In May of 2019, Elon Musk’s Space X project launched Starlink telecommunication satellites. The initial launch included 60 satellites out of a potential 1200 satellites to orbit the earth in pursuit of providing a world-wide ultra-fast internet product. Astronomers, however, are not so pleased with this new project. In fact, the American Astronomical Society (AAS) issued a statement of concern that these satellite constellations will create “the potential for substantial adverse impacts to ground- and space-based astronomy. These impacts could include significant disruption of optical and near-infrared observations by direct detection of satellites in reflected and emitted light; contamination of radio astronomical observations by electromagnetic radiation in satellite communication bands; and collision with space-based observatories.” Suppose now that Elon Musk has two ways of dealing with the problem of his satellites interfering with the observatories: 1) to limit the number of his satellites to 100 which would cost him (in reduced profits) $5B, or 2) to shut down the project entirely for a total cost of $20B. The AAS, on the other hand, has two ways of dealing with this problem: 1) to raise funding to increase the number of their satellites, which would cost a total of $8B, or 2) to shut down all astronomical observatories, which would cost a total of $40B (when accounting for the value of the positive externality created by the research). Suppose now that there are no courts or third-party arbitrators to resolve this dispute; and, further, that Elon Musk places a value on his public image and reputation in the amount of $15B, which he loses if the conflict continues with the AAS. Suppose that you were hired to consult Musk on this issue. Using transaction cost analysis, what contractual agreement (if any) do you think would result in this case? (5 points) What might you advise him to ultimately do and why? (5 points)

Contribution Margin, Break-Even Sales, Cost-Volume-Profit Chart, Margin of Safety, and Operating Leverage

Belmain Co. expects to maintain the same inventories at the end of 20Y7 as at the beginning of the year. The total of all production costs for the year is therefore assumed to be equal to the cost of goods sold. With this in mind, the various department heads were asked to submit estimates of the costs for their departments during the year. A summary report of these estimates is as follows:

It is expected that 12,000 units will be sold at a price of $240 a unit. Maximum sales within the relevant range are 18,000 units.

Required:

1. Prepare an estimated income statement for 20Y7.

Feedback

1. Use the absorption costing format.

Learning Objective 2, Learning Objective 3, Learning Objective 4, and Learning Objective 5.

2. What is the expected contribution margin ratio?
%

3. Determine the break-even sales in units and dollars.

4. Construct a cost-volume-profit chart on your own paper. What is the break-even sales?
$1,920,000

5. What is the expected margin of safety in dollars and as a percentage of sales?

6. Determine the operating leverage.

Accessory World makes floor mats for the automobile industry. Finished sets of mats must pass
through two departments: Cutting and Coating. Large sheets of synthetic material are cut to size in
the Cutting Department and then transferred to the Coating Department, where each set is sprayed
with a chemical coating for improved durability. The following information pertains to May activity
in the Cutting Department:
EXERCISE 18.10
Process Costing through
Two Departments:
Department I
LO18-2 through LO18-5
Cost data:
Total cost of beginning inventory on May 1 . . . . . . . . . . . . . . . . . . . . . . . . . $45,300
Direct materials costs incurred in May. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,925
Conversion costs incurred in May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,525
Cut sets transferred in during May. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Physical units data:
Units in process, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 sets
Units started in May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? sets
Units in process, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000 sets
Percentage of completion data:
Direct materials, May 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60%
Conversion, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Cut sets transferred in, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Direct materials, May 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70%
Conversion, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Cut sets transferred in, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Cost data:
Total cost of beginning inventory on May 1 . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,800
Direct materials costs incurred in May. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Conversion costs incurred in May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,200
Physical units data:
Units in process, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 sets
Units started in May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 sets
Units in process, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 sets
Percentage of completion data:
Direct materials, May 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
Conversion, May 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Direct materials, May 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%
Conversion, May 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
a. Prepare a schedule showing: (1) the number of mat sets transferred from the Cutting Department
to the Coating Department in May, and (2) the number of mat sets started and completed
by the Cutting Department in May.
b. Compute the equivalent units of input resources for the Cutting Department in May.
c. Compute the cost per equivalent unit of input resource for the Cutting Department in May.
d. Prepare the summary journal entry required to transfer the cost of completed mat sets from the
Cutting Department to the Coating Department in May.
e. Compute the total cost assigned to the Cutting Department’s ending inventory on

warehouse costing question

Put together a warehouse budget, based on the info below calculate the estimated annual warehouse cost, warehouse cost per case and warehouse cost as a percentage of sales. (You can assume any information not mentioned below if needed)

--The warehouse is 120K ft2 and leased at an annual rate of $3.80/ft2 net of taxes maintenance and insurance.

