EXHIBIT 5.15
Internal Control Questionnaire Payroll Processing
Yes/No Comments
Control Environment
Are all employees paid by check or direct deposit?
Is a special payroll bank account used?
Are payroll checks signed by persons who do not prepare checks or keep cash funds or accounting records?
If a check-signing machine is used, are the signature plates controlled?
Is the payroll bank account reconciled by someone who does not prepare, sign, or deliver paychecks?
Are payroll department personnel rotated in their duties? Required to take vacations? Bonded?
Is there a timekeeping department (function) independent of the payroll department?
Are authorizations for deductions signed by the employees on file?
Occurrence
Are time cards or piecework reports prepared by the employee approved by her or his supervisor?
Is a time clock or other electromechanical or computerized system used?
Is the payroll register sheet signed by the employee preparing it and approved prior to payment? Are names of terminated employees reported in writing to the payroll department?
Is the payroll periodically compared to personnel files?
Are checks distributed by someone other than the employee’s immediate supervisor?
Are unclaimed wages deposited in a special bank account or otherwise controlled by a responsible officer?
Do internal auditors conduct occasional surprise distributions of paychecks?
Completeness
Are names of newly hired employees reported in writing to the payroll department?
Are blank payroll checks prenumbered and the numerical sequence checked for missing documents?
Accuracy
Are all wage rates determined by contract or approved by a personnel officer? Are timekeeping and cost accounting records (such as hours, dollars) reconciled with payroll department calculations of hours and wages? Are payrolls audited periodically by internal auditors? Are individual payroll records reconciled with quarterly tax reports?
Classification
Do payroll accounting personnel have instructions for classifying payroll debit entries?
Cutoff
Are monthly, quarterly, and annual wage accruals reviewed by an accounting officer?
5.65
Internal Control Questionnaire Items: Assertions, Tests of Controls, and Possible Errors or Frauds. Following is a selection of items from the payroll processing internal control questionnaire in Exhibit 5.15.
Required:
For each of the four preceding questions:
In: Accounting
BSF Co., which produces and sells skiing equipment, is financed as follows:
Bonds payable, 10% (issued at face amount) $2,200,000
Preferred 1% stock, $10 par 2,200,000
Common stock, $25 par 2,200,000
Income tax is estimated at 60% of income. Round your answers to the nearest cent.
a. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $814,000. ？ per share
b. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,034,000. ？ per share
c. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,254,000. ？ per share
In: Accounting
this week we are studying Flowcharting and the different ways in
which they can be useful for accounting information systems.
Present in your words an overview of the benefits and uses of
Flowcharts. If you were a new employee of a company, how could the
use of Flowcharts help you understand the systems of the
organization?
Note:Could you please don't use your handwriting to answer this question to be easy for me to solve...Thanks
In: Accounting
I JUST WANT TO FIND OUT HOW TO CALCULATE THE 189,540 MONEY AMOUNT OF COMMON STOCK IN PART C?
THANK YOU!
In 2013, Elizabeth and some of her friends invested money to start a company named LADIEZ Corporation. The following transactions occurred during 2013:
| Jan 1 | The corporate charter authorized 72,000, $4 cumulative preferred stock and unlimited common stock up to a maximum amount of $21,000,000 to be issued. |
| Jan 6 | Issued 178,000 common shares at $18 per share. Shares were issued to Elizabeth and other investors. |
| Jan 7 | Issued another 540 common shares to Elizabeth in exchange for her legal services in setting up the corporation. The Stockholders agreed that the legal services were worth $9,180. |
| Jan 12 | Issued 4,200 preferred shares for $303,000. |
| Jan 14 | Issued 11,000 common shares in exchange for a building acquired. For this purpose shares were valued at $19. |
| Nov 15 | The first annual dividend on preferred stock was declared. |
| Dec 20 | Paid the dividends declared on preferred stock. |
LADIEZ Corporation generated a $145,000 net income during the
year.
a) Prepare the journal entries to record the above
transactions.
