QUESTION FOUR

4.1 Complete Table 4.1 given below showing quantity, fixed cost, variable cost, total cost and marginal cost.

2. 4.2 Using examples distinguish between fixed costs and variable costs.

3. 4.3 Differentiate between marginal cost and marginal revenue.

4. 4.4 Compare and contrast accounting and economic profits.

QUESTION SIX
6.1 Using marginal cost (MC), marginal revenue (MR), average cost (AC) curves in an appropriate diagram, illustrate and explain how a firm can make abnormal profits.

My subject is ECONOMICS

1.Explain why economists advocate that regulators use marginal-cost and not average-cost pricing. Also explain why regulators favor average cost pricing.

2. Provide the formula for how a Public Utility Commission determines the rate-of-return. Then relate it to the Averch-Johnson Effect.

3. Draw a graph that shows the social welfare loss from a flat rate as compared to using a peak and off-peak rate. Explain.

4. Why is it a challenge to utilities to promote energy efficiency? How might decoupling reduce the challenge?

Factory overhead cost variance report

Instructions

Amount Descriptions

Factory Overhead Cost Variance Report

X

Instructions

Tiger Equipment Inc., a manufacturer of construction equipment, prepared the following factory overhead cost budget for the Welding Department for May of the current year. The company expected to operate the department at 100% of normal capacity of 8,500 hours.

During May, the department operated at 8,820 standard hours, and the factory overhead costs incurred were indirect factory wages, $31,462; power and light, $24,428; indirect materials, $18,260; supervisory salaries, $20,400; depreciation of plant and equipment, $35,300; and insurance and property taxes, $20,800.

Prepare a factory overhead cost variance report for May. To be useful for cost control, the budgeted amounts should be based on 8,820 hours. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries. Enter all variances as positive amounts.

Problem 16-7AA FIFO: Process cost summary, equivalent units, cost estimates LO C2, C3, C4, P4

[The following information applies to the questions displayed below.]

Dengo Co. makes a trail mix in two departments: roasting and blending. Direct materials are added at the beginning of each process, and conversion costs are added evenly throughout each process. The company uses the FIFO method of process costing. During October, the roasting department completed and transferred 26,000 units to the blending department. Of the units completed, 4,900 were from beginning inventory and the remaining 21,100 were started and completed during the month. Beginning work in process was 100% complete with respect to direct materials and 30% complete with respect to conversion. The company has 4,300 units (100% complete with respect to direct materials and 70% complete with respect to conversion) in process at month-end. Information on the roasting department’s costs of beginning work in process inventory and costs added during the month follows.

Problem 16-7A Part 1

Required:
1. Prepare the roasting department's process cost summary for October using the FIFO method. (Round "Cost per EUP" to 2 decimal places.)

Problem 16-7A Part 2

2. Prepare the journal entry dated October 31 to transfer the cost of completed units to the blending department. (Do not round your intermediate calculations.)

• Record the transfer of goods from Roasting to Blending.

Exhibit 4
County Hospital Cost Allocation Data

Support Departments Housekeeping Direct Cost Space (Sq. Ft)

Housekeeping $500,000 8,000

General Administration $750,000 12,000

Maintenance $600,000 15,500

TOTAL SUPPORT DEPTS. $1,850,000 35,000

Patient Service Departments Direct Cost Space (sq. ft) revenues

Medicine $800,000 10,000 $970,000

Surgery $1,200,000 20,000 $3,600,000

Outpatient Adult $560,000 15,000 $720,000

Outpatient Pediatrics $470,000 12,000 $630,000

Total Patient Service Depts. $3,030,000   57,000   $5,920,000

County Hospital Totals $4,880,000   92,500 $5,920,000

27. Assume that managers want to allocate housekeeping costs to the patient service departments. What is the value of the housekeeping cost pool? (2 points)

1. 8,000 sq feet

2. 57,000 sq feet

3. $500,000

4. $1,850,000

Page 7 of 8

28. Assume that space will be the cost driver and that managers want to use the direct cost allocation method. What is the total amount for the cost driver? (2 points)

1. 57,000 sq feet

2. 35,500 sq feet

3. 92,500 sq feet

4. None of the above

29. What is the appropriate allocation rate for the housekeeping cost pool if space is the cost driver and using the direct cost allocation method? (2 points)

1. $5.40 per sq foot

2. $14.08 per sq foot

3. $8.77 per sq foot

4. None of the above

30. Assuming that the cost driver for housekeeping costs is space and using the direct cost allocation method, what is the allocation of housekeeping costs to the Medicine Department? (2 points)

a. $ 87,720
b. $ 54,000
c. $ 140,800
d. None of the above

Unit price: $50
Variable cost: $30
Fixed Cost: $430,000
Expected Sales: 42,000 units per year

However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% high or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.9 million, which will be depreciate straight line over the project life to a final value of zero. The firm’s tax rate is 35% and the required rate of return is 10%.

