Mobile Oil Company

The Mobile Oil company owns land in Alaska that might contain natural oil. The current value of the land is worth $90,000. However, if natural oil is present at the site, the oil will be worth $800,000. If the company decides to extract the oil from the land, the company will have to pay $100,000 in drilling costs.

Before drilling, the company has an option to carry out a seismic survey at the proposed drilling site. If they do not choose to carry out the survey, the company believes that there is a 0.25 probability that the proposed drilling site actually contains natural oil. However, if the company chooses to carry out the survey, the company will have to pay $30,000 for the test to be completed.

If the seismic survey is conducted, there are two possible outcomes. In other words, the survey will show either favorable or unfavorable result that natural oil is present. Based on historic records, if the results are favorable, the probability of hitting oil increases to 0.50. Even if the survey is unfavorable, there is still a chance that natural oil is present. However, if this is the case, the probability of hitting oil reduces to 0.14285.

If Mobile Oil decides not to drill, the company will sell their land at its current value. However, the land is considered worthless if the land is drilled. In addition, if the land has value (i.e. not drilled on), assume that the current value of the land does not change based on the results of the survey.

A summary of the financial parameters is shown below in Table 1, where costs are in terms of thousands of dollars.

Table 1: Financial parameters ($000)

Survey cost

-$30

Drilling cost

-$100

Current value

$90

Oil value

$800

Land value if drilled

$0

1. Develop a decision tree for this problem so that the expected monetary value can be evaluated.

a. HINT: Be sure to reference the tables that have been provided.

b. HINT: You will use the probabilities listed in Table 2 only once in order to develop a decision tree for this problem correctly.

2. Develop a formula that determines the highest expected monetary value that Mobil Oil can anticipate. In addition, develop a formula that will determine the course of action that Mobil Oil will take (i.e. Survey Do not Survey).

Please list out the excel formula's for each. I was not able to include the table for the data when I copied over.

Comments and Hints

Several probabilities are needed in order to construct a decision tree correctly. These probabilities are listed below in Table 2. However, to understand the probabilities that are given to you, please consider the following notation. For example, P(OP) is the probability of oil being present and P(OP|F) is the

probability of oil being present given (i.e. “|” ) that a favorable survey result was obtained. A

description of the abbreviations used in this problem is shown in the list below.

• OP Oil is Present

• ONP Oil is Not Present

• F Favorable Survey

• U Unfavorable Survey

The probabilities that are necessary to fill out the decision tree correctly are shown in the table below.

Table 2: Decision Tree Probabilities

P(OP) 0.25000%

P(ONP) 0.75000%

P(FS) 0.30000%

P(US) 0.70000%

P(OP|FS) 0.50000%

P(OP|US) 0.14285%

P(ONP|FS) 0.50000%

P(ONP|US) 0.85715%

The break-even point tells a company the number of units or the amount of revenue that it must sell or earn in order to pay for all of its costs. At this point, the company has neither profit nor loss.

Companies have two main types of costs: variable costs and fixed costs.

Variable costs are those costs that vary with the number of units produced. Examples of variable costs are direct labor, direct materials and overhead.

Fixed costs are those costs that a company incurs that do not depend on production. For example, most selling, and all administrative costs are fixed. A company must pay these costs even if it does not have any production activity.

The formulas for computing break-even follow:

B/E _{(# units)} = .     Fixed Cost              .

                         Contribution Margin

B/E _(Revenue) = .     Fixed Cost              .

                     Contribution Margin Ratio

If you will notice, both formulas use something called Contribution Margin. Contribution Margin represents the amount of revenue available after all variable costs have been paid for. It represents what is left over to pay for the fixed costs. The Contribution Margin ratio is the percentage Revenue that the Contribution Margin represents. In concept this is similar to Gross Profit.

In Cost Accounting Variable Costs are grouped together, and Fixed Costs are grouped together to create a variation of the traditional Income Statement. This variation is called a Contribution Margin Income Statement.

Read the following ethical dilemma.

Spillproof Company produces molded plastic cup holders for automobiles. Below is a summary of its Contribution Margin Income Statement from last year:

• Revenues: $5,750,000
• Variable costs: $3,850,000
• Fixed costs: $2,000,000
• Net Loss: ($100,000)

Because the company’s CEO is very concerned about the firm’s net losses, she asks the production manager if there are any ways in which they can reduce costs.

A few weeks later, the production manager returns with a proposal to reduce variable costs to 53% of revenues by lowering the cost estimates that the company uses for environmental clean-up costs. Some years the company has to perform waste clean-up and other years it does not. Either way, the company records this estimated cost as part of Variable Cost since it is based on the number of units produced.