--Additional monthly facility costs for taxes, maintenance, and insurance, are $0.20/ft2. In addition, you have uncovered 3 months of typical utility bills that total $12,000.

--The warehouse has 40 direct employees, all making $12/hrplus benefits. Also, the operation has 5 clerical staff, someone credible tells you they get paid $2.00 more per hour than the direct associates.

--The facility was 3 managers, making an average salary of $60K/year, plus a bonus that is 10% of salary.

--All associated receive a health care insurance the average premium last year paid by the company was $10K per employee and expected to go up by 5% this year. All other benefits (payroll taxes) are about 10% of wages.

--The company is financing the purchase of 10 forklifts at $35K each over 7 years at 3% interest

--Racking was installed 2 years ago, 8K pallet positions were purchased at $60/each and are currently being financed over 10 years at 4% interest

--A warehouse management system that was purchased for $240K is being financed over 3 years at 4% interest. Additional annual system maintenance costs are estimated at 25% of the original system cost

--The operation pays a temporary labor provider $15/hr(no benefits) for additional help, you uncover that 15% of the total direct hours are supplied by this temporary labor provider

--No data can be gathered, however, all other costs are estimated to be around 20% of the total annual operation budget

--Annual sales were $129 million last year; a case sells for $10.75.

1. What is the estimated annual warehouse cost?

2. What is the warehouse cost per case?

3. What is the warehouse cost as a percentage of sales?

2. Audie Murphy Apparel (AMA) produces patriotic shirts in three colors: red, blue, and white. The monthly demand for each color is 3,000 units. Each shirt requires 1/2 pound of raw cotton. The cotton costs AMA $2.70 per pound. The transportation time from the supplier to AMA is 2 weeks. It costs AMA $100 to place each order and the annual holding cost percentage for AMA is 20 percent of the cost per pound.

a. What is the optimal order quantity of cotton? Round intermediate calculations to 2 decimal places (e.g., $18.61) and your answer to the nearest whole number.

Optimal order quantity _____ pounds

b. How many orders will AMA place during the next year? Round intermediate calculations to 2 decimal places (e.g., $18.61) and your answer to 2 decimal places (e.g., 108.37 times).

Number of orders ______

c. How frequently should the company order cotton? This is sometimes called the time between orders (TBO). Round intermediate calculations to 2 decimal places (e.g., $18.61) and your answer to 2 decimal places (e.g., once every 4.13 months).

Company orders once every ______months

d. Assuming that the first order is needed on April 1, when should AMA place the order?

a. March 15th

b. April 1st

c. April 15th

e. What is the annual holding cost when the optimal quantity (part a) is ordered? Round intermediate calculations to 2 decimal places (e.g., $18.61) and your answer to the nearest whole number.

Annual holding cost________per year

f. What is the resulting annual ordering cost when the optimal quantity (part a) is ordered? Round intermediate calculations to 2 decimal places (e.g., $18.61) and your answer to the nearest whole number.

Annual ordering cost ______

g. If the annual holding cost percentage was only 5 percent, how would it affect the annual number of orders, the optimal order size, and the average inventory?

14. According to the class overheads and basic ethics, which one of the following assertions about insider trading, which is against the law, is true?

A. Insider trading is legal and should be considered as a potential approach to investing
B. Insider trading is legal and should not be considered as a potential approach to investing

C. Insider trading is illegal and should be considered as a potential approach to investing
D. Insider trading is illegal and should not be considered as a potential approach to investing

9. The managers of New England Singers have evaluated five potential projects. Each project has conventional cash flows. Based on the information given in this paragraph and presented in the table, which one of the projects is the safest?

