A plant is to be built to produce blasting devices for construction work, and the decision must be made as to the extent of automation in the plant. Additional automatic equipment increases the investment costs but lowers the probability of shipping a defective device to the field, which must then be shipped back to the factory and dismantled at cost of $10 per device. The operating costs are identical for the different levels of automation. It is estimated that the plant will operate 10 years. The interest rate is 20%, and the rate of production is 100,000 devices per year for all levels of automation. Prepare a table with a column for all possible levels of automation, a column for the expected number of defectives in 100,000 devices, a column for the expected annual cost of defectives, a column for the annual cost of investment and a column for the total expected annual cost. Using the table, find the level of automation that will minimize the expected total annual cost for the investment costs and the probabilities given below

Level of Automation, Probability of producing a defective, Cost of investment ($)
1 0.100 100,000
2 0.050 150,000
3 0.020 200,000
4 0.010 275,000
5 0.005 325,000
6 0.002 350,000
7 0.001 400,000

An industrial engineer conjectures that a major difference between successful and unsuc- cessful companies is the percentage of their manufactured products returned because of defectives. In a study to evaluate this conjecture, the engineer surveyed the quality control departments of 35 successful companies (identified by the annual profit statement) and 35 unsuccessful companies. The companies in the study all produced products of a similar nature and cost. The successful companies selected had a mean percentage of total output returned by customers in the previous year of 5.51 with a standard deviation of 2.74, and the unsuccessful companies had a mean of 7.13 with standard deviation of 2.32. Is there suffi- cient evidence that successful companies have a lower percentage of their products returned by customers? Use α = 0.05.

1. State the null and alternative hypotheses for this problem.

2. Find the observed value of the test statistic.

3. Suppose you reject the null hypothesis. What conclusion can you make in terms of the problem?

An industrial engineer conjectures that a major difference between successful and unsuc- cessful companies is the percentage of their manufactured products returned because of defectives. In a study to evaluate this conjecture, the engineer surveyed the quality control departments of 35 successful companies (identified by the annual profit statement) and 35 unsuccessful companies. The companies in the study all produced products of a similar nature and cost. The successful companies selected had a mean percentage of total output returned by customers in the previous year of 5.51 with a standard deviation of 2.74, and the unsuccessful companies had a mean of 7.13 with standard deviation of 2.32. Is there suffi- cient evidence that successful companies have a lower percentage of their products returned by customers? Use α = 0.05.

1. State the null and alternative hypotheses for this problem.

2. Find the observed value of the test statistic.

3. Suppose you reject the null hypothesis. What conclusion can you make in terms of the problem?

a-1. Compute the gross profit percentage for both years. (Round your percentage answers to the nearest whole number. i.e. 0.1234 as 12%.)

a-2. Compute the inventory turnover for both years. (Round your answers to 1 decimal place.)

a-3. Compute the accounts receivable turnover for both years. (Round your answers to 1 decimal place.)

b. Which of the following show a positive or negative trend?

a-1. Gross profit percentage

Year 2%

Year 1%

a-2. Inventory turnover times times

Year 2

Year 1

a-3. Accounts receivable turnover times times

Year 2 ,

Year 1

Trend

b. Gross profit rate

Inventory turnover

Accounts receivable turnover

Growth in net sales

Air Corporation produces air purifiers.  The following per unit cost information is available:  direct materials $16,  direct labor $18,  variable manufacturing overhead $11,  variable selling and administrative expenses $6.  Fixed selling and administrative expenses are $50,000, and fixed manufacturing overhead is $150,000 per year.  Using a 45% markup percentage on total per unit cost and assuming 10,000 units, compute the target selling price.

Read the scenario in the teaching notes, share with us your opinion about? • • What you would do if you were Miho? • If Miho decides to sell, what percentage of her equity she should offer Amy in exchange for $30,000? Reference: An Example of Bagel Shop A Japanese girl, Miho, would like to open a bagel shop in Tokyo selling the genuine American bagel. Based on her research and observations on other bagel stores in Tokyo, she decides to sell plain bagels at $1.65. She also estimates the variable cost per bagel is $.45, and the total fixed cost is $4800 per month. Now she wants to know what is the break-even point for her bagel business based on these assumptions. More Reference material: To Sell or Not to Sell The Japanese girl, Miho, in the earlier bagel case, estimates that she would need to invest about $50,000 to purchase the necessary supplies and equipment. She has $20,000 in savings, but still needs additional $30,000. One of her best friends, Amy, is willing to write her the check of $30,000, if she is willing to sell Amy an equity stake in the business. Miho really likes the idea of owning her bagel business outright. But, Miho is not sure what percentage of her total equity she should offer Amy in exchange for $30,000. Here are Miho’s estimates about her bagel business for the first year: ? an average of 6000 bagels per month at $1.65 each ? The variable cost per bagel is $.45 ? The monthly fixed cost is $5,000 ? Tax @ 25% So, the estimated annual net profits are $ 19,800. After adjustment, the annual net cash flow is $20,000. Optional activity #1: Read the above scenario, think about: • What you would do if you were Miho, sell or borrow? • If Miho decides to sell, what percentage of her equity she should offer Amy in exchange for $30,000? You may try the discounted future cash flows approach to calculate the business value first, then decide on the percentage. Whether or not to take debt vs. equity is dependent upon many factors, including whether funding sources are available, the interest rate, the duration of the loan, the amount of the money you need, the percentage of ownership in exchange of the amount of investment, potential of the business (operation years and growth), etc. Thus, to make a sound decision, you probably need to do some research yourselves on 9 1. What is the typical interest rate for commercial loans?

