Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information: Present Truck New Truck Purchase cost new $ 23,000 $ 28,000 Remaining book value $ 10,000 - Overhaul needed now $ 9,000 - Annual cash operating costs $ 11,500 $ 8,000 Salvage value-now $ 5,000 - Salvage value-five years from now $ 4,000 $ 4,000 If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above. The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 9% discount rate. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What is the net present value of the “keep the old truck” alternative? 2. What is the net present value of the “purchase the new truck” alternative? 3. Should Bilboa Freightlines keep the old truck or purchase the new one?

In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After careful study, Mr. Duncan determined the following:

1. A building in which a car wash could be installed is available under a five-year lease at a cost of $5,600 per month.

2. Purchase and installation costs of equipment would total $320,000. In five years the equipment could be sold for about 6% of its original cost.

3. An investment of an additional $8,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere.

4. Both a wash and a vacuum service would be offered. Each customer would pay $1.30 for a wash and $.60 for access to a vacuum cleaner.

5. The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 cents per use of the vacuum for electricity.

6. In addition to rent, monthly costs of operation would be: cleaning, $2,900; insurance, $155; and maintenance, $1,775.

7. Gross receipts from the wash would be about $2,990 per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum.

Mr. Duncan will not open the car wash unless it provides at least a 8% return.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation.

2-a. Determine the net present value using the net present value method of investment analysis.

2-b. Would you advise Mr. Duncan to open the car wash?

Jean Erickson, manager and owner of an advertising company in Charlotte, North Carolina, arranged a meeting with Leroy Gee, the chief accountant of a large, local competitor. The two are lifelong friends. They grew up together in a small town and attended the same university. Leroy is a competent, successful accountant but is having some personal financial difficulties after some of his investments turned sour, leaving him with a $15,000 personal loan to pay off—just when his oldest son is starting college. Jean, on the other hand, is struggling to establish a successful advertising business. She had recently acquired the rights to open a branch office of a large regional advertising firm headquartered in Atlanta, Georgia. During her first two years, she was able to build a small, profitable practice. However, the chance to gain a significant foothold in Charlotte hinged on the success of winning a bid to represent the state of North Carolina in a major campaign to attract new industry and tourism. The meeting she had scheduled with Leroy concerned the bid she planned to submit. Jean: Leroy, I'm at a critical point in my business venture. If I can win the bid for the state's advertising dollars, I'll be set. Winning the bid will bring $600,000 to $700,000 of revenues into the firm. On top of that, I estimate that the publicity will bring another $200,000 to $300,000 of new business. Leroy: I understand. My boss is anxious to win that business as well. It would mean a huge increase in profits for my firm. It's a competitive business, though. As new as you are, I doubt that you'll have much chance of winning. Jean: You're forgetting two very important considerations. First, I have the backing of all the resources and talent of a regional firm. Second, I have some political connections. Last year, I was hired to run the publicity side of the governor's campaign. He was impressed with my work and would like me to have this business. I am confident that the proposals I submit will be very competitive. My only concern is to submit a bid that beats your firm. If I come in with a lower bid and good proposals, the governor can see to it that I get the work. Leroy: Sounds promising. If you do win, however, there will be a lot of upset people. After all, they are going to claim that the business should have been given to local advertisers, not to some out-of-state firm. Given the size of your office, you'll have to get support from Atlanta. You could take a lot of heat. Jean: True. But I am the owner of the branch office. That fact alone should blunt most of the criticism. Who can argue that I'm not a local? Listen, with your help, I think I can win this bid. Furthermore, if I do win it, you can reap some direct benefits. With that kind of business, I can afford to hire an accountant, and I'll make it worthwhile for you to transfer jobs. I can offer you an up-front bonus of $15,000. On top of that, I'll increase your annual salary by 20 percent. That should solve most of your financial difficulties. After all, we have been friends since day one—and what are friends for? Leroy: Jean, my wife would be ecstatic if I were able to improve our financial position as quickly as this opportunity affords. I certainly hope that you win the bid. What kind of help can I provide? Jean: Simple. To win, all I have to do is beat the bid of your firm. Before I submit my bid, I would like you to review it. With the financial skills you have, it should be easy for you to spot any excessive costs that I may have included. Or perhaps I included the wrong kind of costs. By cutting excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to meet or beat your firm's bid.: What would you do if you were Leroy? Fully explain the reasons for your choice. What do you suppose the code of conduct for Leroy's company would say about this situation? What is the likely outcome if Leroy agrees to review the bid? Is there much risk to him personally if he reviews the bid? Should the degree of risk have any bearing on his decision?

