FIFO Perpetual Inventory

The beginning inventory of merchandise at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows:

Required:

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3, using the first-in, first-out method. Under FIFO, if units are in inventory at two different costs, enter the units with the LOWER unit cost first in the Cost of Merchandise Sold Unit Cost column and in the Inventory Unit Cost column.

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.
$

4. Determine the ending inventory cost as of June 30.
$

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

FIFO Perpetual Inventory

The beginning inventory of merchandise at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows:

Required:

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3, using the first-in, first-out method. Under FIFO, if units are in inventory at two different costs, enter the units with the LOWER unit cost first in the Cost of Merchandise Sold Unit Cost column and in the Inventory Unit Cost column.

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.
$

4. Determine the ending inventory cost as of June 30.
$

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

FIFO Perpetual Inventory

The beginning inventory of merchandise at Dunne Co. and data on purchases and sales for a three-month period ending June 30 are as follows:

Required:

1. Record the inventory, purchases, and cost of merchandise sold data in a perpetual inventory record similar to the one illustrated in Exhibit 3, using the first-in, first-out method. Under FIFO, if units are in inventory at two different costs, enter the units with the LOWER unit cost first in the Cost of Merchandise Sold Unit Cost column and in the Inventory Unit Cost column.

2. Determine the total sales and the total cost of merchandise sold for the period. Journalize the entries in the sales and cost of merchandise sold accounts. Assume that all sales were on account.

3. Determine the gross profit from sales for the period.
$

4. Determine the ending inventory cost as of June 30.
$

5. Based upon the preceding data, would you expect the inventory using the last-in, first-out method to be higher or lower?

Check My Work1 more Check My Work uses remaining.

You have always been told that the cost of capital for Clark Upholstery is 9%, so you started to evaluate the two alternatives (renew or replace) using the 9% cost of capital. However, it occurred to you that you have never calculated the cost of capital and you are not sure the last time some else may have calculated the cost of capital. Therefore, before you go any further in the process of evaluating the two alternatives you decide to calculate the cost of capital using the firm’s current capital structure and current yields on long term debt and equity. To make the calculation you know you need the balance sheet to determine the capital structure. Clark Upholstery’s current balance sheet is as follows:

Current Assets $75,000 Current Liabilities $25,000

Fixed Assets Long Term Debt (12%) $150,000

Land $100,000 Equity

Equipment 150,000 Common Stock $50,000

Total Fixed Assets $250,000 Retained Earnings 100,000

Total Equity $150,000

Total Assets $325,000 Total Liab & Equity $325,000

You will use the balance sheet to determine the relative weight of debt vs equity in your long-term capital structure. You also know that you must determine the current yield/value on your debt and equity in order to determine the after-tax cost of both debt and equity. Having both the relative weights of your capital structure and after-tax rates you can then determine your Weighted Average Cost of Capital (WACC), which you will use to evaluate the two alternatives (renew vs replace).

Your outstanding long-term bonds have a 12% coupon rate, but are selling at a discount on the publicly traded market. The current price is $88, that is $880 for a $1,000 face value bond. You need to determine the current yield/value of the current long-term debt. You are considering selling more bonds in the public market to finance the cost of the renewal or replacement. If you do this your investment banker is telling you that a 20-year bond would need a coupon rate of 13.6%, and to be sold Clark Upholstery would incur a $45 per bond discount and flotation costs of $32 per bond. Using this information, you calculate the cost of your current long-term bonds and also the cost if you sell $100,000 additional long-term bonds to finance the investment.

The other portion of your capital structure is your equity, which is comprised of Common Stock and Retained Earnings. Your stock is not publicly traded, so you decide to use the Capital Asset Pricing Model

(CAPM) to determine the cost of equity. To calculate the CAPM you need risk free rate (which you determine to be 4%) and also the markets expected return for the stock of companies like Clark (15%). Using historical information about Clark and also about the furniture Upholstery industry you determine that the firm’s beta is 0.88. You use this information to determine the equity cost of both Common Stock and Retained earnings.

Finally, you combine the debt and equity cost with the weights of debt and equity to determine Weighted Average Cost of Capital (WACC) assuming that Clark will finance the investment using the current mix of debt and use retained earnings (so no new equity is sold). You will also calculate the WACC assuming that Clark will finance $100,000 of the investment by issuing new bonds. Your Investment Banker advises you that taking on $100,000 of new long-term bonds will increase your Beta from 0.88 to 1.1.

