Tasmania car rental company (TMR), a proprietary company, is considering whether to enter Tasmania's discount rental car market. The program will involve buying 100 used cars, midsize cars, and midsize cars at an average price of $15,000. To reduce their insurance costs, TMR will install a LoJack recovery system on each vehicle, which costs $1,500. TMR expects the rental service to have two locations: one near Hobart airport and one near Launceston airport. At each location, TMR has an abandoned lot and building where vehicles can be stored. If TMR does not take on the project, the lot can be leased to a car repair company for $90,000 a year (two lots in total). Whether leased or used for the project, TMR will pay an annual maintenance cost of $25,000 (two batches total). The discount car rental business is expected to reduce its regular car rental business by $20,000 a year.

For tax purposes, the life of the car is set at five years and will be depreciated over five years using the straight-line method, with no residual value. Assume the car will be in use at the beginning of the next fiscal year: July 1, 2019.

Before starting the new business, TMR will need to redevelop and renovate the buildings at each airport. The estimated cost for both locations is $215,000. Suppose that TMR is unable to claim any annual tax relief on capital expenditure on building refurbishment before selling the business. TMR also budgeted for marketing costs, which will be used when the project is launched and for the first two years of operation. The estimated cost is $30,000 per annum. These expenses are fully tax-deductible in the year they are incurred. In addition, the project would require a full injection of $150,000 in net working capital. No additional working capital is required from start to finish. The initial network capital will be fully recovered at the end of year 5.

The income forecast of car rental in the next five years is as follows:

Revenue projections from car rental for the next five years are as follows

Operating costs

Operating variable costs associated with new business are 10% of revenue. Annual operating fixed costs (excluding depreciation) are $1,800 per vehicle.

Existing administrative costs are $550,000 per annum. As a result of the new operation. These administrative costs will increase by 20%. The company is subject to a tax rate of 27.5% on its profit.

Catherine, the chief financial officer of the company would like you to help her examine the feasibility of the project in the next five years, taking into account the sales and operating cost projections prepared by the company's accountants. Given the risks associated with the project, she thinks it is reasonable to use a 12% cost of capital to evaluate the project.

Your Tasks:

Based on the information in the case study, Catherine asked you to write a report to TMR's management about the best course of action for the project. Your report shall address the following specific issues raised by TMR's management:

1. Discuss which costs are relevant to the evaluation of the project and which are not. Your discussion should be supported by valid arguments and references to appropriate sources.

2. How are the possible internecine and opportunity costs taken into account in this analysis?

3. Determine the initial investment cash flow.

4. Estimate all cash flows related to the project over 5 years. Assume that, in the relevant case, capital expenditures and marketing costs are consumed throughout the year, while cash flows related to revenue and operating costs occur at the end of the year. You need to broadly describe the methods used to determine these cash flows.

5. Calculate the payback period of the project. Suppose the business could be sold for millions of dollars at the end of five years. This figure includes the value of car fleets, homes and capital gains for businesses. Ignore any tax consequences that may arise from the sale of the business and ignore the time value of this particular currency calculation. Briefly comment on your results.

6. Estimate the net present value (NPV) of the project, assuming that the initial investment can be sold for $1 million at the end of five years. This figure includes the value of car fleets, homes and capital gains for businesses. Ignore any possible tax sequence for the sale of the business.

Briefly comment on your results and, if necessary, make appropriate comments on the assumptions of these calculations.

7. Using sensitivity analysis, the NPV was recalculated using a scenario that reduced project sales by 10% per year. Briefly comment on your results.

8. In view of your answers to points 5 to 7 above, please inform TMR management whether to proceed with the investment project. In your recommendations, you may wish to suggest possible improvements for this project.

Cover-to-Cover Company is a manufacturer of shelving for books. The company has compiled the following cost data, and wants your help in determining the cost behavior. After reviewing the data, complete requirements (1) and (2) that follow.

1. Determine whether the costs in the table are variable, fixed, mixed, or none of these.

2. For each cost, determine the fixed portion of the cost, and the per-unit variable cost. If there is no amount or an amount is zero, enter "0". Recall that, for N= Number of Units Produced, Total Costs = (Variable Cost Per Unit x N) + Fixed Cost. Complete the following table with your answers.