1. What is project NPV in the best case scenario, that is, assuming all variables take on the best possible value?
2. What is project NPV in the worst case scenario?

Unit price: $50
Variable cost: $30
Fixed Cost: $430,000
Expected Sales: 42,000 units per year
However, you recognize that some of these estimates are subject to error. Suppose that each variable may turn out to be either 10% high or 10% lower than the initial estimate. The project will last for 10 years and requires an initial investment of $1.9 million, which will be depreciate straight line over the project life to a final value of zero. The firm’s tax rate is 35% and the required rate of return is 10%.

1. What is project NPV in the best case scenario, that is, assuming all variables take on the best possible value?
2. What is project NPV in the worst case scenario?

Compute the cost of the ending inventory and the cost of goods sold under FIFO and average-cost.

1.   Williams Furniture Company has the following data:

        Williams Furniture

         Balance Sheet

      December 31, 201x

Assets:

Cash                                                $50,000

Marketable Securities            80,000

Accounts Receivable        3,000,000

Inventory                                1,000,000

Gross plant &

                  Equipment           6,000,000

                  Less Accum

                  Depreciation       2,000,000

Total Assets                            8,130,000

Liabilities And Equity

Accounts Payable               $2,200,000

Accrued Expense                        150,000

Notes Payable (current)        400,000

Bonds Payable                          2,500,000

Common Stock (1.7

Million shares, par $1)     1,700,000

Retained Earnings                  1,180,000

Total Liabilities &

    Equity                                       8,130,000

          Williams Furniture

           Income Statement

           Year ended Dec 31, 201x

Sales (credit)                                            $7,000,000

Fixed costs*                                             2,100,000

Variable costs (.60)                              4,200,000

Earnings before interest and

                  Taxes                                                700,000

Less interest                                                   250,000

Earnings before taxes                               450,000

Less Taxes (35%)                                          157,500

Earnings after taxes                                   292,500

Dividends (40% payout)                         117,000

Increased retained earnings                 175,500

*Fixed costs include a) lease expense of $200,000 and 9b) depreciation of $500,000.

Williams Furniture has a $65,000 per year sinking fund obligation associated with its bond issues. The sinking fund represents an annual repayment of the principal amount of the bond. It is not tax deductible.

a. Calculate the following and compare to industry average. Be thorough and specific with weak points, strong points and your recommendation on how to improve the company’s performance.

                                                      Williams                                  Industry

Profit Margin                                                                              5.75%

Return on Assets                                                                       6.90%

Return on Equity                                                                      9.20%

Receivables Turnover                                                             4.35x

Inventory Turnover                                                                 6.50x

Fixed Asset Turnover                                                              1.85x    

Current Ratio                                                                              1.45x

Quick Ratio                                                                                  1.10x

Interest Coverage                                                                     5.35x

Debt to total assets                                                                 25.05%

b. Calculate break even in sales dollars. Calculate DOL .

2. Litten Oil and Gas Company is a large company with common stock listed on the New York Stock Exchange and bonds traded over the counter.

The vice president of finance is planning to sell $75 million of bonds this year. Present market yields are 12.1%. Litten has $90 million of 7.5% non callable preferred stock outstanding and has no intentions of selling any preferred stock at any time in the future. The preferred stock is currently priced at $80 per share and its dividend per share is $7.80.

The company has had volatile earnings but its dividend per share had had 8% growth and this will continue. The expected dividend is $1.90 per share and common stock is selling for $40 per share. The company’s flotation costs are $2.50 per share preferred stock and $2.20 per share for common stock.

Litten keeps its debt at 50% of assets and its equity at 50%. Litten sees no need to sell common or preferred stock in the near future as is has generated enough internal funds for investment needs. The tax rate for the company is 40%

Calculated the following cost of capital:

a. bond

b. preferred stock

c. common stock in retained earnings

d. new common stock

e. weighted average cost of capital.

3. Smith Corporation is considering two new investments. Project A and Project B are listed below

Project A will cost $20,000 and has the following cash flow

Yr 1 5,000

Yr 2 6,000

Yr 3 7,000

Yr 4 10,000

Project B will also cost $20,000 has the following cash flow

Yr 1 16000

Yr 2    5000

Yr 3    4000

Calculate specific payback for each

Calculate NPV of each. Use the weighted cost of capital of 8%.