A. Project A

B. Project B

C. Project C

D. Project D

E. Project E

New England Singers is considering buying a new, high efficiency sound system. The new system would be purchased today for $86,000. It would be depreciated straight-line to $24,000 over 2 years. In 2 years, the system would be sold and the after-tax cash flow from capital spending in year 2 would be $27,000. The system is expected to reduce costs by $23,000 in year 1 and by $73,000 in year 2. If the tax rate is 50% and the cost of capital is 6.7%, what is the net present value of the new sound system project?

A. $7,377 (plus or minus $100)
B. $8,695 (plus or minus $100)
C. -$15,021 (plus or minus $100)
D. $19,588 (plus or minus $100)

E. None of the above is within $10 of the correct answer

You own a portfolio that has a total value of $37,000. The portfolio has 3,000 shares of stock A, which is priced at $8.00 per share and has an expected return of 9.70%. The portfolio also has 2,000 shares of stock B, which has an expected return of 17.20%. Inflation is expected to be 4.98% and the risk-free return is 3.52%. What is the risk premium for your portfolio?

A. 8.82% (plus or minus 0.05 percentage points)

B. 7.36% (plus or minus 0.05 percentage points)

C. 7.01% (plus or minus 0.05 percentage points)

D. 9.18% (plus or minus 0.05 percentage points)

E. The question cannot be answered without knowing the share price of stock B or the question can be answered without knowing the share price of stock B, but none of the above is within 0.05 percentage points of the correct answer

This research assignment is an actual simulation directly taken from the audit section of a CPA exam. Please research the questions and provide the correct answer along with a short explanation as to why you chose that answer. Each question is worth ten points.

Gloria CPA, an auditor for Smart Move Inc., observed changes in certain Year 2 financial ratios or amounts from the Year 1 ratios or amount. For each observed change, answer the following questions regarding possible explanations. (Assume that the turnover ratios were calculated using year-end balances.)

Inventory turnover decreased substantially from the prior year. Which of the following is a possible explanation for this finding?

A. Items shipped FOB shipping point during December, Year 2, were included in Year 3 sales.

B. Items shipped on consignment during the last month of the year were recorded as sales.

C. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

D. Year-end purchases of inventory were understated by incorrectly excluding items received before year-end.

Accounts receivable turnover decreased substantially from the prior year. Which of the following is not a possible explanation for this finding?

A. Items shipped on consignment during the last month of the year were recorded as sales.

B. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

C. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

D. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year.

Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year. Which of the following is not a possible explanation for this finding?

A. Items shipped on consignment during the last month of the year were recorded as sales.

B. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

C. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

D. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year.

Long-term debt increased from the prior year, but interest expense increased a larger-than-proportionate amount than long-term debt. Which of the following is a possible explanation for this finding?

