, value of stock markets, unemployment (directly related to economic growth), etc.
The FED is probably the institution that influences the economy the most.
You are planning to save for retirement over the next 25 years. To do this, you will invest $880 per month in a stock account and $480 per month in a bond account. The return of the stock account is expected to be an APR of 10.8 percent, and the bond account will earn an APR of 6.8 percent. When you retire, you will combine your money into an account with an APR of 7.8 percent. All interest rates are compounded monthly. How much can you withdraw each month from your account assuming a withdrawal period of 20 years
Answer:
$14,143.86 can be withdrawn each month from the account for 20 years.
Explanation:
To determine this, the first step is to use the formula for calculating the future value (FV) of ordinary annuity to calculate the FV of both stock and bond as follows:
Calculation of Future Value of Stock
FVs = M × {[(1 + r)^n - 1] ÷ r} ................................. (1)
Where,
FVs = Future value of the amount invested in stock after 25 years =?
M = Monthly investment = $880
r = Monthly interest rate = 10.8% ÷ 12 = 0.9%, or 0.009
n = number of months = 25 years × 12 months = 300
Substituting the values into equation (1), we have:
FVs = $880 × {[(1 + 0.009)^360 - 1] ÷ 0.009}
FVs = $880 × 1,522.3445923122
FVs = $1,339,663.24
Calculation of Future Value of Bond
FVd = M × {[(1 + r)^n - 1] ÷ r} ................................. (1)
Where,
FVd = Future value of the amount invested in bond after 25 years =?
M = Monthly investment = $480
r = Monthly interest rate = 6.8% ÷ 12 = 0.566666666666667%, or 0.00566666666666667
n = number of months = 25 years × 12 months = 300
Substituting the values into equation (1), we have:
FVd = $480 × {[(1 + 0.00566666666666667)^300 - 1] ÷ 0.00566666666666667}
FVd = $480 × 784.895879465925
FVd = $376,750.02
Calculation of the amount that can be withdrawn monthly for 20 years
To calculate this, the formula for calculating the present value of an ordinary annuity is used as follows:
PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r] …………………………………. (3)
Where;
PV = Combined present values of stock and bond investments after retirement = FVs + FVb = $1,339,663.24 + $376,750.02 = $1,716,413.26
P = Monthly withdrawal = ?
r = Monthly interest rate = 7.8% ÷ 12 = 0.65%, or 0.0065
n = number of months = 20 years * 12 months = 240
Substitute the values into equation (3) and solve for P to have:
PV = P × [{1 - [1 ÷ (1+r)]^n} ÷ r]
$1,716,413.26 = P × [{1 - [1 ÷ (1 + 0.0065)]^240} ÷ 0.0065]
$1,716,413.26 = P × 121.353915567094
P = $1,716,413.26 / 121.353915567094
P = $14,143.86
Therefore, $14,143.86 can be withdrawn each month from the account for 20 years.
A corporation has 12,000 shares of $20 par stock outstanding that has a current market value of $150. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $50.
a. True
b. False
Answer:
False
Explanation:
In a 4-for-1 stock split, for every 1 share held by shareholders, it is multiplied to 4.
if outstanding shares is 12,000, after the split the shares outstanding pictures becomes 12,000 x 4 = 48,000
Market value of shares outstanding = $150 / 4 = $37.50
An asset has an average return of 10.31 percent and a standard deviation of 22.47 percent. What is the most you should expect to lose in any given year with a probability of 16 percent
Answer:
-34.63
Explanation:
Confidence interval = 1 - probability * 2
= 1 - 0.16 * 2
= 0.71
= 71%
As per 95% rule, range = mean + / -2 * standard deviation.
10.31 +/- 2 * 22.47
10.31 - 2 * 22.47 to 10.31 + 2 * 22.47
10.31 - 44.94 to 10.31 + 44.94
-34.63 to 55.25
Conclusion: -34.63 is the lower bound hence it is the maximum one can expect to lose in any given year.
When the most you should anticipate losing in any given year with a probability of 16 percent is -34.63
Calculation of Probability
Then Confidence interval is = 1 - probability * 2
After that = 1 - 0.16 * 2
Now, = 0.71
= 71%
As per 95% rule, range is = mean + / -2 * standard deviation.
Then, 10.31 +/- 2 * 22.47
After that, 10.31 - 2 * 22.47 to 10.31 + 2 * 22.47
Then, 10.31 - 44.94 to 10.31 + 44.94
Therefore, -34.63 to 55.25
Now, The Conclusion: -34.63 is the lower bound Thus, it is the maximum one can expect to lose in any given year.