Do not enter dollar signs or commas in the input boxes.
| Date | Account Title and Explanation | Debit | Credit |
| Jan 6 | AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | |
| AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | ||
| Issued common stock for cash | |||
| Jan 7 | AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | |
| AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | ||
| Issued common stock in exchange for services | |||
| Jan 12 | AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | |
| AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | ||
| Issue of preferred stock for cash | |||
| Jan 14 | AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | |
| AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | ||
| Issued common stock for building | |||
| Nov 15 | AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | |
| AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | ||
| Dividend declared on preferred stock | |||
| Dec 20 | AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | |
| AnswerAccounts PayableAccounts ReceivableAdvertising ExpenseBuildingCashCommon StockCommon Stock Dividends DistributableCost of Goods SoldDividends Payable - CommonDividends Payable - PreferredIncome SummaryInterest ExpenseInterest PayableInterest ReceivableInterest RevenueInventoryLandLegal ExpenseNotes PayablePreferred StockPrepaid RentRent ExpenseRetained EarningsSalaries ExpenseSales RevenueSupplies ExpenseTelephone ExpenseTravel ExpenseUtilities Expense | Answer | ||
| Recording payment of dividend | |||
b) Prepare the statement of retained earnings for the year ended
December 31, 2013.
| LADIEZ Corporation | |
| Statement of Retained Earnings | |
| For the Year Ended December 31, 2013 | |
| Opening Balance | Answer |
| Add: Net Income | Answer |
| Less: Dividends Paid | Answer |
| Balance – December 31, 2013 | Answer |
c) Prepare the Stockholders’ equity section of the balance sheet as
at December 31, 2013.
| LADIEZ Corporation | |
| Stockholders' Equity | |
| December 31, 2013 | |
| Stock Capital | |
| Authorized: 72,000 $4 cumulative preferred stock and unlimited common stock | |
| Issued: | |
| 189,540 Common Stock | Answer |
| 4,200, $4 Preferred Stock | Answer |
| Total Stock Capital | Answer |
| Retained Earnings | Answer |
| Total Stockholders’ Equity | Answer |
In: Accounting
Steve Murningham, manager of an electronics division, was considering an offer by Pat Sellers, manager of a sister division. Pat's division was operating below capacity and had just been given an opportunity to produce 8,000 units of one of its products for a customer in a market not normally served. The opportunity involves a product that uses an electrical component produced by Steve's division. Each unit that Pat's division produces requires two of the components. However, the price that the customer is willing to pay is well below the price that is usually charged; to make a reasonable profit on the order, Pat needs a price concession from Steve's division. Pat had offered to pay full manufacturing cost for the parts. So Steve would know that everything was above board, Pat supplied the following unit cost and price information concerning the special order, excluding the cost of the electrical component:
Selling price $32
Less costs:
Direct materials 17
Direct labour 7
Variable overhead 2
Fixed overhead 3
Operating profit $3
The normal selling price of the electrical component is $2.30 per unit. Its full manufacturing cost is $1.85 ($1.05 variable and $0.80 fixed). Pat argued that paying $2.30 per component would wipe out the operating profit and result in her division showing a loss. Steve was interested in the offer because his division was also operating below capacity (the order would not use all the excess capacity).
Required:
In: Accounting
Sealing Company manufactures three types of DVD storage units. Each of the three types requires the use of a special machine that has a total operating capacity of 15,000 hours per year. Information on the three types of storage units is as follows:
Basic Standard Deluxe
Selling price $9.00 $30.00 $35.00
Variable cost $6.00 $20.00 $10.00
Machine hours required 0.10 0.50 0.75
Sealing Company's marketing director has assessed demand for the three types of storage units and believes that the firm can sell as many units as it can produce.
Required:
In: Accounting
McCormick & Company is considering a project that requires an initial investment of $24 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $4.3 million. The company will produce bulk units at a cost of $130 each and will sell them for $420 each. There are annual fixed costs of $500,000. Unit sales are expected to be $150,000 each year for the next six years, at which time the project will be abandoned. At that time, the plant and equipment is expected to be worth $8 million (before tax) and the land is expected to be worth $5.4 million (after tax).To supplement the production process, the company will need to purchase $1 million worth of inventory. That inventory will be depleted during the final year of the project. The company has $100 million of debt outstanding with a yield to maturity of 8 percent, and has $150 million of equity outstanding with a beta of 0.9. The expected market return is 13 percent, and the risk-free rate is 5 percent. The company's marginal tax rate is 40 percent.
| Year | |
| 1 | 14.29% |
| 2 | 24.49% |
| 3 | 17.49% |
| 4 | 12.49% |
| 5 | 8.93% |
| 6 | 8.92% |
| 7 | 8.93% |
| 8 | 4.46% |
Questions Below
5. What is the total operating cash flows, given the following operating cash flows:
Sales = 150,000 x $420 = $63,000,000
Costs = 150,000 x $130 + $500,000 = $20,000,000
6. Create an after-tax cash flow timeline.
7. What are the total expected cash flows at the end of
year six? The $4.3 million is an opportunity cost and must be
included at date zero as a cash outflow. If the project is
accepted, however, the land can be sold in six years for $5.4
million.