A. A significant amount of long-term debt was paid off during the current year.

B. Long-term borrowing was refinanced on a short-term basis at lower interest rates.

C. Short-term borrowing was refinanced on a long-term basis at lower interest rates.

D. Short-term borrowing was refinanced on a long-term basis at higher interest rates.

Roadkill on China’s New Route to Progress A pile of rusty pipes and other construction materials are all that remain of Lanzhou New Area’s tram project in Gansu province. The tracks have been paved over, their mismatched lines scarring a six-lane road that ends at the edge of the planned city in central China. “The project is dead,” says a guard, who gives only his surname, Le. President Xi Jinping’s clampdown on debt had claimed another victim. In much of China the economy has powered through Beijing-mandated restrictions on borrowing by local governments and state-owned companies. Analysts surveyed by Bloomberg reckon growth accelerated to 6.8 percent last year, even though fixed investment was probably the weakest since 1999. But for China’s hinterlands—the less developed areas far from the more prosperous industrial centers along the coast—the story is different. Lanzhou New Area, a zone the size of New York City in the provincial capital of Lanzhou, was once a poster child for the spending boom that China’s central and local governments orchestrated to counteract the global financial crisis. After Beijing approved the development in 2012, armies of earth movers rolled in, flattening hills, filling valleys, and digging lakes in service of luring 1 million residents to the zone by 2030. The site achieved internet notoriety in 2016 for its theme-park reproductions of the Parthenon and the Great Sphinx. Now, Xi wants to neutralize the risk that soaring debt will cause a financial crisis and derail growth. The issue was front and center at October’s Communist Party Congress and December’s Central Economic Work Conference, where elite cadres set goals for 2018. Policymakers have introduced measures to restrict loans to real estate developers, local governments, and industries plagued by overcapacity. In Gansu, fixed investment shrank 39 percent in the first 11 months of last year, the most in any province, according to official statistics. “Deleveraging is always painful, but it will be more painful for inland provinces where growth is not as robust,” says Qian Wan, a Bloomberg economist in Beijing who analyzes China’s regional economies. While Lanzhou has a population of 3.7 million, data from the municipal statistics bureau show that fewer than 150,000 live in the New Area, an hour’s drive north of the city center. Work on projects such as the tram and a network of underground tunnels for water pipes and power lines came to a halt when the Bank of Gansu Co. refused last year to renew a 2 billion-yuan ($311 million) line of credit to the corporation overseeing development of the satellite city. More than 200 other projects across Gansu province are at a standstill. Local Communist Party officials denied Bloomberg’s requests for interviews with officials in the area. In a statement to Bloomberg, Bank of Gansu said it’s raised standards for creditors to mitigate risk and reduce financial leverage. Don’t write Lanzhou—or its New Area—off yet. The city, which sits on the banks of the Yellow River near China’s geographical center, was once a major stop on the Silk Road. As such, it stands to benefit from Xi’s One Belt, One Road initiative—a $1 trillion effort to revive and expand those ancient trade routes. It’s worth noting that while Bank of Gansu restricted credit to the local government investment arm, it continued to fund projects related to technological innovation, science, and cultural tourism. If the government can manage the shift in investment in Lanzhou without unleashing the excesses of the past decade, the city may eventually fill its empty tower blocks and once again become a bridgehead for China’s western development.

Briefly discuss the following two questions:

a. What are the key factors affecting the completion of the project?
b. What are your suggestions to the management team as to how to execute the project effectively and efficiently?

5. In Year 6, a donor gives $112.000 to a private not-for-profit entity to enable it to buy a new bus for transportation purposes. Near the end of Year 7. this money is used for the stipulated purpose. The donor made no provisions about the accounting for this acquisition. Which of the following is true about the statement of activities for Year 7?

a. Net assets without donor restrictions increased by $112,000.

b. Net assets with donor restrictions did not change.

c. Net assets without donor restrictions did not change.

d. Net assets with donor restrictions goes up by $112,000 and also down by $112.000

6. In Year 6, a donor gives $112,000 to a private not-for-profit entity to enable it to pay the salary of a new doctor to be hired by the organization. Near the end of Year 7, this money is used for the stipulated purpose. Which of the following is true about the statement of activities for Year 7？

a. Net assets with donor restrictions increased by $112,000.

b. Net assets with donor restrictions did not change.

c. Net assets without donor restrictions goes up by $112.000 and also down by $112.000

d. Net assets with donor restrictions goes up by $112.000 and also down by $112.000.

7. The governing board of a private not-for-profit entity votes to set $400,000 in cash aside in an investment fund so that this money and future interest will be available in five years, when a new building is scheduled for construction. Which of the following is not true?

a. The investments are reported on the statement of financial position as net assets without donor restrictions,

b. The acquisition of the investments is not reported on the statement of activities.  

c. Board-designated funds will appear in the net asset section of the week of not as net assets with donor restrictions

d. Income earned by these investments appears on the statement of activities under the out donor restrictions.

8. A private not-for-profit entity receives three large cash donations .

One gift of $70,000 is restricted by the down so that it cannot be spent for four years .

One gift of $90,000 is restricted to pay the salaries of the entity's workers .

One gift of $120.000 must be held forever with the income to be used to provide food for tid families. In the current yeas, income of $10,000 was carved but not spen.

What is the increase in the current year in wet assets with donor restrictions

a. $190,000 b. $210,000 C. $280,000 d. $290,000

9. A private not-for-profit university changes student tuition of $1 million for the current year. Finan cial aid grants total $220,000. The school also receives a $100,000 grant restricted for faculty sala ries. Of that amount, $30,000 is spent appropriately this year. In preparing a statement of activities, which of the following is not true?

a. Net assets without donor restrictions should show an increase of $30,000 for net assets reclassified

b. Net assets without donor restrictions should report revenue of $1 million

c. Net assets without donor restrictions should report expenses of $30.000

d. Net assets without donor restrictions should report a direct reduction of $220.000 in reporting the tuition revenue.