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Abbott Company uses the allowance method of accounting for uncollectible accounts. Abbott estimates that 3% of credit sales will be uncollectible. On January 1, Allowance for Doubtful Accounts had a credit balance of $3,700. During the year, Abbott wrote off accounts receivable totaling $2,500 and made credit sales of $115,000. There were no sales returns during the year. After the adjusting entry, the December 31 balance in Bad Debt Expense will be
Answer:Bad debts expense = $3,450
Explanation:Bad debt expense is the expense of account receivable that a business understands will not be paid due to the inability of a customer to pay its outstanding debt. Bad debt can be calculated using the direct write off method and the allowance method.
Here Abbot company uses the allowance method by taking into consideration a reserve which is an estimated percentage of the sales known as an adjusted risk for its customers who may not pay.
Credit sales revenue 115, 000
Estimated Bad debt 3%
Bad debts expense 3% x 115,000 = $3,450
Ten years ago you put $150000.00 into an interest earning account. Today it's worth $275000. What is the effective annual interest earned on the account
Answer:
the effective annual interest earned on the account is 6.25%.
Explanation:
The effective annual interest earned on the account can be calculated as follows :
PV = - $150,000
N = 10
PMT = $0
P/yr = 1
FV = $275,000
R = ?
Using a Financial calculator, the effective annual interest, R, earned on the account will be : 6.2488 or 6.25%.
Messing Company has their own credit card and makes a credit sale on February 1 to one of its customers for $5,000. Prepare the February 1 journal entry for Messing Company by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.
Answer:
February 1
DR Accounts Receivable.......................................$5,000
CR Sales........................................................................................$5,000
(To record sales on credit)
The credit card was that of Messing company itself.
Drew and Tammy decide to start a new cake-decorating business. They each contribute $10,000 to get the business off the ground. This money is considered
Answer: a down payment or deposit
Explanation:
Drew and Tammy decide to start a new cake-decorating business. They each contribute $10,000 to get the business off the ground. This money is considered as equity capital.
What do you mean by Business?The exchange, acquisition, sale, or creation of goods and services with the aim of making money and meeting client demands constitutes business. Businesses can be for-profit or nonprofit entities that work to further a social cause or make a profit, respectively.
Equity in the context of finance refers to ownership of assets with potential obligations such as debts. For accounting reasons, equity is calculated by deducting liabilities from the value of the assets. The difference of $14,000, for instance, is equity if a person owns a car worth $24,000 and owes $10,000 on the loan used to purchase the vehicle.
A single asset, like a car or house, or an entire company may be covered by equity. A company that needs to launch or grow its operations can sell equity to raise money that doesn't need to be repaid on a predetermined timeline.
Therefore, The money will be considered as Equity capital.
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What is the latest actual share count reported in the 2013 Colgate-Palmolive 10-K? Please provide your answer without comma separator or decimal.
Answer:
The latest actual share count reported in the 2013 Colgate-Palmolive 10-K:
1465706360 shares
Explanation:
Colgate-Palmolive actual share count as reported in the 2013 10-K is One Billion, Four Hundred and Sixty-Five Million, Seven Hundred and Six Thousand, Three Hundred and Sixty (1,465,706,360) shares. This figure represents the outstanding shares of the company, which are issued and fully paid, out of the 2 billion authorized shares. The outstanding shares multiplied with the market share price gives the market capitalization of Colgate-Palmolive.
Income statement.
Use the data from the following financial statement in the popup window, Complete the partial income statement if the company paid interest expense of $18,100 for 2014 and had an overall tax rate of 40% for 2014. Complete the income statement below:
(Round to the nearest dollar.)
Income Statement Year Ending 2014
Sales revenue $360,000
Cost of goods sold $150,000
Fixed costs $42,900
Selling, general, and administrative expenses $27,200
Depreciation $45,900 EBIT $
Interest expense $ 18100
Taxable income $
Taxes $
Net income $
Find the accumulated depreciation for 2014 first.
The accumulated depreciation for 2014 is:_____(Round to the nearest dollar.)
Answer:
Income Statement Year Ending 2014
Sales revenue $360,000
Cost of goods sold $150,000
Gross profit $210,000
Fixed costs $42,900
Selling, general, and
administrative expenses $27,200
Depreciation $45,900
EBIT $94,000
Interest expense $18,100
Taxable income $ 75,900
Taxes $ 30,360
Net income $ 45,540
Find the accumulated depreciation for 2014 first.