In: Accounting
Superior Markets, Inc., operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:
| Superior Markets, Inc. Income Statement For the Quarter Ended September 30 |
||||||||||||
| Total | North Store |
South Store |
East Store |
|||||||||
| Sales | $ | 3,100,000 | $ | 700,000 | $ | 1,240,000 | $ | 1,160,000 | ||||
| Cost of goods sold | 1,705,000 | 380,000 | 687,000 | 638,000 | ||||||||
| Gross margin | 1,395,000 | 320,000 | 553,000 | 522,000 | ||||||||
| Selling and administrative expenses: | ||||||||||||
| Selling expenses | 819,000 | 232,400 | 315,500 | 271,100 | ||||||||
| Administrative expenses | 388,000 | 107,000 | 152,400 | 128,600 | ||||||||
| Total expenses | 1,207,000 | 339,400 | 467,900 | 399,700 | ||||||||
| Net operating income (loss) | $ | 188,000 | $ | (19,400 | ) | $ | 85,100 | $ | 122,300 | |||
The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:
The breakdown of the selling and administrative expenses that are shown above is as follows:
| Total | North Store |
South Store |
East Store |
|||||
| Selling expenses: | ||||||||
| Sales salaries | $ | 240,400 | $ | 69,000 | $ | 86,600 | $ | 84,800 |
| Direct advertising | 180,000 | 52,000 | 73,000 | 55,000 | ||||
| General advertising* | 46,500 | 10,500 | 18,600 | 17,400 | ||||
| Store rent | 305,000 | 86,000 | 121,000 | 98,000 | ||||
| Depreciation of store fixtures | 16,500 | 4,700 | 6,100 | 5,700 | ||||
| Delivery salaries | 21,300 | 7,100 | 7,100 | 7,100 | ||||
| Depreciation of delivery equipment |
9,300 | 3,100 | 3,100 | 3,100 | ||||
| Total selling expenses | $ | 819,000 | $ | 232,400 | $ | 315,500 | $ | 271,100 |
*Allocated on the basis of sales dollars.
| Total | North Store |
South Store |
East Store |
|||||
| Administrative expenses: | ||||||||
| Store managers' salaries | $ | 71,500 | $ | 21,500 | $ | 30,500 | $ | 19,500 |
| General office salaries* | 46,500 | 11,000 | 18,600 | 16,900 | ||||
| Insurance on fixtures and inventory | 26,000 | 7,800 | 9,500 | 8,700 | ||||
| Utilities | 109,545 | 32,910 | 41,380 | 35,255 | ||||
| Employment taxes | 56,955 | 16,290 | 21,420 | 19,245 | ||||
| General office—other* | 77,500 | 17,500 | 31,000 | 29,000 | ||||
| Total administrative expenses | $ | 388,000 | $ | 107,000 | $ | 152,400 | $ | 128,600 |
*Allocated on the basis of sales dollars.
The lease on the building housing the North Store can be broken with no penalty.
The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $10,000 per quarter. The general manager of the North Store would continue to earn her normal salary of $11,000 per quarter. All other managers and employees in the North store would be discharged.
The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person’s salary is $4,100 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.
The company pays employment taxes equal to 15% of their employees' salaries.
One-third of the insurance in the North Store is on the store’s fixtures.
The “General office salaries” and “General office—other” relate to the overall management of Superior Markets, Inc. If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person’s compensation is $5,500 per quarter.
Required:
1. How much employee salaries will the company avoid if it closes the North Store?
2. How much employment taxes will the company avoid if it closes the North Store?
3. What is the financial advantage (disadvantage) of closing the North Store?
4. Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?
5. Assume that the North Store's floor space can’t be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?
In: Accounting
Who are the users for operational audit? Compliance Audit? Financial Audit?
