At the end of the year, a company offered to buy 4,610 units of a product from X Company for a special price of $11.00 each instead of the company's regular price. The following information relates to the 61,300 units of the product that X Company has already made and sold to its regular customers:

The special order product has some unique features that will require additional material costs of $0.72 per unit and the rental of special equipment for $4,000.

5. Profit on the special order would be

6. The marketing manager thinks that if X Company accepts the special order, regular customers will be lost, with demand falling by 750 units. This loss in sales will cause firm profits to fall by

Sales Returns

Which of the following statements is true relating to the allowance for sales returns?

a. Sales returns is treated as an expense in the income statement and, therefore, reduces profit for the period.

b. An excess of the amount by which the allowance for sales returns is increased compared with the actual returns for the period indicates the company may have inflated profit for the period.

c. The amount by which the allowance for sales returns is reduced during the period is recognized as a reduction of sales for the period, thus reducing profts.

d. Increasing the allowance for sales returns by an amount that is less than the actual returns recognized for the period may indicate either the company is attempting to increase profit for the period or its estimates that less of its products will be returned in the future.

Deferred Revenue
True or false: A reduction of the deferred revenue account can be interpreted as a leading indicator of lower future revenues. Explain

a. Fale. Revenue is recognized when the deferred revenue liability increases. If the deferred revenue account has decreased, more cash came in from customers and more revenue will be recgnized in the future.

b. True. Revenue is recognized when the deferred revenue liability decreases. If the deferred revenue account has decreased, less cash came in from customers and less revenue will be recognized in the future.

c. False. Revenue is recognized when the deferred revenue liability decreases. If the deferred revenue account has decreased, less cash came in from customers and more revenue will be recognized in the future.

d. True. Revenue is recognized when the deferred revenue liability decreases. If the deferred revenue account has decreased, more cash came in from customers and less revenue will be recognized in the future.

Foreign Exchange Effects on Sales  
True or false: A multinational company reports that a large amount of its sales is generated in foreign currencies that have strengthened vis-à-vis the $US. Consolidated revenues are likely lower than would have been reported in the absence of such a shift in exchange rates.

a. False. Strengthening foreign currencies implies a weakening $US. As the $US weakens, foreign currencies purchase less $US, resulting in an decrease in foreign currency-denominated sales, expense and profit. Consolidated revenues will therefore, likely be higher.

b. True. Strengthening foreign currencies implies a weakening $US. As the $US weakens, foreign currencies purchase less $US, resulting in an decrease in foreign currency-denominated sales, expense and profit. Consolidated revenues will therefore, likely be lower.

c. False. Strengthening foreign currencies implies a weakening $US. As the $US weakens, foreign currencies purchase more $US, resulting in an increase in foreign currency-denominated sales, expense and profit. Consolidated revenues will therefore, likely be higher.

d. True. Strengthening foreign currencies implies a weakening $US. As the $US weakens, foreign currencies purchase less $US, resulting in an increase in foreign currency-denominated sales, expense and profit. Consolidated revenues will therefore, likely be lower.

Adger Corporation is a service company that measures its output based on the number of customers served. The company provided the following fixed and variable cost estimates that it uses for budgeting purposes and the actual results for May as shown below:

When preparing its planning budget the company estimated that it would serve 30 customers per month; however, during May the company actually served 35 customers.

Foundational 9-1

Required:

A. What amount of revenue would be included in Adger’s flexible budget for May?

B. What amount of employee salaries and wages would be included in Adger’s flexible budget for May?

C. What amount of travel expenses would be included in Adger’s flexible budget for May?

D. What amount of other expenses would be included in Adger’s flexible budget for May?

E. What net operating income would appear in Adger’s flexible budget for May?

F. What is Adger’s revenue variance for May? (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

The data below is the mileage (thousands of miles) and age of your cars .