Problem 6-27 Sales Mix; Break-Even Analysis; Margin of Safety [LO6-7, LO6-9]

Island Novelties, Inc., of Palau makes two products—Hawaiian Fantasy and Tahitian Joy. Each product’s selling price, variable expense per unit, and annual sales volume are as follows:

Fixed expenses total $506,000 per year.

Required:

1. Assuming the sales mix given above, do the following:

a. Prepare a contribution format income statement showing both dollar and percent columns for each product and for the company as a whole.

b. Compute the company's break-even point in dollar sales. Also, compute its margin of safety in dollars and its margin of safety percentage.

2. The company has developed a new product called Samoan Delight that sells for $55 each and that has variable expenses of $44 per unit. If the company can sell 10,000 units of Samoan Delight without incurring any additional fixed expenses:

a. Prepare a revised contribution format income statement that includes Samoan Delight. Assume that sales of the other two products does not change.

b. Compute the company’s revised break-even point in dollar sales. Also, compute its revised margin of safety in dollars and margin of safety percentage.

Describe how the managerial finance function is related to economics and accounting.
Q2. Describe the legal forms of business organization.
Q3. Discuss business taxes and their importance in financial decisions.
Q4. Complete the 2012 balance sheet for O’Keefe Industries using the information that follows it.
O’Keefe Industries Balance Sheet December 31, 2012
Assets                                                                                                Liabilities and Stockholders’ Equity
Cash                                $33,720                                                                                Accounts payable $130,000 Marketable securities 27,000                                                                            Notes payable ________ Accounts receivable _______                                                                           Accruals                22,000                           Inventories _______                                                                                       Total current liabilities ________ Total current assets _______                                                                  Long-term debt ________
Net fixed assets _______                                                                     Stockholders’ equity $500,000
Total assets ………………$                                                             Total liabilities and stockholders’ equity $------
The following financial data for 2012 are also available:
1. Sales totaled $1,800,000.
2. The gross profit margin was 29%.
3. Inventory turnover was 4.0.
4. There are 365 days in the year.
5. The average collection period was 42 days.
6. The current ratio was 1.61.
7. The total asset turnover ratio was 1.22.
8. The debt ratio was 70%.
Q4) Liquidity management Bauman Company’s total current assets, total current liabilities, and inventory for each of the past 4 years follow:
Item 2009 2010 2011 2012
Total current assets $16,950 $21,900 $22,500 $27,000
Total current liabilities $9000 $12600 $12600 $17400
Inventory 6000 6900 6900 7200

a. Calculate the firm’s current and quick ratios for each year. Compare the resulting time series for these measures of liquidity.
b. Comment on the firm’s liquidity over the 2009–2010 period.
Q5) Inventory management Wilkins Manufacturing has annual sales of $4 million and a gross profit margin of 40%. Its end-of-quarter inventories are  
Quarter Inventory
1 $400000
2 800,000

3 1,200,000

4 200,000


a). Find the average quarterly inventory and use it to calculate the firm’s inventory turnover and the average age of inventory.
b). Assuming that the company is in an industry with an average inventory turnover of 2.0, how would you evaluate the activity of Wilkins’ inventory?

Explain the role that earnings and profits play in determining the tax treatment of distributions. Describe the tax treatment of dividends for individual shareholders. Find an example of a corporation (AT&T) that has a dividend program and share their approach of (AT&T).