The accumulated depreciation for 2014 is:_$45,900____(Round to the nearest dollar.)
Explanation:
A company's income statement is one of the three financial statements prepared by the entity at the end of its fiscal period. The statement compares the company's revenue with the expenses. After deducting the total expenses from the total revenue, the net income or loss is obtained. But before arriving at the net income or loss, there are other profit points that are usually calculated. The first is the gross profit, which is the difference between the sales revenue and the cost of goods sold. It shows the ability of the management to generate enough revenue to cover the cost of goods sold and make a profit from its trading or primary activities.
The next profit point is the Earnings before Interests and Taxes (EBIT). This is an important index for checking the financial performance of a company. The next is the Taxable Income on which the tax rate is determined and paid to government as Company Income Tax. After deducting the tax expense from the pre-tax income, the final profit point is the After-Tax Income or the Net Income. This determines the dividends policy and the share of retained earnings of the entity.
According to McClelland, a high need for ____ is associated with successful attainment of top levels in the organizational hierarchy.
a. power
b. achievement
c. affiliation
d. success
e. expertise
Answer:
power
Explanation:
Based on McClelland's Organizational Hierarchy, the top level is associated with a high need for power. Individuals pursuing this level need to enjoy status recognition, winning arguments, competition, and influencing others since their main motivation or need is to amass as much power as possible, and for this to happen and for them to become powerful/winner someone else must lose.
Schwartzkopf Co. purchased for $2,088,000 property that included both land and a building to be used in operations. The seller's book value was $294,000 for the land and $986,000 for the building. By appraisal, the fair value was estimated to be $826,355 for the land and $2,023,145 for the building. At what amount should Schwartzkopf report the land and the building at the end of the year?
Answer:
Cost allocated to land=$605,520
Cost allocated to building=$1,482,480
Explanation:
Calculation for the amount that Schwartzkopf should report the land and the building at the end of the year
A. Calculation for Cost allocated to land
Using this formula
Cost allocated to land=Fair value of land/
Fair value of building and land×Cost
Let plug in the formula
Cost allocated to land=$826,355/($2,023,145+$826,355)×$2,088,000
Cost allocated to land=$826,355/$2,849,500×$2,088,000
Cost allocated to land=0.29×$2,088,000
Cost allocated to land=$605,520
Therefore the Cost allocated to land will be $605,520
B. Calculation for Cost allocated to building
Using this formula
Cost allocated to building=Fair value of land/
Fair value of building and land×Cost
Let plug in the formula
Cost allocated to building=$2,023,145/$2,023,145+$826,355)×$2,088,000
Cost allocated to building=$2,023,145/$2,849,500×$2,088,000
Cost allocated to building=0.71×$2,088,000
Cost allocated to building=$1,482,480
Therefore Cost allocated to building will be $1,482,480
Pretzelmania, Inc., issues 6%, 10-year bonds with a face amount of $63,000 for $58,523 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid semiannually on June 30 and December 31.
Record the bond issue and first interest payment on June 30, 2018.
Answer:
Please refer to the below for Journal entries
Explanation:
The journal entries are seen below
1. Cash A/c Dr $58,523
Discount on bond payable A/c Cr $4,477
To bonds payable A/c Cr $63,000
(Being the issuance of bond that is recorded)
2. Interest expense A/c Dr $2,048
To discount payable A/c Cr $158
To cash A/c Cr $1,890
(Being the first interest payment that is recorded)
Note:
Interest expense
= $58,523 × 7% × 6 months ÷ 12
= $2,048
Cash
= $63,000 × 6% × 6 months ÷ 12
= $1,890
At the end of the fiscal year, variances from standard costs are usually transferred to the Group of answer choices factory overhead account direct labor account direct materials account cost of goods sold account
Answer: Cost of goods sold account
Explanation:
When a company is operating a Standard Cost system, all their inventory accounts will be recorded at their standard costs.
The Variances that exist between the Standard and Actual costs will be recorded in the variance accounts as well as the manufacturing overhead account.
At the end of the fiscal year, the balances on these accounts are sent to the Cost of Goods sold account to reflect true cost.
An asset has an average return of 11.57 percent and a standard deviation of 24.54 percent. What is the most you should expect to lose in any given year with a probability of 2.5 percent?
