Tom used to run his own business, a small café. Last year, due to water damage from a flash flood, not only did he lose a substantial part of his inventory; but his café also sustained damages. In order to carry on the business, he sold the café to his friend, Bill, who invested money to replace/repair damaged shop fixtures and machines, and to purchase new inventory. The small café offers coffee and tea, and light food snacks bought from outside suppliers. The snacks are heated up in the café and served. There is only one other worker, a waiter. Tom is now the manager. Between the two of them, they make drinks, serve customers, and clean up.

When he was running his own business, Tom did not receive a salary. Now he is paid $2,500 per month. The waiter is paid $1,000 a month. They both work from 9 am to 8 pm, six days a week. Tom is also in charge of purchasing for the café. In the past, he bought inventory in bulk to get a lower price. However, as the inventory is perishable, it often spoils and at the end of each quarter about 30% is thrown away. This spoilage cost has been factored into the cost of ingredients per set. The café sells drink & snacks in a set. The average ingredient costs for each set is $2.20 and it is sold at $4 per set. Rent and utilities average $2,500 per month. The business uses the number of sets as an allocation base for its overhead costs.

The budgeted sales for the next five quarters for the café are stated below:

Required:

(a) Apply normal costing and compute the product cost for a typical set (hint: fixed costs should be allocated using an appropriate predetermined overhead rate).

(b) If Tom is evaluated based on budgeted profit for the café, explain how Bill should rate Tom’s performance for the first two quarters of 2018 if the actual sales for the café are as follows (assume there are differences in the budgeted and actual costs per set of meal and selling price per set of meal).

(c) The café pays for purchases of ingredients one quarter later. All other expenses are paid for in cash in the same quarter. Assuming the café has a cash balance of $28,400 and no outstanding ingredients payments at the beginning of 2018 from purchases in Quarter 4 of 2017, construct the cash budget for Quarter 2 and Quarter 3 of 2018.

What is it about the Market and its pricing system that brings the most efficient allocation of goods?

1.

Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales occur in May of each year, as shown in the company’s sales budget for the second quarter given below:

From past experience, the company has learned that 30% of a month’s sales are collected in the month of sale, another 60% are collected in the month following sale, and the remaining 10% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $410,000, and March sales totaled $440,000.

Required:

1. Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.

2. What is the accounts receivable balance on June 30th?

2.

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company now is planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

The finished goods inventory on hand at the end of each month must equal 3,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 19,250 units.

The raw materials inventory on hand at the end of each month must equal one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 99,375 cc of solvent H300.

The company maintains no work in process inventories.

A monthly sales budget for Supermix for the third and fourth quarters of the year follows.

Required:

1. Prepare a production budget for Supermix for the months July, August, September, and October.

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

1.

Silver Company makes a product that is very popular as a Mother’s Day gift. Thus, peak sales occur in May of each year, as shown in the company’s sales budget for the second quarter given below:

From past experience, the company has learned that 30% of a month’s sales are collected in the month of sale, another 60% are collected in the month following sale, and the remaining 10% are collected in the second month following sale. Bad debts are negligible and can be ignored. February sales totaled $410,000, and March sales totaled $440,000.

Required:

1. Prepare a schedule of expected cash collections from sales, by month and in total, for the second quarter.

2. What is the accounts receivable balance on June 30th?

2.

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company now is planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

The finished goods inventory on hand at the end of each month must equal 3,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 19,250 units.

The raw materials inventory on hand at the end of each month must equal one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 99,375 cc of solvent H300.

The company maintains no work in process inventories.

A monthly sales budget for Supermix for the third and fourth quarters of the year follows.

Required:

1. Prepare a production budget for Supermix for the months July, August, September, and October.

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

Rainbow Company, a medium-sized company specialized in the manufacture and
distribution of equipment for babies and small children, is evaluating a new capital
expenditure project. In a joint venture with another separate company it has invented a
remote controlled pushchair, one of the first of its kind on the market. It has been unable
to obtain a patent for the invention, but is sure that it will monopolize the market for the
first three years. After this, it expects to be faced with stiff completion.
The details are set out below:
1. The project has an immediate cost of K2, 100,000
2. Sales are expected to be K1, 550, 000 per annum for the first three years, falling
to K650, 000 per annum for the last two years.
3. Cost of sales is 40% of sales
4. Distribution costs represents 10% of sales.
5. The company’s cost of capital is 5%
Required:
a) Calculate the NPV of the project at the company’s required rate of return. State
whether the project is financially viable? [5 Marks]
b) Calculate the projects Internal Rate of Return (IRR) to the nearest percent.

