Carlos Cavalas, the manager of Echo Products’ Brazilian Division, is trying to set the production schedule for the last quarter of the year. The Brazilian Division had planned to sell 3,600 units during the year, but by September 30 only the following activity had been reported:

The division can rent warehouse space to store up to 1,000 units. The minimum inventory level that the division should carry is 50 units. Mr. Cavalas is aware that production must be at least 200 units per quarter in order to retain a nucleus of key employees. Maximum production capacity is 1,500 units per quarter.

Demand has been soft, and the sales forecast for the last quarter is only 600 units. Due to the nature of the division’s operations, fixed manufacturing overhead is a major element of product cost.

Required:

1. Assume that the division is using variable costing. How many units should be scheduled for production during the last quarter of the year? (The basic formula for computing the required production for the quarter is: Required production = Expected sales + Desired ending inventory − Beginning inventory.) Show computations and explain your answer. Will the number of units scheduled for production affect the division’s reported income or loss for the year? Explain.

2. Assume that the division is using absorption costing and that the divisional manager is given an annual bonus based on divisional operating income. If Mr. Cavalas wants to maximize his division’s operating income for the year, how many units should be scheduled for production during the last quarter? [See the formula in (1) above.] Explain.

3. Identify the ethical issues involved in the decision Mr. Cavalas must make about the level of production for the last quarter of the year.

Herbal Care is ready to begin its third quarter. The company has requested a $40,000, 90-day loan for its bank to
help meet cash requirements during the quarter. The bank’s loan officer has asked the Herbal to prepare a cash
budget for the quarter. In response, the following data have been assembled:

1. On July 1, the beginning of the third quarter, the company will have a cash balance of $65,000.
2. Actual sales for the last two months and budgeting sales for the third quarter are shown below. Past
experience shows that 20% of a month’s sales are collected in the month of the sale, 50% in the month
following the sale, and 25% in the second month following the sale. The remainder is uncollectible.

Month Amount
May (actual) $350,000
June (actual) $380,000
July (budgeted) $450,000
August (budgeted) $550,000
September (budgeted) $260,000

3. Budgeted merchandise purchases and budgeted expenses for the third quarter are shown below.
Merchandise purchases are paid in full during the month following the purchase. Accounts payable for
merchandise purchases on June 30, which will be paid during July, total $240,000. All other cash expenses are
paid in the month of the expense.

Item    July    August    September
Merchandise purchases    $ 250,000 $ 250,000 $ 245,000
Salaries and wages 50,000    50,000 50,000
Advertising    130,000 110,000 90,000
Rent payments 9,000 9,000 9,000
Depreciation    20,000 20,000 20,000

4. Equipment costing $30,000 will be purchased for cash during July.
5. In preparing the cash budget, assume that the $40,000 loan will be made in July and repaid in September.
Interest on the loan, $1200, will be paid in September.

Required:
Prepare a cash budget for the third quarter (July, August, and September). Include four columns in your cash
budget: one for each month, and one for the entire third quarter.   

Superior Company provided the following data for the year ended December 31 (all raw materials are used in production as direct materials):

Inventory balances at the beginning and end of the year were as follows:

The total manufacturing costs for the year were $685,000; the cost of goods available for sale totaled $735,000; the unadjusted cost of goods sold totaled $668,000; and the net operating income was $34,000. The company’s underapplied or overapplied overhead is closed to Cost of Goods Sold.

Required:

Prepare schedules of cost of goods manufactured and cost of goods sold and an income statement. (Hint: Prepare the income statement and schedule of cost of goods sold first followed by the schedule of cost of goods manufactured.)

Complete this question by entering your answers in the tabs below.

• Income Statement
• COGS Schedule
• COGM Schedule

Prepare an income statement for the year.

prepare COGS schedule

Prepare a COGM schedule.

Periodic Inventory System and Inventory Costing Methods During its first year of operation, Lux Company purchased 5,600 units of a product at $42 per unit. During the second year, it purchased 6,000 units of the same product at $48 per unit. During the third year, it purchased 5,000 units at $60 per unit. Lux managed to have an ending inventory each year of 1,000 units. The company uses the periodic inventory system. Prepare cost of goods sold statements that compare the value of ending inventory and the cost of goods sold for each of the three years using the FIFO inventory costing method. If an amount is zero, enter "0". Year 1 Year 2 Year 3 Beginning inventory: $ $ $ Purchases: $ $ $ Cost of goods available for sale: $ $ $ Ending inventory: $ $ $ Cost of goods sold: $ $ $ Prepare cost of goods sold statements that compare the value of ending inventory and the cost of goods sold for each of the three years using the LIFO method. If an amount is zero, enter "0". Year 1 Year 2 Year 3 Beginning inventory: $ $ $ Purchases: $ $ $ Cost of goods available for sale: $ $ $ Ending inventory: $ $ $ Cost of goods sold: $ $ $

In the Schedule of Cost of Goods Manufactured and Cost of Goods Sold, the cost of goods manufactured is computed according to which of the following equations?