The CEO likes the new projected net income and new break-even point, but is concerned that this change in the estimate will misrepresent the potential liability. The manager disagrees. He feels that the company will not be violating any laws by changing their estimate, and that there is only a possibility of environmental costs in the future anyway.

Requirements for your Main thread post:

1. Calculate the CURRENT breakeven revenues using the current Contribution Margin Income Statement information above.  Show us your work!
2. Re-calculate the breakeven revenues if variable costs are 53% of revenues.  Show us your work!
3. Calculate Spillproof’s projected Net Income/Loss.   Show us your work!
4. Discuss the following:

• 1. What are the ethical issues involved in this case? Explain your answer.
  2. Do you feel that the Production Manager is acting improperly or immorally? Why or why not? Please explain your response.
  3. What stakeholders would be affected if the CEO implemented the Production Managers suggestions? Why?
  4. What should the CEO do?

Top Cat Ltd is a company that supplies pet food to the dogs and cats of Australia. The company’s

marginal tax rate is 30%. The business is considering replacing a five-year-old manually operated

tuna processing machine that originally cost $100,000, presently has a book value of $50,000, and

could be sold for $120,000. This machine is currently being depreciated using the straight-line

method down to a terminal value of zero over the next five years, generating depreciation of

$10,000 per year. The fully automated replacement machine would cost $250,000, have a five-

year expected life over which it would be depreciated down using the straight-line method, and

have no salvage value at the end of five years.

Other information:

• The new machine would produce power savings before depreciation and taxes of $90,000 per year.
• Installation charge for the new machine is $10,000.
• Investment in inventories needs to be increased by $20,000.
• The old machine was operated by one operator who earned $30,000 per year.
• Annual cost of maintenance with the old machine was $10,000 per year.
• Annual cost of maintenance with the new machine is expected to be $40,000 per year.
• The required rate of return is 10% per year.
• A preliminary feasibility study incurred sunk costs of $5,000.

Required

a      Calculate the initial investment associated with the replacement project.

2. Calculate the incremental operating net cash inflows associated with the proposed replacement machine.

c      Determine the terminal cash flow expected from the proposed machine replacement.

d      Calculate the pay-back period of the proposed replacement machine.

e      Calculate the net present value of the proposed replacement machine.

Controllership in Accounting

Topic:   Revenue & Misrepresentation by Clients

Characters: Rachel Hanson, Senior in CPA firm

Jim Thompson, Owner/manager of Fashion Line

Sharon, part-time bookkeeper of Fashion Line

In addition to the usual mix of compilation, review and audit clients for which Rachel Hunt

serves as a senior in a small office of a regional CPA firm, she has been assigned a new

client that recently engaged the firm. Fashion Line, an incorporated retail outlet, is a thriving

local store. The business is run by a single owner/manager, Jim Thompson, who makes

all major decisions. The business has not previously used the services of a CPA firm. In

addition to preparation of financial statements, the CPA firm will handle tax returns for the

business.

At her Line visit to the client’s office, Rachel is introduced to Sharon, the part-time

bookkeeper who is also a full-time accounting student at the local university. At a

subsequent meeting, Sharon confides to Rachel that she found the job at the beginning of the

semester after an extensive search. Sharon really needs the money to help finance her

education, and feels lucky to have found a good-paying job during the current economic

downturn. Feeling that Rachel is someone she can talk to and get advice from, Sharon

describes a situation that has been on her mind for some time now.

Sharon’s concern relates to the handling of sales revenues. When monies from sales revenues

are counted and deposited on a weekly basis, a chart is filled out with categories carefully

delineating the type of payment: cash, checks, American Express, or Visa/Mastercard.

Sharon’s employer, after depositing the weekly total, brings this chart back with his own

written-in total of the actual amount deposited.

After looking over some of these weekly deposit chats, Sharon noticed that $500 cash was

missing from each deposit. After a more thorough inspection of monthly tax documents that

Jim Thompson has filled out, Sharon noticed that the reported monthly gross revenue was

$2,000 less than what had been actually counted.

The employer is the only person handling the money after it has been counted. He is also the

only one to deposit the money. When Sharon asked Mr. Thompson about revenue not being

reported for tax purposes, he assured her that every dollar of income was reported on the tax

forms. Furthermore, Jim asserted, since Sharon wasn’t the person who signed the forms,

she shouldn’t be concerned.

