Business Applications  Operating leverage: Description of business for Caterpillar, Inc.

With 2014 sales and revenues of $55.184 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments—Resource Industries, Construction Industries, and Energy & Transportation (formerly Power Systems)—and also provides financing and related services through its Financial Products segment. Caterpillar is also a leading U.S. exporter.

Description of business for the Kroger Company from its Form 10-K:

The Kroger Co. was founded in 1883 and incorporated in 1902. As of January 31, 2015, we are one of the largest retailers in the nation based on annual sales. . . .

As of January 31, 2015, Kroger operated, either directly or through its subsidiaries, 2,625 supermarkets and multi-department stores, 1,330 of which had fuel centers. Approximately 48% of these supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. Our current strategy emphasizes self-development and ownership of store real estate. Our stores operate under several banners that have strong local ties and brand recognition. Supermarkets are generally operated under one of the following formats: combination food and drug stores (“combo stores”); multi-department stores; marketplace stores; or price impact warehouses.

Required

1. Determine which company appears to have the higher operating leverage.
2. Write a paragraph or two explaining why the company you identified in Requirement a might be expected to have the higher operating leverage.
3. If revenues for both companies increased by 5 percent, which company do you think would likely experience the greater percentage increase in operating earnings? Explain your answer

What are the characteristics of limited liability company? What protection does it offer the partners of the company which a general partnership doesn’t?

Suppose, a company considers two alternative expansion projects. The first project requires initial outlay of -$100,000; and the second one costs less: - $7,000. Subsequent incremental cash flows from the more expensive project will be $27,000 for 5 years. The cash flows from the second alternative will be lower: $4,000 for 3 years. Which expansion project would you recommend the company undertakes and why? WACC is 7%.

Oxford Company has two divisions. Thames Division, which has an investment base of $81,000,000, produces and sells 940,000 units of a product at a market price of $148 per unit. Its variable costs total $40 per unit. The division also charges each unit $72 of fixed costs based on a capacity of 1,000,000 units.

Lakes Division wants to purchase 230,000 units from Thames. However, it is willing to pay only $80 per unit because it has an opportunity to accept a special order at a reduced price. The order is economically justifiable only if Lakes can acquire Thames’ output at a reduced price.

Division managers are evaluated using residual income using a 12 percent cost of capital

Required:

a. What is the residual income for Thames without the transfer to Lakes?

b. What is Thames’s residual income if it transfers 230,000 units to Lakes at $80 each?

c. What is the minimum transfer price for the 230,000-unit order that Thames would accept if it were willing to maintain the same residual income with the transfer as it would accept by selling its 940,000 units to the outside market? (Round your answer to 2 decimal places.)

Skane Shipping Ltd. (SSL) operates a fleet of container ships in international trade between Sweden and Singapore. All of the shipping income (that is, that related to SSL’s ships) is deemed to be earned in Sweden. SSL also owns a dock facility in Singapore that services SSL’s fleet. Income from the dock facility is deemed to be earned in Singapore. SSL’s income deemed attributable to Sweden is taxed at a 65 percent rate. Its income attributable to Singapore is taxed at a 20 percent rate. Last year, the dock facility had operating revenues of $14 million, excluding services performed for SSL’s ships. SSL’s shipping revenues for last year were $80 million.

Operating costs of the dock facility totaled $15 million last year and operating costs for the shipping operation, before deduction of dock facility costs, totaled $51 million. No similar dock facilities in Singapore are available to SSL.

However, a facility in Malaysia would have charged SSL an estimated $9 million for the services that SSL’s Singapore dock provided to its ships. SSL management noted that had the services been provided in Sweden, the costs for the year would have totaled $23 million. SSL argued to the Swedish tax officials that the appropriate transfer price is the price that would have been charged in Sweden. Swedish tax officials determined that the Malaysian price is the appropriate one.

Required:

1. Calculate the revenues, costs, income taxes and total taxes for both SSL and the Dock Facility using the Malaysian basis. (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.)

2. Calculate the revenues, costs, income taxes and total taxes for both SSL and the Dock Facility using the Swedish basis. (Do not round intermediate calculations. Enter your answers in millions rounded to 2 decimal places.)