Multiple Choice

Cost of goods manufactured = Total manufacturing costs + Beginning finished goods inventory – Ending finished goods inventory

Cost of goods manufactured = Total manufacturing costs + Beginning work in process inventory – Ending work in process inventory

Cost of goods manufactured = Total manufacturing costs + Ending work in process inventory – Beginning work in process inventory

Cost of goods manufactured = Total manufacturing costs + Ending finished goods inventory – Beginning finished goods inventory

Suppose there are two goods in an economy, X and Y. Prices of these goods are Px and Py, respectively. The income of the only agent (consumer) in the economy is I. Using this information, answer the following questions:

a. Write down the budget constraint of the consumer. Draw it on a graph and label the critical points accordingly. Provide a verbal explanation of why all income is spent, mentioning the underlying assumption for this outcome.

b. Define substitution and income effects.

c. Assuming both goods are normal, suppose Px goes down due to an excess supply of good X, whereas Py is held constant. Drawing a graph, show the substitution and income effects as well as the total effect of this price reduction. Explain the change in demands for the goods using the relation, where MU represents marginal utility. Be precise in labeling your graph and its step-by step explanation.

MUx / Px = MUy / Py

d. Looking at the sign of the total effect, discuss the relation between the price of a normal good and its demand.

e. Now suppose X is an inferior good. How does your answer to part (c) change? Drawing a new graph, comment on the signs of the substitution and income effects.

f. What is Giffen paradox? Drawing a new graph, discuss it in terms of the magnitudes of the substitution and income effects. How is the demand for a Giffen good sloped? Why? Provide the necessary definitions and explain it using the signs and magnitudes of substitution and income effects.

Economists classify the goods as NORMAL or INFERIOR or LUXURY GOODS based on the ___

a. Income elasticity of demand

b. Own price elasticity of supply

c. Own price elasticity of demand

d. Cross price elasticity of demand

In the classification of the types of consumer goods, what are the types of convenience goods?

As they get closer to the end of the current year, John and Chan begin to think about next year. John is the head of the budget team and he has already gathered some of the information he needs to prepare the next year’s budget. His sales forecast remains 30,000 Men’s Razors and 10,000 Women’s Razors at a selling price of $45.00 and $55.00 for the whole year. John would consider changing the selling price of one or both of the products if he felt it would increase profits or market share.

The Men’s Razor is made out of 1 pound of raw materials at a cost of $5.00 per unit. The Women’s Razor uses 1.5 pounds of raw materials at a cost of $7.00 per unit. Raw Materials are purchased on credit and paid for fifty percent in the first quarter following the purchase and the remainder in the second quarter following the purchase. The last year’s Q3 and Q4 purchases of raw materials were $45,000 and $95,000 respectively. John wants an ending balance of raw materials equal to ten percent of the raw materials needed in the next quarter. The beginning balance of raw materials was 1,200 pounds split equally between the two products.

Unit sales for 2017 are forecasted to be:

      Sales are forty percent cash and sixty percent credit. Credit sales are collected fifty percent in the quarter following the sale and forty-five percent in the second quarter following the sale. Five percent of credit sales are expected to go uncollected. Total sales for Q3 and Q4 of the previous year, which are expected to be partially collected during this year, were $300,000 and $850,000.

12. Prepare a Sales (Revenues) Budget and Cash Collection schedule for the year ended December 31, 2017.

13. Prepare a Raw Materials Purchases budget and Cash Payments schedule for the year ended December 31, 2017.

14. Prepare a Direct Labor budget for the year ended December 31, 2017. Recall from a previous part of the project that the Men’s Razor takes 1.5 DL hours to manufacture and the Women’s Razor takes 2.0 DL hours and that the subcontractors who assembly the razors get paid $10.00 per hour.

Compute the expected return and standard deviation for the following properties. The current price of each property is $500,000. Which has the better risk-return tradeoff?

Property A:

• Pessimistic: NOI stays flat at $50,000 per year for the next 5 years. Resale price is $500,000 in year 5. Probability = 25%.
• Most Likely: NOI starts at $50,000 the first year and grows by 1% for the next 5 years. Resale price is $525,000 in year 5. Probability = 50%.
• Optimistic: NOI starts at $50,000 the first year and grows by 3% for the next 5 years. Resale price is $575,000 in year 5. Probability = 25%.

Property B:

• Pessimistic: NOI starts at $50,000 the first year and decreases by 2% for the next 5 years. Resale price is $475,000 in year 5. Probability = 25%.
• Most Likely: NOI starts at $50,000 the first year and grows by 1% for the next 5 years. Resale price is $525,000 in year 5. Probability = 50%.
• Optimistic: NOI starts at $50,000 the first year and grows by 5% for the next 5 years. Resale price is $600,000 in year 5. Probability = 25%.