The following selected accounts and their current balances appear in the ledger of Clairemont Co. for the fiscal year ended May 31, 2018:

Birrell Scientific Inc. manufactures electronic products, with two operating divisions, the GPS Systems and Communication Systems divisions. Condensed divisional income statements, which involve no intracompany transfers and which include a breakdown of expenses into variable and fixed components, are as follows:

*$60 of the $90 per unit represents materials costs, and the remaining $30 per unit represents other variable conversion expenses incurred within the Communication Systems Division.

The GPS Systems Division is presently producing 85,000 units out of a total capacity of 150,000 units. Materials used in producing the Communication Systems Division's product are currently purchased from outside suppliers at a price of $60 per unit. The GPS Systems Division is able to produce the materials used by the Communication Systems Division at a variable cost of $41 per unit. Except for the possible transfer of materials between divisions, no changes are expected in sales and expenses.

Required:

1. Would the market price of $60 per unit be an appropriate transfer price for Birrell Scientific Inc.?
No

2. If the Communication Systems Division purchases 25,000 units from the GPS Systems Division, rather than externally, at a negotiated transfer price of $52 per unit, how much would the operating income of each division and the total company operating income increase?

The GPS Systems Division's operating income would increase by
$

The Communication Systems Division's operating income would increase by
$

Birrell Scientific Inc.'s total operating income would increase by
$

Feedback

Review how transfer pricing functions.

2. Multiply the units transferred by the difference between the transfer price (supplying company) or the market price (purchasing company) and the variable cost per unit.

3. Prepare condensed divisional income statements for Birrell Scientific Inc. based on the data in part (2).

Feedback

3. Keep in mind, 25,000 units are transferred in at $52 per unit plus $38 in other variable conversion expenses incurred within the division.

4. If a transfer price of $49 per unit is negotiated, how much would the operating income of each division and the total company operating income increase?

The GPS Systems Division’s operating income would increase by
$

The Communication Systems Division's operating income would increase by
$

Birrell Scientific Scientific Inc.'s total operating income would increase by
$

5a. What is the range of possible negotiated transfer prices that would be acceptable for Birrell Scientific Inc.?

Between $ and $

5b. Assuming that the managers of the two divisions cannot agree on a transfer price, what transfer price would represent the best compromise? If required, round your answer to the nearest dollar.

$51

Using the capital expenditures above, calculate the missing depreciation numbers for all 3 years.

All equipment will be depreciated using the straight-line method. Everything in the table is purchased on January 1 of the first year (2019)

In addition, on June 30 of the 3rd year, the two iMac computers are sold for a total of $500 and two new better computers are purchased for $4,000 total.

For its three investment centers, Martinez Company accumulates the following data:

The centers expect the following changes in the next year: (I) increase sales 10%; (II) decrease costs $390,000; (III) decrease average operating assets $450,000.

Compute the expected return on investment (ROI) for each center. Assume center I has a controllable margin percentage of 70%.

1. Decision on Accepting Additional Business

   Down Home Jeans Co. has an annual plant capacity of 64,600 units, and current production is 46,700 units. Monthly fixed costs are $40,300, and variable costs are $25 per unit. The present selling price is $37 per unit. On November 12 of the current year, the company received an offer from Fields Company for 16,700 units of the product at $29 each. Fields Company will market the units in a foreign country under its own brand name. The additional business is not expected to affect the domestic selling price or quantity of sales of Down Home Jeans Co.

   a. Prepare a The area of accounting concerned with the effect of alternative courses of action on revenues and costs.differential analysis dated November 12 on whether to reject (Alternative 1) or accept (Alternative 2) the Fields order. If an amount is zero, enter zero "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

   Differential Analysis
   Reject Order (Alt. 1) or Accept Order (Alt. 2)
   November 12
   	Reject Order (Alternative 1)	Accept Order (Alternative 2)	Differential Effect on Income (Alternative 2)
   Revenues	$	$	$
   Costs:
   Variable manufacturing costs
   Income (Loss)	$	$	$

   Feedback

   b. Having unused capacity available is

   • relevant
   • irrelevant
   to this decision. The differential revenue is
   • more
   • less
   than the differential cost. Thus, accepting this additional business will result in a net
   • gain
   • loss
   .

   c. What is the minimum price per unit that would produce a positive contribution margin? Round your answer to two decimal places.
   $

At the beginning of the current season on April 1, the ledger of Granite Hills Pro Shop showed Cash $2,810; Inventory $3,500; and Common Stock $6,310. The following transactions were completed during April 2017.