10. Which of the following statements about the reporting of functional expenses is not true!

a. A statement of functional expenses is now required of all private not-for-profit entities. b. Functional expenses are divided between program services and supporting services. c. Functional expenses can be reported as a footnote rather than as a separate statement of func tional expenses.

d. Functional expenses can be reported within the statement of activities rather than as a separate statement of functional expenses.

11. A private not-for-profit entity has the following expenses for the current year.

Research to cure disease $60,000

Fundraising costs 70,000

Work to help individuals with disabilities .... 40,000

Administrative salaries... 90,000

How should the not-for-profit entity report these costs?

a. Program service expenses of $100,000 and supporting service expenses of $160,000

b. Program service expenses of $160,000 and supporting service expenses of $100,000

c. Program service expenses of $170,000 and supporting service expenses of $90,000

d. Program service expenses of $190,000 and supporting service expenses of $70,000

12. A private not-for-profit entity spends $100,000 to send a mailing that solicits donations and pro- vides educational and other information about the charity. Which of the following is true?

a. No part of the $100,000 can be reported as a program service expense.

b. Some part of the $100,000 must be reported as a program service expense.

c. No authoritative guidance exists, so the entity can allocate the cost as it believes best.

d. Under certain circumstances, the entity should allocate a portion of the $100,000 to program service expenses.

13. A private not-for-profit entity sends a mailing to all of its current and former members regardless of whether they have ever donated money or not. The mailing has a total cost of $22,000. It asks for monetary contributions to help achieve the charity's stated mission. In addition, 80 percent of the mailed material is educational in nature, providing information about the entity's goals. Which of the following is true?

a.Some part of the $22000 should be reported as a program service cost because of the educational materials included.

b.No part of the $22000 should be reported as a program service cost because there is no specific call to action.

C. No part of the $22000 should be reported as a program service cost because the mailing was sent to both current and former members regardless of their donation history.

d.Some part of the $22000 should be reported as a program service cost because more than 50 percent of the material was educational in nature.

Gary Stevens and Mary James are production managers in the Consumer Electronics Division of General Electronics Company, which has several dozen plants scattered in locations throughout the world. Mary manages the plant located in Des Moines, Iowa, while Gary manages the plant in El Segundo, California. Production managers are paid a salary and get an additional bonus equal to 5% of their base salary if the entire division meets or exceeds its target profits for the year. The bonus is determined in March after the company’s annual report has been prepared and issued to stockholders.

Shortly after the beginning of the New Year, Mary received a phone call from Gary that went like this:

Gary: How’s it going, Mary?

Mary: Fine, Gary. How’s it going with you?

Gary: Great! I just got the preliminary profit figures for the division for last year and we are within $200,000 of making the year’s target profits. All we have to do is pull a few strings, and we’ll be over the top!

Mary: What do you mean? Gary: Well, one thing that would be easy to change is your estimate of the percentage completion of your ending work in process inventories. Mary: I don’t know if I can do that, Gary. Those percentage completion figures are supplied by Tom Winthrop, my lead supervisor, who I have always trusted to provide us with good estimates.

Besides, I have already sent the percentage completion figures to corporate headquarters. Gary: You can always tell them there was a mistake. Think about it, Mary. All of us managers are doing as much as we can to pull this bonus out of the hat. You may not want the bonus check, but the rest of us sure could use it.

The final processing department in Mary’s production facility began the year with no work in process inventories. During the year, 210,000 units were transferred in from the prior processing department and 200,000 units were completed and sold. Costs transferred in from the prior department totaled $39,375,000. No materials are added in the final processing department. A total of $20,807,500 of conversion cost was incurred in the final processing department during the year.

Gary is recommending that the completion percentage by adjusted by 10 percentage points in order to assist the team in making their bonus.

Required Discussion Points:

Do you think Mary James should go along with the request to alter estimates of the percentage completion? Why or why not?

How will this affect the financial statements?

Who will be affected by this change?

What should she do with this information?

​