Answer:
-37.51
Explanation:
Confidence interval = 1 - Probability * 2
= 1 - 0.025*2
= 0.95
= 95%
As per 95% rule , range = mean +/- 2 * Standard deviation
= 11.57 +/- 2 * 24.54
= 11.57 - 2 * 24.54 to 11.57 + 2 * 24.54
= 11.57 - 49.08 to 11.57 + 49.08
= -37.51 to 60.65
Conclusion: -37.51 is the lower bound hence it is the max one can expect to lose in any given year.
Problem 11-5 Sensitivity Analysis and Break-Even [LO1, 3] We are evaluating a project that costs $560,400, has a six-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 80,000 units per year. Price per unit is $38, variable cost per unit is $24, and fixed costs are $680,000 per year. The tax rate is 22 percent, and we require a return of 10 percent on this project. a-1. Calculate the accounting break-even point. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) a-2. What is the degree of operating leverage at the accounting break-even point
Answer:
a-1. $1,845,714.29
a-2 8.2805
Explanation:
a-1 Calculate the accounting break even point.
At break even point, the net income is 0.
Given the data below as extracted from the information above;
Quantity Q = 80,000 units
Price per unit P = $38
Unit variable cost VC = $24
Fixed costs FC = $680,000
Tax rate = 22%
• Break even point
= Fixed costs / P - VC
= $680,000 / ($38 - $24)
= $680,000 / $14
= 48,571.43
Therefore, accounting break even
= Q × P
= 48,571.43 × $38
= $1,845,714.29
(a-2) What is the degree of operating leverage at the accounting break even point.
Given that;
Fixed costs = $680,00
Asset investment = $560,400
Project life span = 6 years
Depreciation = Asset investment / Project life span
= $560,00 / 6
= $93,400
Please note that at accounting level, the operating cash flow is equal to depreciation,
Operating cash flow = Depreciation = $93,400
Therefore, the degree of operating leverage is;
= 1 + Fixed costs / Operating cash flow
= 1 + $680,000 / $93,400
= 8.2805
Suppose the Federal Reserve purchases $1,000,000 worth of foreign assets.
a. if the Federal Reserve purchases the foreign assets with 51,000,000 in currency, show the effect of this open market operation, using T-accounts. What happens to the monetary base?
b. if the Federal Reserve purchases the foreign assets by selling 51,000,000 in T-bills, show the effect of this open market operation, using T-accounts. What happens to the monetary base?
Answer:
A. Federal Reserve
Assets Liabilities
Foreign Assets $1,000,000 Currency in circulation $51,000,000
The federal liabilities increase by $51,000,000 in currency because it uses that money to purchase foreign assets which increase the foreign assets category by an equivalent amount. The monetary base is defined as the sum of currency circulating in the public and commercial banks reserve with the central bank
Since, the currency in circulation has increased. Thus, the monetary base will increase by $51,000,000
B. Federal Reserve
Assets Liabilities
Securities T-bill - $51,000,000
Foreign Assets $1,000,000
The federal is basically swapping T-bills with foreign assets. It did not use currency to make this purchase and the composition of assets changes, but the total does not.
Thus, the monetary base does not change
Problem 16-12 Calculating WACC [LO1] Blitz Industries has a debt-equity ratio of 1.5. Its WACC is 7.7 percent, and its cost of debt is 5.4 percent. The corporate tax rate is 25 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-1. What would the cost of equity be if the debt-equity ratio were 2? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. What would the cost of equity be if the debt-equity ratio were 1.0? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c-3. What would the cost of equity be if the debt-equity ratio were zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
a) 13.18%
b) 9.06%
c-1) 14.55%
c.2) 11.805%
c.3) 9.06%
Explanation:
debt = 60%, cost of debt = 5.4% x 0.75 = 4.05%
equity = 40%, Re = ?
WACC = 7.7%
7.7% = (40% x Re) + (60% x 4.05%)
7.7% = (40% x Re) + 2.43%
(40% x Re) = 5.27%
Re = 5.27% / 40% = 13.175 = 13.18%
13.18% = ReU + (ReU - 0.054) x 1.5 x (1 - 25%)
13.18% = ReU + (ReU - 0.054) x 1.125
0.1318 = ReU + 1.125Reu - 0.06075
0.19255 = 2.125ReU
ReU = 0.19255 / 2.125 = 9.06%
ReL = 9.06% + (9.06% - 5.4%) x 2 x 0.75
ReL = 14.55%
ReL = 9.06% + (9.06% - 5.4%) x 1 x 0.75
ReL = 11.805%
Entity A supplies planed timber, paint, varnish, springs, upholstery, and cushioning to Entity B, which produces a ready to use furniture. Entity C is the marketing department of Entity B. In this context, ______.