Journalize the April transactions using a perpetual inventory system. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. Round answers to 0 decimal places, e.g. 5,275.)

1. Machine Replacement Decision

   A company is considering replacing an old piece of machinery, which cost $597,600 and has $352,200 of accumulated depreciation to date, with a new machine that has a purchase price of $484,300. The old machine could be sold for $63,200. The annual variable production costs associated with the old machine are estimated to be $156,000 per year for eight years. The annual variable production costs for the new machine are estimated to be $101,500 per year for eight years.

   a. Prepare a The area of accounting concerned with the effect of alternative courses of action on revenues and costs.differential analysis dated April 29 to determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine. If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

   Differential Analysis
   Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
   April 29
   	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effect on Income (Alternative 2)
   Revenues:
   Proceeds from sale of old machine	$	$	$
   Costs:
   Purchase price
   Variable productions costs (8 years)
   Income (Loss)	$	$	$

   Feedback

   Determine whether to continue with (Alternative 1) or replace (Alternative 2) the old machine.
   

   • Continue with the old machine
   • Replace the old machine

   Feedback

   b. What is the sunk cost in this situation?

   The sunk cost is $.

1. Make-or-Buy Decision for a Service Company

   The Theater Arts Guild of Dallas (TAG-D) employs five people in its Publication Department. These people lay out pages for pamphlets, brochures, magazines, and other publications for the TAG-D productions. The pages are delivered to an outside company for printing. The company is considering an outside publication service for the layout work. The outside service is quoting a price of $16 per layout page. The budget for the Publication Department for the current year is as follows:

   Salaries	$190,100
   Benefits	43,200
   Supplies	23,000
   Office expenses	28,800
   Office depreciation	25,900
   Computer depreciation	17,300
   Total	$328,300

   The department expects to lay out 18,000 pages for the current year. The Publication Department office space and equipment would be used for future administrative needs, if the department's function were purchased from the outside.

   a. Prepare a The area of accounting concerned with the effect of alternative courses of action on revenues and costs.differential analysis dated February 22 to determine whether TAG-D should layout pages internally (Alternative 1) or purchase layout services from the outside (Alternative 2). If an amount is zero, enter "0". For those boxes in which you must enter subtracted or negative numbers use a minus sign.

   Differential Analysis
   Lay out Pages Internally (Alt. 1) or Purchase Layout Services (Alt. 2)
   February 22
   	Lay out Pages Internally (Alternative 1)	Purchase Lay out Services (Alternative 2)	Differential Effect on Income (Alternative 2)
   Sales price	$	$	$
   Costs:
   Purchase price of lay out work	$	$	$
   Salaries
   Benefits
   Supplies
   Office expenses
   Office depreciation
   Computer depreciation
   Income (loss)	$	$	$

   Feedback

   b. The benefit from using an outside service is shown to be

   • more
   • less
   than performing the layout work internally. The fixed costs (depreciation expenses) in the budget are
   • relevant
   • irrelevant
   to the decision. Thus, the work should
   • be
   • not be
   purchased from the outside on a strictly financial basis.

   c. Before electing to

   • keep
   • lay off
   the five employees, the Guild should consider the
   • short-run impact
   • long-run impact
   of the decision.

The following information pertains to Austin, Inc. and Huston Company:

Required
a-1. Compute each company’s debt-to-assets ratio, current ratio, and times interest earned (EBIT must be computed).

Compute each company’s return-on-equity ratio and return-on-assets ratio. Use EBIT instead of net income when computing the return-on-assets ratio.