Choose from any drop-down list
|
a. |
Collection agent |
|
b. |
Accounting staff of the organization |
|
c. |
Purchasing agent |
|
d. |
Different groups for different
purposes long dash—many outside entities |
|
e. |
Authority setting down procedures, internal or external |
|
f. |
Management of the organization |
Users of audit report
In: Accounting
|
Laval produces lamps and home lighting fixtures. Its most popular product is a brushed aluminum desk lamp. This lamp is made from components shaped in the fabricating department and assembled in its assembly department. Information related to the 31,000 desk lamps produced annually follow. |
| Direct materials | $ | 265,000 | |||
| Direct labor | |||||
| Fabricating department (7,000 DLH × $25 per DLH) | $ | 175,000 | |||
| Assembly department (16,200 DLH × $22 per DLH) | $ | 356,400 | |||
| Machine hours | |||||
| Fabricating department | 14,400 | MH | |||
| Assembly department | 20,100 | MH | |||
| Expected overhead cost and related data for the two production departments follow. |
| Fabricating | Assembly | |||||||||
| Direct labor hours | 130,000 | DLH | 360,000 | DLH | ||||||
| Machine hours | 174,000 | MH | 126,000 | MH | ||||||
| Overhead cost | $ | 390,000 | $ | 455,000 | ||||||
| Required | |
| 1. |
Determine the plantwide overhead rate for Laval using direct labor hours as a base. |
| 2. |
Determine the total manufacturing cost per unit for the aluminum desk lamp using the plantwide overhead rate. (Round the intermediate calculations to 2 decimal places for overhead costs.) |
| 3. |
Compute departmental overhead rates based on machine hours in the fabricating department and direct labor hours in the assembly department.(Round your answers to 2 decimal places.) |
| 4. |
Use departmental overhead rates from requirement 3 to determine the total manufacturing cost per unit for the aluminum desk lamps. (Round the intermediate calculations to 2 decimal places for overhead costs.) |
In: Accounting
QUESTION 16
|
a. |
None |
|
|
b. |
One |
|
|
c. |
Two |
In: Accounting
Explain the difference between under allocated overhead and over allocated overhead. What causes each situation?
In: Accounting
Fernetti Company sold $6,000,000, 9%, 10-year bonds on January 1, 2014. The bonds were dated January 1, 2014, and pay interest on January 1 and July 1. Fernetti Company uses the straight-line method to amortize bond premium or discount. The bonds were sold at 96. Assume no interest is accrued on June 30.
Instructions
(a) Prepare all the necessary journal entries to record the issuance of the bonds and bondinterest expense for 2014, assuming that the bonds sold at 102.(b) Prepare journal entries as in part (a) assuming that the bonds sold at 96.(c) Show statement of financial position presentation for each bond issued at December31, 2014.
In: Accounting
(Show work and Calculations)
On January 1, 2016, when its $30 par value common stock was
selling for $80 per share, Bridgeport Corp. issued $11,900,000 of
8% convertible debentures due in 20 years. The conversion option
allowed the holder of each $1,000 bond to convert the bond into
five shares of the corporation’s common stock. The debentures were
issued for $12,852,000. The present value of the bond payments at
the time of issuance was $10,115,000, and the corporation believes
the difference between the present value and the amount paid is
attributable to the conversion feature. On January 1, 2017, the
corporation’s $30 par value common stock was split 2 for 1, and the
conversion rate for the bonds was adjusted accordingly. On January
1, 2018, when the corporation’s $15 par value common stock was
selling for $135 per share, holders of 30% of the convertible
debentures exercised their conversion options. The corporation uses
the straight-line method for amortizing any bond discounts or
premiums.