3. What is the difference in tax costs to SSL between the alternate transfer prices for dock services, that is, its price in Sweden versus that in Malaysia? (Do not round intermediate calculations.Enter your answer in millions rounded to 2 decimal places.)

What is Benford's Law and how can it be applied to detect financial statement fraud?

P15-7 (LO3) (Cash Dividend Entries) The books of Conchita Corporation carried the following account balances as of December 31, 2017. Cash $ 195,000 Preferred Stock (6% cumulative, nonparticipating, $50 par) 300,000 Common Stock (no-par value, 300,000 shares issued) 1,500,000 Paid-in Capital in Excess of Par—Preferred Stock 150,000 Treasury Stock (common 2,800 shares at cost) 33,600 Retained Earnings 105,000 The company decided not to pay any dividends in 2017. The board of directors, at their annual meeting on December 21, 2018, declared the following: “The current year dividends shall be 6% on the preferred and $.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock.” At the date of declaration, the preferred is selling at $80 per share, and the common at $12 per share. Net income for 2018 is estimated at $77,000. Instructions (a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously. (b) Could Conchita Corporation give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash?

Question 1:

Black Falcon Pty Ltd makes premium range dog biscuits used to provide high level nutrition for dogs, which it introduced to the market in 2016 in the highly competitive premium dog food market. Black Falcon realises that it would be competing against well-known brands that have held market share based on their reputation for many years.  From the feedback received at trade fairs during 2017, Black Falcon has been generally regarded as an equal standard of quality as the other premium providers.  However, the product was initially provided at a low introductory price to encourage customers and retailers to purchase Black Falcon’s dog food. Black Falcon is now seeking to increase the price each year as the firm’s reputation grows.

Black Falcon produces very few defective products and insists upon the highest quality materials from its suppliers. Conversion Costs in each year depend on production capacity defined in terms of units that can be produced, not the actual units produced. Selling and customer-service costs depend on the number of customers that Black Falcon can support, not the actual number of customers it serves. See Table 1 below for information.

REQUIRED:

1. Identify the business strategy adopted by Black Falcon PtyLtdand explain briefly how you reached your decision on the type of business strategy adopted.   
2. Calculate the operating profit for the two accounting years.
3. Prepare the variances for the change in profit between the two years due to the growth strategy.
4. Prepare the variances to reconcile the change in profit between for the two accounting years due to the productivity strategy.
5. Discuss the change in Black Falcon’s operating profitfor the two accounting years.

DOES CVP ANALYSIS APPLY TO SERVICE INDUSTRIES?

Skysong Company sells 10% bonds having a maturity value of $2,550,000 for $2,366,166. The bonds are dated January 1, 2017, and mature January 1, 2022. Interest is payable annually on January 1.

Determine the effective-interest rate. (Round answer to 0 decimal places, e.g. 18%.)

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answer to 0 decimal places, e.g. 38,548.)

Compare the two scenarios for acquiring a machine for a project for 22 years expected operations, at a company with an internal rate of return of i = 16%. Using PW, find which scenario is better. Scenario 1. Buy an initial small machine at $13,000, it cost $2,400/year to run for the first 12 years, buy a second larger machine at $26,000 and run it for 10 years at a cost of $4,000/year. There is no salvage value at the end of service for either machine. Scenario 2. Buy a large machine for $36,000 and run it for 22 years at a cost of $1,000/year. At the end of the 22 years, the machine is assumed to have a salvage value of $5,000.

Given the following pre-closing trial balance, prepare the Balance Sheet

Hamilton Manufacturing Company Direct materials 175,000 Materials handling 35,000 Grinding 300,000 Polishing 100,000 Product Modification 500,000 Providing Power 225,000 System Calibration 400,000 Machine Hours 37,500 units Direct Labor Hours 15,000 Engineering hours 1,200 Batches 200 Materials handling based on direct material cost Grinding based on machine hours Polishing based on machine hours Product Modification based on engineering hours Providing Power based on direct labor hours System Calibration based on batches Job 231 Completed 1,675 units Direct Materials 18,500 Direct labor hours 350 Machine hours 755 Engineering hours 245 Batches 35 Using the ABC Method find the activity overhead rates. Once you have those activity rates find the total cost of Job 231 including materials and the cost per unit