Answer:
A is an upstream supply chain member while C is the downstream chain member
Explanation:
There are two portions of the supply i.e downstream and upstream. In the upstream it reflects the suppliers of the organization and its process for managing the relation
While on the other hand the downstream reflects the process for distribution and delivery of products to the customers T
Therefore in the given case, Entity A is upstream while the Entity C is downstream
Nichols, Inc. has 1,000 shares of 4%, $100 par value, cumulative preferred stock and 75,000 shares of $1 par value common stock outstanding at December 31 of the current year and has declared a dividend for the year. What is the annual dividend that will be paid to the preferred stockholders
Answer: $20,000
Explanation:
The dividends due to preferred stock are fixed and quoted on the preference shares.
The above shares are to get 4% of their par value in dividends.
= (4% * 100) * 5,000 shares
= $20,000
A yearly dividend is a the price paid per share of funds by the firm to its stockholders.
The yearly dividend that will be paid to the elected stockholders will be $20,000
It can be determined by using the formula:[tex]= \text{Monthly Shares} \times \text{Number of payments per year}[/tex]
The above shares are to get 4% of their par price in interests:[tex]= (4\% \times 100) \times 5,000 \; \text{shares}[/tex]
= $20,000
Therefore, $20,000 will be paid to the stockholders.
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A cloth manufacturing firm is deciding whether or not to invest in new machinery. The machinery costs $45,000 and is expected to increase cash flows in the first year by $25,000 and in the second year by $30,000. The firm’s current fixed costs are $9,000 and current marginal cost are $15. The firm currently charges $18 per unit.
Required:
If the interest rate is 5% then. what is the present value of the cash flows?
Answer:
$51,020.40
Explanation:
We use the formula PV = FV * (1 + r)^n for finding the present value
There are two cash flows, one that occur in year 1 at $25,000 and second that occur in year 2 at $30,000.
Find the PV of this cash flow at r = 5% and n = 1 and 2 =
25000(1+5%)^-1 + 30000(1 + 5%)^-2
25,000(1+0.05)^-1 + 30,000(1 + 0.05)^-2
25,000(1.05^)-1 + 30,000(1.05)^-2
25,000(0.952381) + 30,000(0.907029)
23,809.525 + 27,210.87
=$51,020.40
Thus, the present value of the cash flows is $51,020.40
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year Unit Sales1 76,0002 89,0003 108,7504 101,5005 68,800Production of the implants will require $2,250,000 in net working capital to start and additional net working capital investments each year equal to 20 percent of the projected sales increase for the following year. Total fixed costs are $4,700,000 per year, variable production costs are $270 per unit, and the units are priced at $420 each. The equipment needed to begin production has an installed cost of $19,500,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 25 percent of its acquisition cost. The tax rate is 25 percent the required return is 15 percent. MACRS schedulea. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)b. What is the IRR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
Answer:
NPV = $3,013,537.02
IRR = 20.15%
Explanation:
initial investment $19,500,000
sales revenue per year:
year 1 = 76,000 x $420 = $31,920,000
year 2 = 89,000 x $420 = $37,380,000
year 3 = 108,750 x $420 = $45,675,000
year 4 = 101,500 x $420 = $42,630,000
year 5 = 68,800 x $420 = $28,896,000
change in net working capital:
year 0 = $2,250,000
year 1 = ($37,380,000 - $31,920,000) x 0.2 = $1,092,000
year 2 = ($45,675,000 - $37,380,000) x 0.2 = $1,659,000
year 3 = ($42,630,000 - $45,675,000) x 0.2 = -$609,000
year 4 = ($28,896,000 - $42,630,000) x 0.2 = -$2,746,800
year 5 = -$1,646,000
fixed costs = $4,700,000
contribution margin per unit = $420 - $270 = $150 per unit
resale value at the end of year 5 = $3,900,000
MACRS depreciation 7 year property:
year % depreciation expense