Year Miles Age

2017    8.5    1

2009 100.3    9

2014   32.7    4

2004 125.0   14

2003 115.0   15

2011   85.5    7

2012   23.1    6

2012   45.0    6

2004 123.0   14

2013   51.2    5

2013 116.0    5

2009 110.0    9

2003 143.0   15

2017   12.0    1

2005 180.0   13

2008 270.0   10

Please include appropriate Minitab Results when important

a. Identify terms in the simple linear regression population model in this context.

b. Obtain a scatter diagram for the sample data. Interpret the scatter diagram.

c. Obtain a scatter diagram with the least squares regression line included. Interpret the intercept and slope in the context of this problem.

d. In theory what ought to be the value of the population model intercept? Explain.

e. What is the informal prediction for what the mileage should be on your car? What is the error in the prediction of the mileage for your car?

f .Use some statistical reasoning to assess whether or not the prediction for the mileage on your car was “accurate”?

g. How would you respond if someone asks “about” how many miles do students drive per year?

The data below is the mileage (thousands of miles) and age of your cars as sample.

Year Miles Age

2017    8.5    1

2009 100.3    9

2014   32.7    4

2004 125.0   14

2003 115.0   15

2011   85.5    7

2012   23.1    6

2012   45.0    6

2004 123.0   14

2013   51.2    5

2013 116.0    5

2009 110.0    9

2003 143.0   15

2017   12.0    1

2005 180.0   13

2008 270.0   10

Please include appropriate Minitab Results when important

a. Identify terms in the simple linear regression population model in this context.

b. Obtain a scatter diagram for the sample data. Interpret the scatter diagram.

c. Obtain a scatter diagram with the least squares regression line included. Interpret the intercept and slope in the context of this problem.

d. In theory what ought to be the value of the population model intercept? Explain.

e. What is the informal prediction for what the mileage should be on your car? What is the error in the prediction of the mileage for your car?

f. Use some statistical reasoning to assess whether or not the prediction for the mileage on your car was “accurate”?

g. How would you respond if someone asks “about” how many miles do students drive per year?

The data below is the mileage (thousands of miles) and age of your cars .

Year Miles Age

2017    8.5    1

2009 100.3    9

2014   32.7    4

2004 125.0   14

2003 115.0   15

2011   85.5    7

2012   23.1    6

2012   45.0    6

2004 123.0   14

2013   51.2    5

2013 116.0    5

2009 110.0    9

2003 143.0   15

2017   12.0    1

2005 180.0   13

2008 270.0   10

Please include appropriate Minitab Results when important

a. Identify terms in the simple linear regression population model in this context.

b. Obtain a scatter diagram for the sample data. Interpret the scatter diagram.

c. Obtain a scatter diagram with the least squares regression line included. Interpret the intercept and slope in the context of this problem.

d. In theory what ought to be the value of the population model intercept? Explain.

e. What is the informal prediction for what the mileage should be on your car? What is the error in the prediction of the mileage for your car?

f .Use some statistical reasoning to assess whether or not the prediction for the mileage on your car was “accurate”?

g. How would you respond if someone asks “about” how many miles do students drive per year?

Case 4 – Budgeting and Variance

Mike has been selling lemonade at his lemonade stand under the name ‘Mike’s Lemonade’ for the past few summers and has had tremendous success. As a matter of fact, kids are so “hooked” on his lemonade that he is now offering credit to those customers who have spent their allowance but need more of his product. His weekly budget is:

BUDGET NOTES:

• ‘Salaries & wages’ are comprised of Mike’s salary
• Cash customers pay $0.50/cup and credit customers pay a 10% surcharge
• Lemons, sugar, and cups expenses are for 100 cups of lemonade
• Equipment (pitcher, spoons, measuring cups) are rented from Mike’s mother

1. Mike’s Lemonade – Monthly Budget

Mike plans to keep his lemonade stand open for the 3 summer months (total of 12 weeks) each year. For better planning, expand his weekly budget into a monthly (4 weeks) budget.

2. Mike’s Lemonade – Budget Variance

Things go well for the first two months of operations. However, after the third month Mike finds that he is losing money badly, having to offset his losses from his personal savings account (previous months’ profits). He speaks with his father, a CPA at an accounting firm, who recommends that Mike run a budget variance report. Mike asks you to complete the following table (note – the budget numbers should come from your monthly budget in #1):

Clearly there is a problem, so Mike begins to investigate. He talks to his customers and finds that many were away on vacation some or part of his third month of operations. He also talks to his distributors (the grocery store manager) and finds that the price of lemons and sugar are likely to increase this year due to drought and freezing. Mike estimates that the cost of his supplies will increase by 3% next year.

