Company Epsilon is considering entering the active marketing advisory service and there has been much discussion regarding how much a marketing advisor should charge per hour of service. The company has budgeted to supply 500,000 hours of advisory service for the forthcoming year. Its variable cost is estimated at $25 per hour and its fixed costs are estimated at $500,000 for the forthcoming year. The company has been discussing whether to use a cost-plus approach or perhaps examining the demand levels. The marketing department has the following information on demand levels at different prices:

Required:

1. Calculate the price per hour Company Epsilon should charge based on a cost-plus approach for pricing the service at full cost plus 15%.

2. Considering the company can meet any demand level in the table above and that fixed costs will remain unchanged for all the preceding demand levels, what price per hour should the company charge?

3. Explain whether the different approaches lead to a different or identical price per hours and which approach should the company choose for the active marketing advisory service.

Let’s say that you purchased a house in January 2005 for $375,000 when Case-Shiller stood at 135.46, and noted that the Index had climbed to 165.33 one year later. Assuming that the trend continued at the same rate, compounded yearly, what would you have been able to re-sell the property for in January 2012?

Payments on a Jan. 1, 1995 40,000 loan are as follows:

1/1/96: 5,000
1/1/97: 5,000
1/1/98: 5,000
On July 1, 1998 an additional 10,000 is paid on the loan and no more payments are made.

If d(4)=0.1 how much is owed on the loan on Jan. 1, 2005?

EXERCISE 6-2. [LO 2] Mansard Hotels has five luxury hotels located in Boston, New York, Chicago, San Francisco, and Los Angeles. For internal reporting purposes, each hotel has an income statement showing its revenue and direct expenses. Additionally, the company allocates to each hotel a share of general administrative and advertising costs (e.g., salary of the company president, salary of the company CFO, hotel chain advertising, etc.) based on relative revenue.

a. Write a paragraph explaining why the allocation of general administrative and advertising costs to the specific hotels is potentially useful or potentially harmful.

The two discussion questions for this week are as follows:

1. In thinking about overcoming the negative publicity and securities fraud fines related to revenue fraud, some companies succeed and move on, while others fail following the fraud. What forces might influence corporate “survivability” in the face of financial reporting fraud related to revenue?
2. How would you feel entrusting the care of your elderly relative to a company that was previously involved in fraudulent financial reporting?
   1. Would you be able to trust that company to care for your relative?
   2. Do you think that the company has moved on and is now a reliable caregiver that you could trust?

Wally’s Widget Company (WWC) incorporated near the end of 2011. Operations began in January of 2012. WWC prepares adjusting entries and financial statements at the end of each month. Balances in the accounts at the end of January are as follows:

  Cash $ 19,220 Unearned Revenue (40 units) $ 4,550   
  Accounts Receivable $ 10,250 Accounts Payable (Jan Rent) $ 1,700   
  Allowance for Doubtful Accounts $ (1,100) Notes Payable $ 15,500   
  Inventory (45 units) $ 3,600 Contributed Capital $ 5,400   
Retained Earnings – Feb 1, 2012 $ 4,820   

• WWC establishes a policy that it will sell inventory at $175 per unit.
• In January, WWC received a $4,550 advance for 40 units, as reflected in Unearned Revenue.
• WWC’s February 1 inventory balance consisted of 45 units at a total cost of $3,600.
• WWC’s note payable accrues interest at a 12% annual rate.
• WWC will use the FIFO inventory method and record COGS on a perpetual basis.

February Transactions
02/01

Included in WWC’s February 1 Accounts Receivable balance is a $1,900 account due from Kit Kat, a WWC customer. Kit Kat is having cash flow problems and cannot pay its balance at this time. WWC arranges with Kit Kat to convert the $1,900 balance to a note, and Kit Kat signs a 6-month note, at 12% annual interest. The principal and all interest will be due and payable to WWC on August 1, 2012.

02/02

WWC paid a $700 insurance premium covering the month of February. The amount paid is recorded directly as an expense.

02/05

An additional 150 units of inventory are purchased on account by WWC for $9,000 – terms 2/15, n30.

02/05

WWC paid Federal Express $600 to have the 150 units of inventory delivered overnight. Delivery occurred on 02/06.

02/10

Sales of 120 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.

02/15

The 40 units that were paid for in advance and recorded in January are delivered to the customer.

02/15

25 units of the inventory that had been sold on 2/10 are returned to WWC. The units are not damaged and can be resold. Therefore, they are returned to inventory. Assume the units returned are from the 2/05 purchase.

02/16 WWC pays the first 2 weeks wages to the employees. The total paid is $2,600.
02/17

Paid in full the amount owed for the 2/05 purchase of inventory. WWC records purchase discounts in the current period rather than as a reduction of inventory costs.

02/18 Wrote off a customer’s account in the amount of $1,200.
02/19

$3,400 of rent for January and February was paid. Because all of the rent will soon expire, the February portion of the payment is charged directly to expense.

02/19

Collected $8,400 of customers’ Accounts Receivable. Of the $8,400, the discount was taken by customers on $5,500 of account balances; therefore WWC received less than $8,400.

02/26

WWC recovered $440 cash from the customer whose account had previously been written off (see 02/18).

02/27

A $700 utility bill for February arrived. It is due on March 15 and will be paid then.

02/28 WWC declared and paid a $400 cash dividend.

Adjusting Entries:

02/29

Record the $2,600 employee salary that is owed but will be paid March 1.

02/29

WWC decides to use the aging method to estimate uncollectible accounts. WWC determines 8% of the ending balance is the appropriate end of February estimate of uncollectible accounts.

02/29 Record February interest expense accrued on the note payable.
02/29 Record one month’s interest earned Kit Kat’s note (see 02/01).

Prepare all February journal entries and adjusting entries. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

- Record the cost of goods sold for 120 units

- Record the unearned revenue for 40 units paid in advance

-Record the cost of goods sold for 40 units

-Record the 25 units of inventory returned

- Record the sales return and allowance

- WWC pays the first two weeks wages to the employees. The total paid is $2600

-Paid in full the amount owed for the 2/05 purchase of inventory. WWC records purchase discounts in the current period rather than as a reduction of inventory costs.

-Wrote off a customers account in the amount of $1200

-$3400 of rent for January and February was paid.

Because all of the rent will soon expire, the February portion of the payment is charged directly to expense.

- Collected $8400 of customers Accounts Receivable. Of the $8400, the discount was taken by customers on $5500 of account balances ; therefore WWC received less than $8400

-Record the entry to reversal of allowance for doubtful accounts

-Record the entry to recovered $440 cash from the customer

-A $700 utility bill for February arrived. It is due on March 15th and will be paid then.

-WWC declared and paid a $400 cash dividend

-Record the $2600 employee salary that it owed but will be paid March 1st

-WWC decides to use the aging method to estimate uncollectible accounts. WWC determines 8% of the ending balance is the appropriate end of February estimate of uncollectible accounts.

-Record February interest expense accrued on the note payable

- Record one month's interest earned Kit Kats note (see 02/01)

A manager of an e-commerce company would like to determine average delivery time of the products. A sample of 25 customers is taken. The average delivery time in the sample was four days. Suppose the delivery times are normally distributed with a standard deviation of 1.2 days.

a) Provide a 95 % confidence interval for the mean delivery time.

b) The manager claims that the average delivery time of their products does not exceed 3 days. Write the null and alternative hypothesis regarding to the claim of the manager.

c) Test the manager’s claim at 95 % confidence level.

d) Write the conclusion of your result