Animation Nation (AN) copies and distributes Japanese animated videos for the U.S. market. In order to better serve this market, it is considering the immediate purchase of new video reproduction equipment costing $600,000.

AN expects this equipment to last 3 years and plans to use straight-line depreciation during its economic life. At the end of three years it will place the equipment at the street curb, from which it will costlessly disappear.

The new equipment is expected to generate sales of $500,000 in the first year, $350,000 in the second year, and $100,000 in the third year. The shrinkage in sales is expected to result from new entries into the market.

In order to support these sales AN will require $50,000 in net working capital (NWC) in the first year, keeping it at that level until the third year, at which time NWC will be drawn down to zero, the level it was at before the project was undertaken.

The costs of goods sold are expected to be $200,000 in the first year, $210,000 in the second year and $80,000 in the third year. The tax rate applicable to AN’s situation is 34%; of course, if EBIT is negative, it will pay no tax.

1.         Develop a Depreciation Schedule.

2.         Estimate NWC and NFA. This can be thought of as a pro forma balance sheet.

3.         Compute ΔNWC and NCS.

4.         Estimate OCF. Recall that OCF = EBIT + Depreciation – Taxes. This requires the development of what can be thought of as pro forma income statements for years 0, 1, 2 and 3. Each statement should be of the general form

Animation Nation

Pro Forma Income Statement

Year x

Sales

Cost of Goods Sold

Depreciation

EBIT

Taxes

Net Income

Animation Nation

Pro Forma Income Statement

Year 0

Sales                                       

Cost of Goods Sold                

Depreciation                          

EBIT                                      

Taxes                                     

Net Income                            

Animation Nation

Pro Forma Income Statement

Year 1

Sales                           

Cost of Goods Sold    

Depreciation              

EBIT                          

Taxes                         

Net Income                

Animation Nation

Pro Forma Income Statement

Year 2

Sales                           

Cost of Goods Sold    

Depreciation              

EBIT                          

Taxes                                   

Net Income                

Animation Nation

Pro Forma Income Statement

Year 3

Sales                           

Cost of Goods Sold    

Depreciation  

EBIT                         

Taxes                                    

Net Income              

5.         Compute CF. Recall that CF = OCF - DNWC – NCS, where OCF is operating cash flow, CF is cash flow, DNWC is change in net working capital, and NCS is net capital spending. Given this information, complete the table below.

6.         Determine the required return. By assumption, it is 15%.

7.         Compute NPV.           

8.         Reflect and decide. Should Animation Nation undertake this project?

9.         Compute IRR and decide should Animation Nation undertake the project based on IRR.

PotashCorp

The data set in the file ch18_MCSP_PotashCorp contains average quarterly share prices for PotashCorp and prices for potash mineral. Investigate the relationship between these variables. (a) Some people think that if the share price of a mining company is high, that is because investors expect high mineral prices for thecorresponding quarter. Can the potash price be estimated from the PotashCorp share price? The data includes a period when the price of potash mineral was exceptionally high. If you eliminate the quarters when the price of potash was over CDN$600/tonne, does that affect your analysis? (b) Other people think that if the price at which a mineral can be sold is high, then the share price of the companies producing that mineral will also be high. Is that the case for PotashCorp? That is, can PotashCorp’s share price be estimated from the potashmineral price? If you eliminate the quarters when the price of potash was over CDN$600/tonne, does that affect your analysis? (c) Compare your answers to (a) and (b) including R-squared, P-value for slope, and the regression lines themselves.

Share Buy-Backs and Special Dividends in Canada

PotashCorp announced a program to buy back up to 5% of its common shares between August 2013 and July 2014.