Cost Fixed Portion of Cost Variable Portion of Cost (per Unit)

Lumber $ $

Utilities $ $

Depreciation $ $

Biblio Files Company is the chief competitor of Cover-to-Cover Company in the bookshelf business. Biblio Files is analyzing its manufacturing costs, and has compiled the following data for the first six months of the year. After reviewing the data, answer questions (1) through (3) that follow.

1. From the data previously provided, help Biblio Files Company estimate the fixed and variable portions of its total costs using the High-Low Method. Recall that Total Costs = (Variable Cost Per Unit x Units Produced) + Fixed Cost. Complete the following table.

2. With your Total Fixed Cost and Variable Cost per Unit from the High-Low Method, compute the total cost for the following values of N (Number of Units Produced).

3. Why does the total cost computed for 4,360 units not match the data for January in the table at the top of this panel?

The High-Low method gives a formula for the estimated total cost and may not match levels of production other than the highest and lowest.

The High-Low method only gives accurate data when fixed costs are zero.

The High-Low method gives accurate data only for levels of production outside the relevant range.

The High-Low method is accurate only for months in which production is at full capacity.

Review the contribution margin income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statements panels. Complete the following table from the data provided in the income statements. Each company sold 84,800 units during the year.

Cover-to-Cover Company   Biblio Files Company

Contribution margin ratio (percent) % %

Unit contribution margin $ $

Break-even sales (units)

Break-even sales (dollars) $ $

Biblio Files Company is making plans for its next fiscal year, and decides to sell two new types of bookshelves, Basic and Deluxe. The company has compiled the following estimates for the new product offerings.

The company is interested in determining how many of each type of bookshelf would have to be sold in order to break even. If we think of the Basic and Deluxe products as components of one overall enterprise product called “Combined,” the unit contribution margin for the Combined product would be $2.31. Fixed costs for the upcoming year are estimated at $346,962. Recall that the totals of all the sales mix percents must be 100%. Determine the amounts to complete the following table.

Refer again to the income statements for Cover-to-Cover Company and Biblio Files Company on their respective Income Statement panels. Note that both companies have the same sales and net income. Answer questions (1) - (3) that follow, assuming that all data for the coming year is the same as the current year, except for the amount of sales. If required, round answers to the nearest dollar.

1. If Cover-to-Cover Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?

2. If Biblio Files Company wants to increase its profit by $30,000 in the coming year, what must their amount of sales be?

3. What would explain the difference between your answers for (1) and (2)?

Cover-to-Cover Company’s contribution margin ratio is lower, meaning that it’s more efficient in its operations.

The answers are not different; each company has the same required sales amount for the coming year to achieve the desired target profit.

Biblio Files Company has a higher contribution margin ratio, and so more of each sales dollar is available to cover fixed costs and provide income from operations.

The companies have goals that are not in the relevant range.

Learned Corporation has provided the following information:

Required:

a. For financial reporting purposes, what is the total amount of product costs incurred to make 5,000 units?
b. For financial reporting purposes, what is the total amount of period costs incurred to sell 5,000 units?
c. If the selling price is $24.40 per unit, what is the contribution margin per unit sold? (Round your answer to 2 decimal places.)
d. If 6,000 units are produced, what is the total amount of direct manufacturing cost incurred?
e. If 6,000 units are produced, what is the total amount of indirect manufacturing costs incurred?

Learned Corporation has provided the following information:

Required:

a. For financial reporting purposes, what is the total amount of product costs incurred to make 6,000 units?
b. For financial reporting purposes, what is the total amount of period costs incurred to sell 6,000 units?
c. If the selling price is $23.60 per unit, what is the contribution margin per unit sold? (Round your answer to 2 decimal places.)
d. If 7,000 units are produced, what is the total amount of direct manufacturing cost incurred?
e. If 7,000 units are produced, what is the total amount of indirect manufacturing costs incurred?