Raleigh Department Store uses the conventional retail method for the year ended December 31, 2019. Available information follows:

1. The inventory at January 1, 2019, had a retail value of $50,000 and a cost of $36,200 based on the conventional retail method.
2. Transactions during 2019 were as follows:

Sales to employees are recorded net of discounts.

3. The retail value of the December 31, 2020, inventory was $104,325, the cost-to-retail percentage for 2020 under the LIFO retail method was 70%, and the appropriate price index was 107% of the January 1, 2020, price level.
4. The retail value of the December 31, 2021, inventory was $53,350, the cost-to-retail percentage for 2021 under the LIFO retail method was 69%, and the appropriate price index was 110% of the January 1, 2020, price level.

Required:
3. Assume Raleigh Department Store adopts the dollar-value LIFO retail method on January 1, 2020. Estimating ending inventory for 2020 and 2021.

Raleigh Department Store uses the conventional retail method for the year ended December 31, 2019. Available information follows:

1. The inventory at January 1, 2019, had a retail value of $45,000 and a cost of $27,500 based on the conventional retail method.
2. Transactions during 2019 were as follows:
   

Sales to employees are recorded net of discounts.

3. The retail value of the December 31, 2020, inventory was $56,100, the cost-to-retail percentage for 2020 under the LIFO retail method was 62%, and the appropriate price index was 102% of the January 1, 2020, price level.
4. The retail value of the December 31, 2021, inventory was $48,300, the cost-to-retail percentage for 2021 under the LIFO retail method was 61%, and the appropriate price index was 105% of the January 1, 2020, price level.

Required:
3. Assume Raleigh Department Store adopts the dollar-value LIFO retail method on January 1, 2020. Estimate ending inventory for 2020 and 2021.

Raleigh Department Store uses the conventional retail method for the year ended December 31, 2019. Available information follows:

1. The inventory at January 1, 2019, had a retail value of $45,000 and a cost of $27,500 based on the conventional retail method.
2. Transactions during 2019 were as follows:
   

Sales to employees are recorded net of discounts.

3. The retail value of the December 31, 2020, inventory was $56,100, the cost-to-retail percentage for 2020 under the LIFO retail method was 62%, and the appropriate price index was 102% of the January 1, 2020, price level.
4. The retail value of the December 31, 2021, inventory was $48,300, the cost-to-retail percentage for 2021 under the LIFO retail method was 61%, and the appropriate price index was 105% of the January 1, 2020, price level.

Required:
2. Estimate ending inventory for 2019 assuming Raleigh Department Store used the LIFO retail method. (Amounts to be deducted should be indicated with a minus sign.)

Case Defence sells smartphone cases and uses the perpetual inventory system. The following is information on the purchases and sales of “defender box” cases. On October 1, case Defence had 28 units with a unit cost of $22.

Procedures   Sales

Date Units Unit Cost Units Unit Price    Oct. 3   18 23

Oct. 6 23 $58

Oct. 12 28 25

Oct. 19 28 $58

Oct. 23 38 27

Oct. 30 33 $58

. 31 23 28

Required:

1. Calculate the dollar value of cost of goods sold and ending inventory for the month of October using the following methods. a. FIFO b. Moving weighted average. Round all unit costs to two decimal places and round all other numbers to the nearest dollar.

2. Using the calculations in Part 1, complete the following table:

FIFO Moving weighted avg.

Sales……………………………..

Cost of goods sold…………

Gross profit…………………….

3. Does using FIFO or moving weighted average produce a. A higher gross profit? b. A higher ending inventory balance?

4. Calculate the gross profit percentage for FIFO and moving weighted average for the month of October. Round to the nearest percentage.