The Case

You are a Senior Consultant for the professional service firm, BUSI 2083 LLP. Your firm specializes in providing a wide variety of internal business solutions for different clients. It is your final week on the job and a Manager asks you for some help prior to your departure. Eager to leaving a lasting impression, you start reading the background information provided by the Manager.

Lesley Donovan is the controller for the East division of Explorer Ltd. Jason Conner, head of plant engineering, has just left Donovan’s office after presenting three alternatives for submission in the capital expenditure budget for the fiscal year 2014. The budget is due to the CEO in two days and therefore Donovan realizes that time is of the essence.

Conner has outlined the following alternatives to replace an outdated milling machine:

build a general purpose milling machine;

buy a special purpose numerically controlled milling machine; or

buy a general purpose milling machine.

Explorer Ltd. is a well-established company. The company was set up about 30 years ago by two brothers Dan and Kevin Thompson, in Huntsville, Ontario, to produce accessories for the automobile industry. The Central division continues to serve the auto industry, and is the largest division in the company with sales of $35 million annually. Dan’s son is now head of this division. Kevin is still active in the company and is the Chief Executive Officer (CEO). His office is located in Toronto.

The parts division supplies seals to the mining and petrochemical industry from a plant in Toronto. This division is only ten years old and until 2010 was highly profitable. As a result of the downturn in the sector of the economy, sales in 2012 were only $12 million.

The East division, located in Scarborough, is the engineering division. Full-time employees tend to work approximately 2,000 hours in the division. Regular product lines include industrial fans, industrial cooling units, and refrigeration units for industrial users. The division is highly capital-intensive and sales tend to be directly related to general economic conditions.

Each division runs independently and performance is based upon budgeted return on investment. Bonuses are paid if the budget target is achieved. Annually, each division prepares a detailed budget submission to Kevin, outlining expected profit performance and capital expenditure requests. The milling machine proposal is part of the capital expenditure request.

The 2013 pro forma income statement for East division is set out below:

Sales	$22,364,000
Cost of Goods Sold	$14,760,240
Gross Profit	$7,603,760
Selling and General Administrative Costs	$3,578,760
Allocated Costs (based on sales)	$1,677,300
Income Before Income Taxes	$2,347,700
Return on Sales – 10.5%
Return on Investment – 8.5%
Investment (Historical Cost)	$27,626,118

Jason Connor has pointed out to Donovan that the existing machine is not only outdated but maintenance costs are becoming prohibitive. Jason also noted that maintenance costs of new general purpose machines are only $26,000 while special purpose machines can save an additional $14,000 in maintenance. Also there would be a significant savings in insurance as the price for a general purpose machine would drop to $3,000 while a special purpose machine would be 67% higher than the general purpose machine. The machine has no market or salvage value and he is sure that its book value is now zero. The trouble is that he doesn’t know which proposal is best for the company. In addition to the cost and revenue date provided, Connor provided comments on each alternative below:

Build a general purpose machine:

This machine can be built by East division. The division is below capacity at present as a major contract has just been completed. The division could thus produce the machine without affecting revenue-producing activity, but it will take six months to complete. The machine is expected to last five years and have no salvage value because removal costs will probably equal selling price.

Connor believes that the division has the technical expertise to undertake the work. In 2012, the division produced a specialized drilling machine that has proven very successful. Connor pointed out that David Williams, chief engineer, loves the design challenge of new machines. Donovan sat down with Connor and produced the following cost estimates:

Material and parts	$55,000
Direct labour (DL$)	$90,000
Variable overhead (50% of DL$)	$45,000
Fixed overhead (25% of DL$)	$22,500
TOTAL	$212,500

Donovan argues that this job should also bear a proportion of administrative costs; she suggests $12,000.

Buy a special purpose machine:
The advantage of this special purpose machine is that only one operator is required and output per hour could increase by 25%. In addition, maintenance costs are significantly reduced because microchip circuitry is employed.
Connor points out that this machine is state-of-the-art and would probably mean that new work could be taken on. A numerically controlled machine required extensive training of operators. In total, 26 weeks are spent in the supplier’s factory located in Florida. While the training is going on, the supplier provides an operator to work the machine without charge. Expected costs of this training period including hotel, per diem, and travel will cost $3,000 per week, excluding the operator’s labour which is set at $15 per hour.
The machine costs $625,000, and the supplier guarantees the salvage value of $25,000 at the end of five years. It is available immediately. It is estimated the machine can generate sales of $243,750 annually at full capacity and require $19,500 in direct materials cost. While the direct material costs are equivalent, the level of sales for the general purpose machine are $48,000 lower than the special purpose machine.