Mike talks to his father again, who recommends that Mike project monthly budgets for next year including predictions for drops in volume and increases in costs. He also suggests that Mike may want to consider raising the price of his lemonade, but must take into account that price affects volume.

3. Mike’s Lemonade – Projected Monthly Budget

Develop a monthly budget for each of the 3 summer months (June, July, and August) for next year. Make and note any assumptions under ‘Budget Notes’, including from the information that Mike learned from his investigation.

4. What could Mike do to improve his net profit?

Two hundred consumers are surveyed about a new brand of snack food, Crunchicles. Their age groups and preferences are given in the table.

One consumer from the survey is selected at random. Leave all answers in a reduced fraction.

1. What is the probability that the consumer is 18–24 years of age, given that he/she dislikes Crunchicles?
   
      
   
2. What is the probability that the selected consumer dislikes Crunchicles?
   
      
   
3. What is the probability that the selected consumer is 35–55 years old or likes Crunchicles?
   
      
   
4. If the selected consumer is 70 years old, what is the probability that he/she likes Crunchicles?

REQUIRED

Post all transactions, adjusting and closing entries for Midnight Oil for the fiscal year ending December 31, 2004.

MIDNIGHT OIL (MO)

Midnight Oil (MO) was formed as a private corporation on January 1, 2003, by Hanna Carins. Although Carins had been making candles in her basement in Port Stanley for years to give as gifts, she had decided to expand her operations in order to generate additional income. Port Stanley, a small town bordered by Lake Erie, was about 30-minutes drive from London, Ontario. The town attracted many tourists to its beaches, making it an ideal locale for the sale of specialty candles. Carins’ second fiscal year had just ended, and she was anxious to discover how profitable it had been.

PRODUCTION PROCESS AND FIXED ASSETS

Carins used several pieces of equipment to manufacture her signature cube candles. The first, a large stove burner, was used to melt the raw, solid wax. Carins had purchased the burner on the first day of operations for $4,500 and had amortized it using the straight-line method over 10 years.¹ The burner worked well until May 1, 2004, when Carins spent $900 to repair the heating mechanism. This unexpected repair was paid for with cash and was expected to add on additional year to the burner’s useful life. Its salvage value would remain the same.

Large pots, used to melt the wax, deteriorated quickly and were amortized using the units-of-output method. Their total original cost was $2,200, with an estimated$200 salvage value after approximately 700 batches. The pots had been used for 275 batches by early November of fiscal 2004 in anticipation of the Christmas season, and on November 8, 2004, Carins decided to scrap all the pots. Carins received $100 from a wrecker for the metal. The following day, Carins purchased new large pots for a total cost of $2,900 cash. She decided to amortize the new pots using the same method of amortization as the old pots (including the original life of 700 batches) buy decided on a $00 salvage value. The new pots were used to make a total of 40 batches from November 9, 2004, to December 31, 2004.

Three moulds were used to form the melted wax into the square shape that Carins had designed. These moulds were amortized using the double-declining-balance method, had useful life of five years and were expected to have a salvage value of $150 each. Each mould had originally cost $1,200, not including transportation costs of $75 each. On the first day of fiscal 2004, each mould had a net book value of $765.

In additional to the office equipment listed on the fiscal 2003 balance sheet (see Exhibit 1), Carins had purchased a new printer for $1,000 on January 1, 2004, to make her invoices look more professional. The printer had been purchased using a 90-day note payable that carried four per cent annual interest and had been paid in full in cash on the maturity date. Carins planned to amortize the printer using the same method as the rest of the office equipment.

MANUFACTURING FACILITY

Originally, Carins had believed she could operate out of her basement, but she quickly realized more space was needed. In early June 2003, Carins began renting a small 500-square-foot workspace in Port Stanley for $450 per month paid with cash on the last day of each month. Upon signing the three-year lease, Carins had been required to pay both first and last month’s rent. The manufacturing area represented 450 square feet, and the remaining space was used for Carins’s office.