When a company has a strong balance sheet with surplus cash, it needs to find a use for that cash consistent with its strategic goals and the current business environment. When economic conditions aren’t favourable for spending the cash to pay off debt, acquire another company or expand operations, it can use its cash in two other ways: (1) announcing a special dividend, and (2) buying back shares, otherwise known as stock repurchase agreements. Both of these options return value to shareholders. The difference between them is that share buy-backs can be done gradually over several quarters and the amount of the buy-back can be adjusted to the surplus cash available in future quarters; special dividends, on the other hand, require the company to be pretty certain that a base level of surplus cash will continue to be available in future quarters.

Suppose you’re advising the board of directors of a major company that needs to decide between a share buy-back and a special dividend. Surplus cash during the past eight quarters is given in the table. (Quarter 8 is the most recent.)

The board will issue a special dividend if it can be both 95% certain that surplus cash will exceed $1.15 billion in quarter 9 and 95% certain that it will exceed $1.2 billion in quarter 10. It will announce a share buy-back program if it can be both 90% certain that the total surplus cash from quarter 9 will exceed $1.15 billion and that the surplus cash from quarter 10 will exceed $1.2 billion. Use linear regression to advise the board of directors about its options.

The data is given below

ACC 3010 Project 3 Part 1

• a) Go to the Australian Bureau of Statistics website and find the latest (December 2019) figures for output. In particular, find the percentage change in Trend GDP from the September Quarter 2019 to December Quarter 2019; and the December Quarter 2018 to December Quarter 2019; and the percentage change in Seasonally Adjusted GDP over the same two periods.

• b) Do the same for the December 2018 figures. (1 mark)

• c) Explain whether, based on the GDP data and all else equal, you would prefer to be incumbent Government running for re-election this time last year or now.

• d) Now find the ABS data for the Consumer Price Index, specifically report the figures for the December 2019 and December 2018 All Groups CPI and the Seasonally Adjusted CPI.

• e) What are the categories that experienced the most significant price rises and falls? Discuss whether, given your usual consumption bundle, you were likely better or worse off in December 2019 compared to September 2019.

• f) With COVID-19, there are talks about countries entering a period of recession. The article defines a technical recession as being two consecutive quarters of negative real GDP growth. What is the NBER (National Bureau of Economic Research) definition of a recession? (1 mark)

Camden Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:

Required

October sales are estimated to be $125,000, of which 40 percent will be cash and 60 percent will be credit. The company expects sales to increase at the rate of 8 percent per month. Prepare a sales budget.

The company expects to collect 100 percent of the accounts receivable generated by credit sales in the month following the sale. Prepare a schedule of cash receipts.

The cost of goods sold is 60 percent of sales. The company desires to maintain a minimum ending inventory equal to 10 percent of the next month’s cost of goods sold. However, ending inventory of December is expected to be $6,000. Assume that all purchases are made on the account. Prepare an inventory purchases budget.

The company pays 70 percent of accounts payable in the month of purchase and the remaining 30 percent in the following month. Prepare a cash payments budget for inventory purchases.

Budgeted selling and administrative expenses per month follow:

*The capital expenditures budget indicates that Camden will spend $82,000 on October 1 for store fixtures, which are expected to have a $10,000 salvage value and a three-year (36-month) useful life.

Use this information to prepare a selling and administrative expenses budget.

Utilities and sales commissions are paid the month after they are incurred; all other expenses are paid in the month in which they are incurred. Prepare a cash payments budget for selling and administrative expenses.

Camden borrows funds, in increments of $1,000, and repays them on the last day of the month. Repayments may be made in any amount available. The company also pays its vendors on the last day of the month. It pays interest of 1 percent per month in cash on the last day of the month. To be prudent, the company desires to maintain a $6,000 cash cushion. Prepare a cash budget.

Camden Company is a retail company that specializes in selling outdoor camping equipment. The company is considering opening a new store on October 1, 2019. The company president formed a planning committee to prepare a master budget for the first three months of operation. As budget coordinator, you have been assigned the following tasks:

Prepare a pro forma income statement for the quarter.

Prepare a pro forma balance sheet at the end of the quarter.

Prepare a pro forma statement of cash flows for the quarter.