You now have two WACC, one for the current capital structure and one that assumes the investment is financed by $100,000 of new long-term bonds and the balance being funded by Retained Earnings. You will use both WACC to evaluate the two investment alternative (renew or replace).

Now that you have all the calculations of incremental after-tax cash flow and WACC you are ready to evaluate the alternatives. To do this you decide to calculate all the classic evaluation methods, Payback Period, PV and its related Profitability Index and Internal Rate of Return. You have also heard about Modified Internal Rate of Return (MIRR) and aren’t sure if you will need/use it, but you will calculate it just in case. The company is concerned about an economic downturn in the near future which could throw off the revenue projections, and therefore has established a 4-year payback period as a pre-qualification for any new investments. You will now complete your project evaluation and do an accept/reject determination and a ranking for the two alternatives at both WACC.

Alt 1 Alt 2

26300   50100
36000   65200
35980   39420
43460   16340
33460   15940
1800   2200

Selected financial data for Spark Enterprises follows for a production level of 120,000 units.

Total Fixed Costs $300,000

Total costs (fixed and variable) $ 450,000

a. Calculate the variable cost per unit.

b. if flash corporation makes 75,000 units, calculate the fixed cost per unit.

c. if flash corporation makes 160,000 units, calculate the total variable costs.

d. if flash corporation makes 180,000 units, calculate the total costs.

A French Winery, Cave des Vignerons de Rasteau is a fine winery. The firm’s fixed costs for 0 units of output and its average total cost of producing different output levels are summarized in the table below. Complete the table to find the fixed cost, variable cost, total cost, average fixed cost, average variable cost, and marginal cost at all relevant levels of output.

Saint Mary’s University jointly runs a dual degree program with the Beijing Normal University at Zhuhai. In order to do so, Saint Mary’s provides faculty to instruct in China. For the spring session scheduled to run from April 22^nd to May 31^st, 2019 Saint Mary’s had an individual prepared to instruct this course. This person entered into a contract with SMU which stated in part that the individual would instruct in China during the entirety of the spring session, but said nothing about cancellation by either party. At some point on or about late February, this individual advised Saint Mary’s that they would not be able to come to Zhuhai. Assume for the purposes of this assignment that the individual had been diagnosed with cancer, and was unable to travel.

In or about early March Professor Scott had been offered and had accepted a position as the new instructor by Saint Mary’s. A contract was entered into that included, among other things, clear instructions that he would need to secure the appropriate Visa that would allow him to travel to Zhuhai. As time was tight (in legal terms we say that time was of the essence) Scott was encouraged to go ahead and book flights and make the necessary arrangements in order to be in China to start classes on April 22.

In Canada, the Chinese embassy is responsible for issuing appropriate Visas for travel to China. In order to facilitate the processing of applications, the embassy utilizes an independent company known as the Chinese Visa Processing Centre Limited…this company is a separate entity from the government and operates at arm’s length from the embassy. Applications are filled out online, and when complete, the applicant must print the application form and attend in person at the offices of the Chinese Visa Processing Centre where they pay a fee and also provide biometric scans that enable the embassy to conduct their work. The Chinese Visa Processing Centre essentially pre screens visa applications to ensure conformity with the established decision parameters. If there are readily apparent issues, for example an expired passport or things of an administrative nature, then the Chinese Visa Processing Centre will hold an application pending the correction of the issue by the applicant. The Processing Centre also states that applicants who cannot pick up their passport in person must provide a prepaid pre-addressed return envelope so that the passport containing the Visa can be returned to the applicant.

Scott prepared the online application form as advised. Given the type of Visa required, Scott needed a letter, known as the Foreign Expert Invitation Letter issued by the provincial government in Guangdong, China. Although this letter was not mentioned in the contract, Saint Mary’s represented verbally that they would secure the letter for Scott. Saint Mary’s did, in fact secure the letter, which was advanced to Scott via email on March 19. Having completed the application, and with the letter in hand, Scott flew to Ottawa to deliver the visa application.

Before that however, Scott had booked flights from Halifax to Zhuhai that would have him arrive in China on April 19 in time to begin classes on the 22^nd. Scott was instructed to secure cancellation insurance on all flights. Scott did, in fact, pay for and receive a policy of insurance that clearly stated that it would cover the cost of flights cancelled due to medical emergencies or death, including medical emergencies or death to immediate family members of the insured party.