Utilities for the rented workspace had totaled $1,100 in fiscal 2004, but Carins had recorded payments by cheques for $1,150. Carins allocated utilities costs based on space occupied. Insurance covering production operation only was purchased annually on January 1 with cash and had cost $800 in fiscal 2003. The premium had increased by 10 per cent in fiscal 2004.

WAGES AND SALARIES

While Carins did perform some of the manufacturing herself, she needed two part-time workers to help make the candles. The part-time employees earned $7.15 per hour, and each had worked 250 hours in fiscal 2004. All wages had been paid in full. Carins had been compensating herself generously ($2,000 per month), and she thought that 50 per cent of her time was spent actually making the candles. On top of her monthly salary, depending on the results for fiscal 2004, Carins would decide whether to issue herself, as the shareholder, a dividend subsequent to year-end.

OTHER DISBURSMENTS

Carins had paid the following miscellaneous costs with cash: $684 for fiscal 2003 income taxes, $260 for the telephone, $500 in promotional materials, and $65 for transportation to customers. MO had also established a petty cash fund for $110 on December 30, 2004.

Carins had required a bank loan to help cover the initial costs of the production equipment and inventory. The loan was listed on the balance sheet and was being paid back in equal annual installments of $500, paid on the first day of the fiscal year beginning January 1, 2004. Carins paid five per cent interest on the loan amount outstanding at the end of each year. Both the loan and the interest were paid with cash.

SALES

All of MO’s customers purchased their candles with cash. By the end of the year, MO had six regular customers whose purchases had totaled $49,000.² Discounts had not been offered in fiscal 2004.

INVENTORIES

Oil, used to coat the moulds, was the only production supply required. Carins had purchased $170 worth of supplies in fiscal 2004 with cash, and she had $25 worth of supplies remaining on December 31, 2004.

MO used the weighted-average-cost method of inventory valuation to determine the value of wax at year-end. Carins had started fiscal 2004 with 20 kilogram of wax, had purchased 310 kilograms,³ and counted only five kilograms on hand on December 31, 2004. Glaxen Inc. was MO’s only supplier. Glaxen shipped FOB destination and demanded cash on delivery. Carins remembered that a shipment had been ordered for 24 kilograms on December 27. The shipment had cost $245 but had not yet arrived in Port Stanley. Wax covered rope wicks were also included in the raw materials account. No purchases had been made in the year, and Carins estimated $11 worth of wicks remained on hand.

Some candles were partially completed at the end of December 31, 2004. Carins estimated that an allocation of $120 of her salary had five hours of part-time work had been spent manufacturing the candles, and that $40 of raw materials had been used so far. Carins used direct labor dollars as the proxy for determining partial factory overhead.

Finally, Carins had counted 70 finished candles in the small storage area and had no record of any damaged candles.

MO paid corporate tax at a rate of 20 per cent.

REQUIRED

Post all transactions, adjusting and closing entries for Midnight Oil for the fiscal year ending December 31, 2004.

¹Carins expected a salvage value of $500 at the end of the burner’s useful life

²Representing 4,640 candles

³For a total cost of $936

¹Raw materials – wax ($30); raw materials – wicks ($23); finished goods ($95, representing 30 candles).

^2The office equipment was amortized using the straight-line method over 10 years with no salvage value

³Relates to utilities used but not paid as at year-end.

⁴MO paid corporate income tax at a rate of 20 per send.

The following table contains the historic returns from a portfolio consisting of large stocks and a portfolio consisting of long-term Treasury bonds over the last 20 years. T-bills returns represent risk-free returns. Analyze the risk-return trade-off that would have characterized these portfolios. The following dataset is also available in Excel format in Module 3 Resources on Canvas. Returns in the dataset are in percents. For example, 31.33 means 31.33% per year.

a. Estimate the annual risk premium of large stocks, and T-bonds?. (Round your answers to 2 decimal places.)

b. Estimate the annual volatility of large stocks and long-term T-bonds, respectively. (Round your answers to 2 decimal places.)

c. Estimate the Sharpe ratio of large stocks and long-term T-bonds, respectively. (Round your answers to 2 decimal places.)

d. Now assume that you have always invested half of your wealth in the stock and the other half in the T-bonds. Estimate the Sharpe ratio of your portfolio. (Round your answers to 2 decimal places.)