(a) Prepare the entry to record the original
issuance of the convertible debentures
(b) Prepare the entry to record the exercise of the conversion option, using the book value method
In: Accounting
HARDING PLASTIC MOLDING COMPANY CAPITAL BUDGETING: RANKING PROBLEMS On January 11, 1993, the finance committee of Harding Plastic Molding Company (HPMC) met to consider 4 capital-budgeting projects. Present at the meeting were Robert L. Harding, president and founder, Susan Jorgensen, comptroller, and Chris Woelk, head of research and development. Over the past 5 years, this committee met every month to consider and make final judgment on all proposed capital outlays brought up for review during the period. Harding Plastic Molding Company was founded in 1965 by Robert L. Harding to produce plastic parts and molding for the Detroit automakers. For the first 10 years of operations, HPMC worked solely as a subcontractor for the automakers, but since then has made strong efforts to diversify in an attempt to avoid the cyclical problems faced by the auto industry. By 1993, this diversification attempt led HPMC into the production of over 1,000 different items, including kitchen utensils, camera housings, and phonographic and recording equipment. It also led to an increase in sales of 800% during the 1975–1993 period. As this dramatic increase in sales was paralleled by a corresponding increase in production volume, HPMC was forced, in late 1991, to expand production facilities. This plant and equipment expansion involved capital expenditures of approximately $10.5 million and resulted in an increase of production capacity of about 40%. Because of this increased production capacity, HPMC made a concerted effort to attract new business and consequently has recently entered into contracts with a large toy firm and a major discount department store chain. While non-auto-related business has grown significantly, it still represents only 32% of HPMC’s overall business. Thus, HPMC has continued to solicit non-automotive business, and, as a result of this effort and its internal research and development, the firm has four sets of mutually exclusive projects to consider at this month’s finance committee meeting. Over the past 10 years, HPMC’s capital-budgeting approach has evolved into a somewhat elaborate procedure in which new proposals are categorized into three areas: profit, research and development, and safety. Projects falling into the profit or research and development areas are evaluated using present value techniques, assuming a 10 percent opportunity rate; those falling into the safety classification are evaluated in a more subjective framework. Although research and development projects have to receive favorable results from the present value criteria, there is also a total dollar limit assigned to projects of this category, typically running about $750,000 per year. This limitation was imposed by Harding primarily because of the limited availability of quality researchers in the plastics industry. Harding felt that if more funds than this were allocated, “we simply couldn’t find the manpower to administer them properly.” The benefits derived from safety projects, on the other hand, are not in terms of cash flows; hence, present value methods are not used at all in their evaluation. The subjective approach used to evaluate safety projects is a result of the pragmatically difficult task of quantifying the benefits from these projects in dollar amounts. Thus, these projects are subjectively evaluated by a management-worker committee with a limited budget. All 8 projects to be evaluated in January are classified as profit projects. The first set of projects listed on the meeting’s agenda for examination involves the utilization of HPMC’s precision equipment. Project A calls for the production of vacuum containers for thermos bottles to be produced for a large discount hardware chain. The containers would be manufactured in 5 different size and color combinations. This project would be carried out over a 3-year period, for which HPMC would be guaranteed a minimum return plus a percentage of the sales. Project B involves the manufacture of inexpensive photographic equipment for a national photography outlet. Although HPMC currently has excess plant capacity, each of these projects would utilize precision equipment of which the excess capacity is limited. Thus, adopting either project would tie up all precision facilities. In addition, the purchase of new equipment would be both prohibitively expensive and involve a time delay of approximately 2 years, thus making these projects mutually exclusive. (The cash flows associated with these 2 projects are given in Exhibit 1.) The second set of projects involves the renting of computer facilities over a 1-year period to aid in customer billing and, perhaps, inventory control. Project C entails the evaluation of a customer billing system proposed by Advanced Computer Corporation. Under this system, all the bookkeeping and billing presently done by HPMC’s accounting department would be done by Advanced. In addition to saving costs involved in bookkeeping, Advanced would provide a more efficient billing system and do a credit analysis of delinquent customers, which could be used in the future for in-depth credit analysis. Project D is proposed by International Computer Corporation and includes a billing system similar to that offered by Advanced, and in addition, an inventory control system that will keep track of all raw materials and parts in stock and reorder when necessary. This inventory control system would reduce the likelihood of material stockouts, which have become more and more frequent over the past 3 years. (The cash flows for these projects are given in Exhibit 2.)
EXHIBIT 1. Harding Plastic Molding Company Cash Flows:
Year Project A Project B
$-75,000 $-75,000
1 10,000 43,000
2 30,000 43,000
3 100,000 43,000
EXHIBIT 2. Harding Plastic Molding Company Cash Flows:
Year Project C Project D
0 $-8,000 $-20,000
1 11,000 25,000
QUESTIONS What are the NPV, PI, Payback, and IRR for projects A and B? Should project A or B be chosen? Might your answer change if project B is a typical project in the plastic molding industry?
What are the NPV, PI, Payback, and IRR for projects C and D? Should project C or D be chosen?
I need help with projects C and D please.
Write Recommendation Write and present a formal recommendation for management on which projects should be undertaken (A or B, C or D). Include your supporting calculations for each grouping of projects and your reasoning for your decision. Paper should be 2-3 pages double spaced, free of grammatical errors, and have a professional appearance.
In: Accounting