While sitting in the departure lounge awaiting his return flight to Halifax, having attended at the Visa Processing Centre as required Scott received a telephone call from the Chinese Visa Processing Centre and was told that the embassy has already had a look at the Foreign Expert Invitation Letter. Scott was advised that the letter would not suffice because it lacked certain information, and also because it needed to be issued by the appropriate government authorities in the Guangdong Province. The letter had actually been issued by the University, in accordance with past practice This issue had not been raised for previous applications.

As a result of this problem, it became impossible to travel as planned and Scott advised his travel agent that the flights would need to be cancelled or changed. Further, Scott and officials at Saint Mary’s decided that he should not rebook any travel until it was absolutely certain that the new letter could be obtained.

On April 19, Scott received a different Foreign Expert Invitation Letter and forwarded it to the Chinese Visa Processing Centre. They acknowledged receipt on April 22 and indicated that he should receive confirmation that the Visa had been processed by April 26.

With this new knowledge, Saint Mary’s and Beijing Normal University at Zhuhai amended the start date of the course to May 6.

On April 26, Scott received word that his Visa had been processed and his passport had been placed in the provided pre-paid, pre-addressed envelope and put in the mail. The expected delivery date was April 29. Unfortunately, on April 29 it was discovered that the passport had been delivered to any entirely different address, not in Halifax Nova Scotia, but in Mississauga Ontario, 2000 kilometres away. The address label on the envelope that had been purchased from Canada Post had been tampered with before it was sold. When it was placed in the postal system by the Chinese Visa Processing Centre, it had two different addresses, and Canada Post picked one but they picked the wrong one. When contacted by Scott, Canada Post officials advised that once the envelope had been placed in the mailbox of the receiver, it became the receiver’s property, and Canada Post could not recover it because this would constitute theft. They took no responsibility for the envelope, saying it was the buyer’s problem.

Fortunately the passport was located. The individual that had the passport said that he would return it if Scott came to get it at his home. When Scott travelled to the home, the gentleman said he would only return it if Scott paid a significant reward. At first Scott declined, but the gentleman indicated that he would call the police and state that Scott was trespassing on his property. Scott felt he had no choice, and so he complied and made the payment.

When Scott returned to his hotel with the passport, the rain started to fall heavily. The stone walkway at the front of the hotel was quite slippery, and unfortunately Scott fell and injured his shoulder. Hotel staff would take no responsibility for the injury, stating Scott should have been more careful as it was raining. A sign on the wall of the hotel indicated that the paving stones could become slippery when wet, and patrons of the hotel were cautioned that the hotel accepted no responsibility for injuries. Unfortunately, the hotel concierge had left a luggage cart in front of the sign such that it was not visible.

1. IDENTIFY ALL THE POTENTIAL LEGAL ISSUES WITH REFERENCE TO THE MATERIALS COVERED IN THE COURSE. YOU MAY PREPARE YOUR ANSWER IN POINT FORM. NOTE ALSO THAT YOU ARE ASKED ONLY TO IDENTIFY THE POTENTIAL LEGAL ISSUES, SO A COMPLETE ANALYSIS IS NOT REQUIRED. (50 points)

2. ASSUME YOU ARE A LAWYER RETAINED BY SAINT MARY’S. ADVISE SAINT MARY’S OF ALL OF THEIR RIGHTS AND OBLIGATIONS IF SCOTT HAD NOT BEEN ABLE TO SECURE THE VISA. (10 points)

3. IDENTIFY, WITH REFERENCE TO RISK MANAGEMENT STRATEGIES, AREAS WHERE RISK WAS ENCOUNTERED AND HOW THE PARTIES DEALT WITH THE RISK. SPECIFY THE PARTICULAR RISK MANAGEMENT STRATEGY. (35 points)

4. WOULD IT MAKE ANY DIFFERENCE TO YOUR ANALYSIS IF SCOTT WAS PAID OR IF HE WAS A VOLUNTEER? WHY OR WHY NOT? (5 points)

DRK, Inc., has just sold 240,000 shares in an initial public offering. The underwriter’s explicit fees were $144,000. The offering price for the shares was $32, but immediately upon issue, the share price jumped to $33.00.

a. What is the total cost to DRK of the equity issue?

b. Is the entire cost of the underwriting a source of profit to the underwriters?

___ Yes

___No

Chapter 11

1) What is the difference between the short run and the long run?

2) What is the law of diminishing returns? Why is this proposition called a "law"?

3) What are the two components of a firm's total cost in the short run, and what are their definitions?

4) What is the difference between average total cost and marginal cost and are they ever equal to each other?