Some goods are normal goods at lower income levels and inferior goods at higher income levels. One example is the fast food category in the US restaurant industry (e.g., McDonalds). In this case, lower income consumers will purchase more fast food if they earn small increases in income. However, the consumers will substitute other types of food and purchase less fast food as their income rises to much higher levels. Can you think of a second example from some other industry in the US or another country?

Suppose you are the marketing manager for a company that faces this sort of demand response from the customers of its major products. How would you develop an advertising program that adapts to this behavior over the growth (increasing income) and recession (declining income) stages of the macro economy? For example, would you change your pricing policy as the economy grows or declines, or would you change the target audience for your ads? Are there other things your could do in this situation?

Appropriate Transfer Prices: Opportunity Costs
Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 4,000,000 pounds and that sold 2,800,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 1,600,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanut-processing company are as follows:

Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.08 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 2,800,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound.

(a) Compute the annual gross profit for the Peanut Division using a transfer price of $2.00.
$Answer

(b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.08.
$Answer

(c) Which of the following is least likely to motivate the manager to take actions that will maximize corporate profits?

a.Set the transfer price at 2.00 for all transfers.

b.Set the transfer price at .86 for all transfers.

c.Set the transfer price at .86 for the first 1,200,000 lbs. transferred.

d.Set the transfer price at .86 for the first 1,200,000 lbs. transferred, and at 2.00 for the next 400,000 lbs. transferred.

e.None of the above.

*Problem 1-4A (Video)

The following data were taken from the records of Clarkson Company for the fiscal year ended June 30, 2020.

Raw Materials Inventory

7/1/19 $48,900 Factory Insurance $5,100

Raw Materials Inventory

6/30/20 46,900

Factory Machinery

Depreciation 18,000

Finished Goods

Inventory 7/1/19 97,700 Factory Utilities 30,000

Finished Goods

Inventory 6/30/20 21,600

Office Utilities

Expense 9,350

Work in Process

Inventory 7/1/19 25,200 Sales Revenue 558,900

Work in Process

Inventory 6/30/20 23,700 Sales Discounts 5,000

Direct Labor 142,050

Plant Manager’s

Salary 65,200

Indirect Labor 25,360

Factory Property

Taxes 9,710

Accounts Receivable 35,500 Factory Repairs 2,200

Raw Materials

Purchases 96,700

Cash 40,700

Prepare a cost of goods manufactured schedule. (Assume all raw materials used were direct materials.)

CLARKSON COMPANY

Cost of Goods Manufactured Schedule

$

$

:

$

:

$

Prepare an income statement through gross profit.

CLARKSON COMPANY

(Partial) Income Statement

$

:

$

:

$

Prepare the current assets section of the balance sheet at June 30, 2020. (List Current Assets in order of liquidity.)

CLARKSON COMPANY

(Partial) Balance Sheet

$

$

$

The Quick Pass CPA Review Co., charges $10,000 for its review classes, and offers a money-back guarantee, if the student does not pass on the first try. The company collected $500,000 from students in its first class, which was held from July through October of 2019. Since the grades of the students on the November test will not be known until January 2020, the owner of Quick Pass intends to not recognize any income until the number of students who actually passed is known, so that he can report income and refund in the same year. What is your advice to your client?

Packard Corporation began a new development project in 2020. The project reached technological feasibility on September 1, 2021, and was available for release to customers at the beginning of 2022. Development costs incurred prior to September 1, 2021, were $4,650,000, and costs incurred from September 1 to the product release date were $1,950,000. The 2022 revenues from the sale of the new software were $3,200,000, and the company anticipates additional revenues of $12,800,000. The economic life of the software is estimated at three years. Amortization of the software development costs for the year 2022 would be:

Multiple Choice

• $392,500.

• $1,550,000.

• $650,000.

• $2,200,000.

During the year, Jumping Jacks, paid cash to purchase land. reported in the statement of cash flows?  How would Jumping Jacks report this on the statement of cash flows?

Hoola Hoops is preparing a Cash Flow Statement for the fiscal year ended September 30, 2020.  Which of the following transactions affects Hoola Hoops’ Cash Flows?

Bravo Company prepared a Cash Flow Statement that included the following information. Cash from operating activities was $39,000, cash used for investing activities was ($59,000) and the net change in cash was $70,000, Based on this information what was cash from/used for financing activities?

1. Your company has a strong brand name in the United States, and you’re ready to enter Africa, especially West Africa. You decide to acquire a local company in Liberia. Considering your understanding of branding, would you use the existing US brand in Liberia? Would you use it in all of West Africa? Or would you use your strong US brand globally? Would you use both brands in the same markets? Discuss the advantages and disadvantages of the various strategies, taking into account the trust factor of brands, the influence of local differences, and the country-of-origin effect.

Question 12

The following facts pertain to a non-cancelable lease agreement between Shamrock Leasing Company and Pharoah Company, a lessee.

The collectibility of the lease payments by Shamrock is probable.

Compute the amount of the lease receivable at commencement of the lease. (For calculation purposes, use 5 decimal places as displayed in the factor table provided and round answer to 2 decimal places, e.g. 5,275.15.)

Prepare a lease amortization schedule for Shamrock for the 5-year lease term. (Round answers to 2 decimal places, e.g. 5,275.15.)

Prepare the journal entries to reflect the signing of the lease agreement and to record the receipts and income related to this lease for the years 2020 and 2021. The lessor’s accounting period ends on December 31. Reversing entries are not used by Shamrock. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.15. Record journal entries in the order presented in the problem.)

Suppose the collectibility of the lease payments was not probable for Shamrock. Prepare all necessary journal entries for the company in 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 2 decimal places, e.g. 5,275.15.)

(Round answers to 0 decimal places, e.g. 2,500. Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Exercise 18-13

The condensed financial statements of Ness Company for the years 2019 and 2020 are presented below.

Compute the following ratios for 2020 and 2019. Inventory on December 31, 2018, was $310. Assets on December 31, 2018, were $1,900. Equity on December 31, 2018, was $870.