Learned Corporation has provided the following information: Cost per Unit Cost per Period Direct materials $ 5.60 Direct labor $ 4.55 Variable manufacturing overhead $ 2.15 Fixed manufacturing overhead $ 21,000 Sales commissions $ 0.80 Variable administrative expense $ 0.70 Fixed selling and administrative expense $ 6,500 Required: a. For financial reporting purposes, what is the total amount of product costs incurred to make 5,000 units? b. For financial reporting purposes, what is the total amount of period costs incurred to sell 5,000 units? c. If the selling price is $24.40 per unit, what is the contribution margin per unit sold? (Round your answer to 2 decimal places.) d. If 6,000 units are produced, what is the total amount of direct manufacturing cost incurred? e. If 6,000 units are produced, what is the total amount of indirect manufacturing costs incurred?

Learned Corporation has provided the following information: Cost per Unit Cost per Period Direct materials $ 5.10 Direct labor $ 4.30 Variable manufacturing overhead $ 1.90 Fixed manufacturing overhead $ 36,000 Sales commissions $ 0.80 Variable administrative expense $ 0.70 Fixed selling and administrative expense $ 12,600 Required: a. For financial reporting purposes, what is the total amount of product costs incurred to make 9,000 units? b. For financial reporting purposes, what is the total amount of period costs incurred to sell 9,000 units? c. If the selling price is $23.90 per unit, what is the contribution margin per unit sold? (Round your answer to 2 decimal places.) d. If 10,000 units are produced, what is the total amount of direct manufacturing cost incurred? e. If 10,000 units are produced, what is the total amount of indirect manufacturing costs incurred?

Auto Resales, Inc. started business on January 1, 20X1 (beginning inventory balance is zero). On January 1, 20X1 the company purchased all of the inventory for their used car sales lot. Purchase information is:

Types of cars, number of cars, and sales price per car are as follows:

During the year, Auto Resales, Inc. sold the following cars:

Using the relative sales value approach, what is the cost allocated to each Lexus car?

Using the relative sales value approach, what is the total cost of goods sold for 20X1?

Russell and Sons, a CPA firm, established the following standard labor cost data for completing what the firm referred to as a Class 2 tax return. Russell expected each Class 2 return to require 4.6 hours of labor at a cost of $53 per hour. The firm actually completed 600 returns. Actual labor hours averaged 4.3 hours per return and actual labor cost amounted to $61 per hour.

Required

Determine the total labor variance and indicate whether it is favorable (F) or unfavorable (U).

Determine the labor price variance and indicate whether it is favorable (F) or unfavorable (U).

Determine the labor usage variance and indicate whether it is favorable (F) or unfavorable (U).

(For all requirements, do not round intermediate calculations and select "None" if there is no effect (i.e., zero variance).)

(1) On August 1, 2018, We R Clean Company signed a 9-month contract with a hotel chain to provide pool and spa cleaning services for 3 hotel sites. The contract price of $14,850 was collected on the date the contract was signed. The services will be provided evenly over the next 9 months, starting on August 1. The adjusting entry on December 31, 2018 will

Credit Service Revenue for $6,600

Debit Earned Revenue for $6,600

Credit Service Revenue for 8,910

Debit Unearned Revenue for $8,250

(2) Collegiate Fitness Centers have 15,000 members whose monthly dues are $30 each. The company does not send individual bills to customers, who have until the 10th day of the month following the month of service to pay their monthly dues. On December 31, 2017, the company’s records show that 7,000 customers have already paid their December dues, and the payments were properly recorded. The adjusting entry to be recorded on December 31 will include

After operating a successful US hotel corporation (H Corp) for several years, Donald decides to set up a wholly owned subsidiary in the export business (X Corp). His initial investment in this corporation is $1,000. Through a stroke of luck, the US tax laws change and X Corp becomes worth $100,000 overnight, even though its balance still only reflects $1,000 cash and $1,000 equity.

Donald is considering selling the operation but is concerned about the tax ramifications.

a. What would H Corps gain be if it sold the stock of X Corp for $100,000?

b. Instead, Donald has offered to sell X Corp to Bill Corp in a tax free exchange of 100% of       X Corp for $100,000 of Bill Corp stock. Assuming Bill Corp accepts this offer, what is Bill Corps basis in X Corp stock? What is H Corps gain, if it immediately sells its stock in Bill Corp for $100,000?

c. What alternative structure might Bill Corp offer which might provide additional tax benefits to Bill Corp? Explain and show calculations

d. What might Bill Corp do to entice H Corp to accept the revised deal?