1 14.29% $2,786,550
2 24.49% $4,775,550
3 17.49% $3,410,550
4 12.29% $2,396,550
5 6.44%* $1,255,800*
*net of resale value
net cash flow year 0 = -$19,500,000 - $2,250,000 = -$21,750,000
net cash flow year 1 = [($11,400,000 - $4,700,000 - $2,786,550) x 0.75] + $2,786,550 - $1,092,000 = $4,629,637.50
net cash flow year 2 = [($13,350,000 - $4,700,000 - $4,775,550) x 0.75] + $4,775,550 - $1,659,000 = $6,022,387.50
net cash flow year 3 = [($16,312,500 - $4,700,000 - $3,410,550) x 0.75] + $3,410,550 + $609,000 = $10,171,012.50
net cash flow year 4 = [($15,225,000 - $4,700,000 - $2,396,550) x 0.75] + $2,396,550 + $2,746,800 = $11,239,687.50
net cash flow year 5 = [($10,320,000 - $4,700,000 - $1,255,800) x 0.75] + $1,255,800 + $1,646,000 = $6,174,950
NPV = $3,013,537.02
IRR = 20.15%
In this exercise we will use our knowledge of finance to calculate interest, so we find that:
[tex]NPV = \$3,013,537.02[/tex] [tex]IRR = 20.15\%[/tex]
So knowing that from the initial investment we will obtain the following values per year:
[tex]year 1 = 76,000 * \$420 = \$31,920,000[/tex]
[tex]year 2 = 89,000 * \$420 = \$37,380,000[/tex]
[tex]year 3 = 108,750* \$420 = \$45,675,000[/tex]
[tex]year 4 = 101,500 * \$420 = \$42,630,000[/tex]
[tex]year 5 = 68,800 * \$420 = \$28,896,000[/tex]
So knowing that from the net working capital we will obtain the following values per year:
[tex]year 0 = \$2,250,000\\year 1 = (\$37,380,000 - \$31,920,000) * 0.2 = \$1,092,000\\year 2 = (\$45,675,000 - \$37,380,000) * 0.2 = \$1,659,000\\year 3 = (\$42,630,000 - \$45,675,000) * 0.2 = -\$609,000\\year 4 = (\$28,896,000 - \$42,630,000) * 0.2 = -\$2,746,800\\year 5 = -\$1,646,000[/tex]
Then from the values previously informed we can calculate the cash flow, as:
[tex]year 0 = -\$19,500,000 - \$2,250,000 = -\$21,750,000\\year 1 = [(\$11,400,000 - \$4,700,000 - \$2,786,550) * 0.75] + \$2,786,550 - \$1,092,000 = \$4,629,637.50\\year 2 =\$6,022,387.50\\year 3 = \$10,171,012.50\\year 4 = \$11,239[/tex]
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Net sales$688,500 $450,000 Cost of goods sold 337,364 133,200 Determine the 2016 and 2017 trend percents for net sales using 2016 as the base year.
Answer:
Trend- % change in sales = 34.64%
Explanation:
Trend analysis entails determining the performance of a business over time by comparing its performance data from one period to another. The aim of trend analysis is to identify the behavior of a set of ratios over a period of time by comparing them across different years.
To determine the trend for a particular data, we use the formula below
% Change in variable =
(Current year figure - Previous year figure)/Previous year figure × 100
DATA
Current year figure for sales (2017) - 450,000
Previous year figure for sale (2016) - 688,500
% change in sales = (450,000 -688,500)/688,500 × 100 = 34.64%
% change in sales = 34.64%
This implies that the company made sales in 2017 which is 34.64% less than that made in 2016
Three months ago, you purchased a stock for $54.14. The stock is currently priced at $57.36. What is the EAR on your investment?
Answer:
The EAR on the investment is 23.79%
Explanation:
Here, we are concerned with calculating the EAR on the stock investment.
Firstly, we start with calculating the return on shares
Mathematically, that is; P1 - P0
From the question P1 = $57.36 while P0 = $54.14
So Return on shares = $57.36-$54.14 = $3.22
We proceed with calculating the Return on shares in percentage
Mathematically;
Return on shares in % = Return on shares/P0 * 100
= 3.22/54.14 * 100 = 5.95%
Lastly we calculate the effective annual interest;
The effective annual interest = 5.95%/3 * 12 = 23.79%
The EAR on the investment is 23.79%
Calculation of EAR:Since Three months ago, you purchased a stock for $54.14. The stock is currently priced at $57.36.
So, the difference of the price is
= $57.36-$54.14
= $3.22
Now return on shares should be
= 3.22/54.14 * 100
= 5.95%
Now EAR is
= 5.95%/3 * 12
= 23.79%
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