This is the trial balance of Cullumber Company on September 30.

The October transactions were as follows.

Post to the ledger accounts. (Post entries in the order of information presented in the question.)

A newly formed firm must decide on a plant location. There are two alternatives under consideration: locate near the major raw materials or locate near the major customers. Locating near the raw materials will result in lower fixed and variable costs than locating near the market, but the owners believe there would be a loss in sales volume because customers tend to favor local suppliers. Revenue per unit will be $175 in either case.

Using the above information, determine which location would produce the greater profit. (Omit the "$" sign in your response.)

(Click to select)Kansas CityOmaha would produce the greater gross profit of $ .

USM sells products it manufactures in the United States to unrelated foreign and U.S. customers who agree in a written installment debt obligation to pay the purchase price in installments over a period of 5 years. USM sells the installment obligations to Matterhorn for less than the unpaid principal balance on the obligations. Matterhorn either collects the obligations at maturity at face value or sells them to an unrelated party for more than it paid USM for them but less than their face value.

(a) What are the tax consequences of these transactions under Internal Revenue Code Sections 864(d), 951(a)(1)(A) and 954(c)?

(b) Would the result change in part (a) if Matterhorn loaned the funds directly to the unrelated foreign customers who used them to buy the products from USM for cash?

George Jetson owns and operates a restaurant and catering business which has seen the business show an increase in revenue over the last 6 months. With an increase in revenues George realized the expenses would also increase, but expected to see an increase in the cash position of the business. In reviewing the cash position and bank account, he has realized there has been a decrease in the cash position. The business receives cash and credit cards at the restaurant and also extends credit to customers for the catering business.

1. Explain the internal controls George needs to have in place for the receipt of both cash and credit cards for the restaurant.
2. Explain the issues involved with extending credit to customers in regards to both trade receivables and notes receivables.
3. Select and defend one of the methods to handle the write-off of bad debt.

To Savor or to Groupon?

Mr. Chang, the owner of Enter the Dragon, a high-end Asian restaurant in Chicago, was puzzled by the choices put before him by the Groupon sales representative. He could offer a daily deal at Groupon (a $60 coupon for $30) that would be seen by hundreds of thousands of Groupon subscribers in the Chicago region, or he could offer a more tailored discount at Savored, a restaurant reservation site also owned by Groupon. Business had been slow lately, especially during weeknights, and Mr. Chang wanted to spur demand. He wanted to make sure, however, that he did so in a way that actually increased profits. He estimated that demand on weeknights was normally distributed, with a mean of 60 and a standard deviation of 30. Given a capacity of 100 and only a single seating per table per night, there were empty tables on many nights.

Groupon and the Daily Deal

Launched in 2008, Groupon expanded rapidly on the basis of its daily deals. The daily deal amounted to a 50 to 70 percent discount coupon for a product or service offered by a local business. The deal was broadcast by Groupon to its subscribers; if the number of buyers exceeded a threshold, the deal was finalized and the company shared about half the revenues with the local business while keeping the rest as its commission. The local business thus received about 20 to 25 cents on the dollar of retail value. Customers who purchased a coupon using the daily deal then contacted the local business for their product or service. At restaurants like Enter the Dragon, Groupon buyers tended to get their reservations as soon as they purchased their coupon, which was well before regular customers tried to get their reservations. The popularity of the daily deal among subscribers led to rapid growth at Groupon. After rejecting a $6 billion offer from Google, the company went public in 2011. Its stock has had a turbulent journey since then. After opening at $25, the stock hit a low of $4 by the end of 2012 before recovering to $10 by early 2014. The drop in price could be attributed in part to the higher marketing costs and the negative publicity from some retailers who had used the daily deal. Some complained that “the financials just can’t work,”2 whereas others called Groupon the “worst marketing ever.” Retailers complained that while Groupon brought in new customers, the margins were terrible because the 20 to 25 cents on the dollar recovered from a Groupon deal was much lower than the revenue the new customers provided. A very popular blog post by Jay Goltz on the New York Times3 site offered retailers a way to evaluate the benefit of the daily deal. He suggested that retailers think of Groupon as advertising. Instead of writing a check to the advertising agency, retailers using the daily deal were choosing to lose money on sales. Thus, the only calculation that mattered was the cost per new customer acquired from a daily deal. The blog post suggested the following eight key metrics to decide whether the daily deal was cost effective advertising:

1. Incremental cost of sales

2. Size of the average sale

3. Percentage of coupons redeemed

4. Percentage of coupons purchased by current customers

5. Number of coupons purchased per customer

6. Percentage of new coupon customers who become regular customers

7. Value of all Groupon subscribers seeing the daily deal

8. Current cost to acquire new customer through advertising

The value of the daily deal depended on these numbers. In an example described on the blog, Mr. Goltz focused on a restaurant that sold 3,000 coupons with a face value of $75 for $35 (the restaurant received only $17.50, with Groupon keeping the rest as commission). He assumed that the restaurant spent 40 percent (of normal revenue, not discounted revenue) in incremental cost; customers spent, on average, $85 ($10 more than the coupon); only 85 percent of the coupons were redeemed; 40 percent of the coupons were purchased by current customers; two coupons were purchased per customer; and about 10 percent of the new customers came back to the restaurant. In this case, the restaurant received a check of $52,500 (= 3000 * 17.50) from Groupon and additional revenues of $25,500 (= 3000 * 0.85 * 10) because the customers who came to the restaurant spent $10 more than the face value of the coupon. The incremental cost of serving these customers was $86,700 (= 3000 * 0.85 * 85 * 0.40). The restaurant thus lost $8,700 on this deal. If viewed as advertising expense, it was necessary to evaluate the number of new repeat customers that the deal brought in. Given that 2,550 (= 3000 * 0.85) coupons were redeemed and each customer bought two coupons, the deal was used by a total of 1,275 customers. Given that 60 percent of these were new customers, the deal brought 765 (= 1275 * 0.6) new customers to the restaurant. If 10 percent of them would return, the deal effectively brought in 76 new repeat customers. The restaurant then had to decide whether spending $8,700 to bring in 76 new repeat customers was more effective than other forms of advertising.

Savored and Restaurant Discounts

Groupon acquired Savored, a restaurant reservation engine, in September 2012. Savored offered discounts of up to 40 percent at upscale restaurants as long as customers made the reservations online in advance. Restaurants could vary the discount offered by time of day and day of week, with larger discounts for less popular times. Restaurants could

also vary the number of tables available at the discount price. Savored suggested times when discounts should be offered after studying a restaurant’s traffic patterns. For example, all Saturday night slots at the Capital Grille on Wall Street were discounted because it attracted a workweek crowd, whereas the Fatty Crab in the West Village in Manhattan offered only a Saturday night discount at 11 p.m.4 Savored had helped restaurants manage their idle capacity effectively. Le Cirque, an upscale Manhattan restaurant, had eliminated its cheaper pre-theater menu because Savored reservations filled those slots.

Study Questions

Use the spreadsheet Chapter16-Groupon for any supporting analysis.

1. Assume a variable cost of $10 per table and an average spending of $60 per table. With the daily deal ($60 for $30 coupon), Groupon provides Mr. Chang with a revenue of $15 per table. The analysis provided in the New York Times blog indicates that Mr. Chang makes money ($5 per table) through the daily deal (rather than incurring advertising expense). Do you think the analysis has included all aspects that need to be considered? Should Mr. Chang go ahead with the daily deal given that he can advertise while making a little bit of money per coupon?

2. With Savored, Mr. Chang can limit the number of tables he allows for the discount price. Assuming he makes the same revenue with Savored per discounted table as the daily deal ($15), do you think the ability to limit the number of tables at discount has any advantages? Would you prefer to use Savored or the daily deal?

3. Would you prefer to use Savored or the daily deal? Why?

The restaurant owner Lobster Jack wants to find out what the peak demand periods are, during the hours of operation, in order to be better prepared to serve his customers. He thinks that, on average, 60% of the daily customers come between 6:00pm and 8:59pm (equally distributed in that time) and the remaining 40% of customers come at other times during the operating hours (again equally distributed). He wants to verify if that is true or not, so he asked his staff to write down during one week the number of customers that come into the restaurant at a given hour each day. His staff gave him the following data:

Help the manager figure out if his instincts are correct or not. Use a Chi-Squared test to see if the observed distribution is similar to the expected. Use the average demand for a given time as your observed value.