Answer the following question from the case above :-

1. What are the relevant facts of the case?

2. What, if any, are the ethical issues?

3. Who are the stakeholders?

4. What are the possible alternatives including any ethical concerns?

5. What are the practical constraints?

6. What action(s) should be taken?

According to Rescorla-Wagner, combining two or more conditioned stimuli with a single US:

A. Strengthens the association between both of the CS and the US

B. Blocks the association between both of the CS and the US

C. Blocks the association between one of the CS and the US

D. Weakens the association between both CS and the US

Horizon Corporation manufactures personal computers. The company began operations in 2016 and reported profits for the years 2016 through 2019. Due primarily to increased competition and price slashing in the industry, 2020’s income statement reported a loss of $20 million. Just before the end of the 2021 fiscal year, a memo from the company’s chief financial officer to Jim Fielding, the company controller, included the following comments:

If we don’t do something about the large number of unsold computers already manufactured, our auditors will require us to write them off. The resulting loss for 2021 will cause a violation of our debt covenants and force the company into bankruptcy. I suggest that you ship half of our inventory to J.A. Sales in Nevada. I know the company’s president and he will accept the merchandise and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost profits to an acceptable level. The J.A. Sales will simply return the merchandise in 2022 after the financial statements have been issued.

In order for a person to collect from a life insurance policy, the beneficiary who purchases the policy must have ___________ in the life of the insured.

A researcher with the Department of Education followed a cohort of students who graduated from high school in a certain​ year, monitoring the progress the students made toward completing a​ bachelor's degree. One aspect of his research was to determine whether students who first attended community college took longer to attain a​ bachelor's degree than those who immediately attended and remained at a​ 4-year institution. The data in the table attached below summarize the results of his study. Complete parts​ a) through​ e) below.

a) What is the response variable in this​ study? What is the explanatory​ variable?

A. The response variable is the number of students. The explanatory variable is the time to graduate.

B. The response variable is the use of community college or not. The explanatory variable is the time to graduate.

C. The response variable is the time to graduate. The explanatory variable is the use of community college or not.

D. The response variable is the time to graduate. The explanatory variable is the number of students.

b) Explain why this study can be analyzed using inference of two sample means. Determine what qualifications are met to perform the hypothesis test about the difference between two means. Select all that apply.

A. The samples can be reasonably assumed to be random.

B. The sample sizes are not more than​ 5% of the population.

C. The samples are independent.

D. The sample sizes are large​ (both greater than or equal to​ 30).

E. The population is given to be normally distributed.

c) Does the evidence suggest that community college transfer students take longer to attain a​ bachelor's degree?

Use an α=0.01 level of significance. Perform a hypothesis test. Determine the null and alternative hypotheses.

A. Upper H 0H0​: mu Subscript community college Baseline equals mu Subscript no transferμcommunity college=μno transfer​,

Upper H 1H1​: mu Subscript community college Baseline greater than mu Subscript no transferμcommunity college>μno transfer

B. Upper H 0H0​: mu Subscript community college Baseline greater than mu Subscript no transferμcommunity college>μno transfer​,

Upper H 1H1​: mu Subscript community college Baseline less than mu Subscript no transferμcommunity college<μno transfer

C.Upper H 0H0​: mu Subscript community college Baseline less than mu Subscript no transferμcommunity college<μno transfer​,

   Upper H 1H1​: mu Subscript community college Baseline greater than mu Subscript no transferμcommunity college>μno transfer

D.Upper H 0H0​: mu Subscript community college Baseline equals mu Subscript no transferμcommunity college=μno transfer​,

   Upper H 1H1​: mu Subscript community college Baseline less than mu Subscript no transferμcommunity college<μno transfer

Determine the test statistic.

t=_______ ​(Round to two decimal places as​ needed.)

Determine the​ P-value.

​P-value=_______ ​(Round to three decimal places as​ needed.)

Should the hypothesis be​ rejected?

▼(Do not reject, Reject) the null hypothesis. The evidence ▼(does, does not) suggest that community college transfer students take longer to attain a​ bachelor's degree at the

α=0.01 level of significance.

d) Construct a 99​% confidence interval for mu Subscript community college Baseline minus mu Subscript no transferμcommunity college−μno transfer

to approximate the mean additional time it takes to complete a​ bachelor's degree if you begin in community college.

The confidence interval is the range from _______ to ________.​(Round to three decimal places as​ needed.)

e) Do the results of parts​ c) and​ d) imply that community college causes you to take extra time to earn a​ bachelor's degree?

No

Yes