Buy a general purpose machine:
The purchase price of this machine is $295,000 and cost levels associated with the machine are expected to be the same as the general purpose machine built by the company because the technology is similar. The salvage value of the machine net of removal costs, is estimated to be $5,000 in five years. It can be delivered immediately.

General comments

The required rate of return for this investment class has been set at 8% by Kevin Thompson.

Question:

Prepare the budget submission to Kevin?

As CFO of Portobello Scuba Diving Inc. you are asked to look into the possibility of adopting a lockbox system to expedite cash receipts from clients. Portobello receives check remittances totaling ​$28 million in a year. The firm records and processes 15,000 checks in the same period. The National Bank of Brazil has informed you that it could provide the service of expediting checks and associated documents through the lockbox system for a unit cost of $0.30 per check. After conducting an​ analysis, you project that the cash freed up by the adoption of the system can be invested in a portfolio of​ near-cash assets that will yield an annual​ before-tax return of 10 percent. The company usually uses a​ 365-day year in its financial calculations.

a. What reduction in check collection time is necessary for Portobello to be neither better nor worse off for having adopted the lockbox​ system?

b. How would your solution to part ​(a​) be affected if Portobello could invest the​ freed-up balances at an expected annual return of only ​percent?

Barcelona Machine Tools. Oriol​ D'ez Miguel​ S.R.L., a manufacturer of heavy duty machine tools near​ Barcelona, ships an order to a buyer in Jordan. The purchase price is

€426,000.

Jordan imposes a

12%

import duty on all products purchased from the European Union. The Jordanian importer then​ re-exports the product to a Saudi Arabian​ importer, but only after imposing its own resale fee of

29%.

Given the following spot exchange rates on April​ 11, 2010, what is the total cost to the Saudi Arabian importer in Saudi Arabian​ riyal, and what is the U.S. dollar equivalent of that​ price?  ​(Click on the

  

icon to import the table into a​ spreadsheet.)

Currency Crossrate	Spot Rate
Jordanian dinar​ (JD) per euro ​(€​)	0.962
Jordanian dinar​ (JD) per U.S. dollar​ ($)	0.718
Saudi Arabian riyal​ (SRI) per U.S. dollar​ ($)	3.731

The spot​ rate, Saudi Arabian riyal per Jordanian dinar is SRI

nothing​/JD.

​(Round to five decimal​ places.)

In 2013, Slim Drug Company began to notice problems with its obesity drug. The company stopped selling the drug near the end of 2013. In the last six months of 2014, the company was sued by 1,000 people who had an allergic reaction to the company’s obesity drug. At the end of 2014, the company’s lawyers believe there is a 60% chance the company will need to make payments in the range of $1,000 to $5,000 to settle each claim. At the end of 2015 while none of the cases have been resolved, the company’s lawyers now believe there is an 80% chance the company will need to make payments in the range of $2,000 to $7,000 to settle each claim. In 2016, 400 claims were settled at a total cost of $1.2 million. Based on this experience, the company believes 30% of the remaining cases will be settled for $3,000 each, 50% will be settled for $5,000 and 20% will be settled for $10,000 each.

Required: Using AASB Standards, show what journal entries would be required in 2013, 2014, 2015 and 2016.

A magnetic field of 37.2 T has been achieved at the MIT Francis Bitter National Magnetic Laboratory. Find the current needed to achieve such a field
a) 2.00 cm from a long straight wire
b) At the centre of a circular coil of radius 42.0 cm that has 100 turns
c) Near the center of a solenoid with radius 2.40 cm, length 32.0 cm and 40000 turns

What effect will each of the following have on the demand for product B? Indicate how the demand side will change for each one.

a) Product B becomes more fashionable. b) The price of substitute product C falls. c) Income declines and product B is an inferior good. d) Consumers anticipate that the price of B will be lower in the near future. e) The price of complementary product D falls.

Conduct an online search about the following topic:
Effect of Transmission Lines Electric Fields on Humans (depending on voltage levels, safe distance
from power lines, risk of working or living near power lines).
Your findings should be presented in the form of a word file consisZng of 4 pages (including
diagrams, pictures, other graphics) with Times New Roman font, size 12.

10. (a) The persistent organic pollutants (POPs) that transport via atmosphere into the Arctic have their unique chemical signature. Explain this statement by comparing their chemical properties with POPs that stay near the source region and appropriate examples. (b) Describe the significance of the global distillation model in understanding the long-distance transport of POPs to the arctic. (c) What are the long-term ecological and human ramifications of POPs contamination in the arctic.

In each​ case, find the approximate sample size required to construct a 90​% confidence interval for p that has sampling error SE=0.07. a. Assume that p is near 0.4. b. Assume that you have no prior knowledge about​ p, but you wish to be certain that your sample is large enough to achieve the specified accuracy for the estimate.

a. The approximate sample size is _____

b. The approximate sample size is _____