Part 1:

What is the p-value of your Chi-Square test?

Parts 2:

The owner now wants you to help him analyze his sales data. The restaurant is famous for its Lobo lobster roll. You were given some information based on which you deduced that the demand for the lobster roll was normally distributed with a mean of 220 and standard deviation of 50. You also know that the lobster supplier can provide lobster at a rate that mimics a uniform distribution between 170 and 300. One Lobster is used per roll and the lobsters need to be fresh (i.e. the restaurant can only use the lobsters that are delivered that day).

You decide to run 200 simulations of 1000 days each.

1. Calculate the expected sales of Lobster roll per day based on your simulation results. I solved

201

2. Use the expected sales from each of your 200 simulations to create a confidence interval for the average expected sales. What is the 95% confidence interval, L (Your confidence interval is mean +/- L), for this estimate?

Assume that Division A has has a product that can be sold either to Division B of the same company or to outside customers. The manager of both division are evaluated based on their own divisions return on investment. The manager are free to decide if they will participate in any internal transfers.

Division A

Capacity in units = 100,000

Number of units now being sold out to outside customers = 750,000

Selling price per unit on the outside market = $60

Variable costs per unit = $35

Fixed costs per unit = $17

Division B

# of units needed annually = 20,000

Purchase price now being paid to outside supplier = $60

Will the division managers agree to transfer and if so, within what range will the transfer be?

the manager will agree to transfer at a price between $52 - $57

the manager will agree to transfer at a price between $52 - $60

the manager will agree to transfer at a price between $35 - $60

the manager will not agree to a transfer

the manager will agree to transfer at a price between $35 - $38

Shelli graduates from the University of South next month on her 25^th birthday, and she is excited to begin her new career. Because she wants to have a comfortable living when she retires, Shelli has decided to begin planning for her retirement now. As a result, she is currently evaluating the amount she needs to contribute to a retirement fund satisfy her financial requirements at retirement. After speaking to retired friends and relatives, Shelli estimates she will need $60,000 each year to be able to live comfortably and enjoy her “twilight years.” In addition, Shelli expects that she can invest in a retirement fund that will yield 8 percent interest compounded annually for a long as she contributes to the fund. As soon as she retires, Shelli will have to move her retirement “nest egg” to another investment so she can withdraw money when she needs it. Her plans are to move the money to a fund that allows withdrawals at the beginning of each year and pays 5 percent interest compounded annually. Shelli expects to retire in 40 years, and, after taking an online “life expectancy” quiz, she has concluded that she will live another 25 years after she retires. If Shelli’s expectations are correct, how much must she contribute to the retirement fund to satisfy her retirement plans if she intends to make her first contribution to the fund one year from today and the last contribution on the day she retires?

Alvin wants to save money to pay for his college education, which he plans to start in three years. Currently, the cost per year (for everything—food, clothing, tuition, books, transportation, and so forth) to attend the college he has chosen is $15,000; but these costs are expected to increase at the same rate as inflation, which is 3 percent, each year. Alvin plans to make three equal annual deposits into his “education” investment account beginning today. These deposits will earn 8 percent interest.

a.   If he plans to finish his college degree in four years, what will be the cost of Alvin’s education each year he is in college?

b.   How much must Alvin contribute each year so that he has enough money in his education fund when he starts college in three years to pay the costs for the four years it takes him to complete his degree?

The PerottiPharma Company is investigating the relationship between advertising expenditures and the sales of some over-the-counter (OTC) drugs. The following data represents a sample of 10 common OTC drugs. Note that AD = Advertising dollars in millions and S = Sales in millions $.

1. What is the equation of the regression line?
2. State the hypotheses to test for the significance of the regression equation.
3. Is there a significant relationship between dependent and independent variables at alpha=0.05? Why or why not?
4. Interpret the slope of the regression line in the context of the problem.
5. Find the coefficient of determination and interpret its meaning in the context of the problem.
6. Create a 95% prediction interval for Sales if Advertising dollars = $50 million and interpret its meaning.