Variable Costing, Absorption Costing

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,600 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,900 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,500. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year’s operations are as follows (on an absorption-costing basis):

Required:

1. Calculate the cost of the firm’s ending inventory under absorption costing. Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$

What is the cost of the ending inventory under variable costing? Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$

2. Prepare a variable-costing income statement. Round the unit cost to five decimal places, when required. Round your final answers to the nearest dollar. Use the rounded values in subsequent computations.

What is the difference between the two income figures?
$

Variable Costing, Absorption Costing

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,500 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 38,600 scoops. Fixed overhead was applied at $0.75 per unit produced. Fixed overhead was underapplied by $2,700. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year’s operations are as follows (on an absorption-costing basis):

Required:

1. Calculate the cost of the firm’s ending inventory under absorption costing. Round unit cost to five decimal places. Round your final answer to the nearest dollar.

$

What is the cost of the ending inventory under variable costing? Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$

2. Prepare a variable-costing income statement. Round the unit cost to five decimal places, when required. Round your final answers to the nearest dollar. Use the rounded values in subsequent computations.

What is the difference between the two income figures?
$

Variable Costing, Absorption Costing

During its first year of operations, Snobegon, Inc. (located in Lake Snobegon, Minnesota), produced 40,500 plastic snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away. Unit sales were 39,000 scoops. Fixed overhead was applied at $0.70 per unit produced. Fixed overhead was underapplied by $2,800. This fixed overhead variance was closed to Cost of Goods Sold. There was no variable overhead variance. The results of the year’s operations are as follows (on an absorption-costing basis):

Required:

1. Calculate the cost of the firm’s ending inventory under absorption costing. Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$ ????

Feedback

What is the cost of the ending inventory under variable costing? Round unit cost to five decimal places. Round your final answer to the nearest dollar.
$ ????

Feedback

2. Prepare a variable-costing income statement. Round the unit cost to five decimal places, when required. Round your final answers to the nearest dollar. Use the rounded values in subsequent computations.

Feedback

Use a contribution margin format income statement that groups costs according to behavior (variable and fixed)

What is the difference between the two income figures?
??????

1) An autarkic country has a production possibility curve with constant opportunity costs such that it can produce at most 210 units of silk, or at most 70 units of kerosene. Suppose this country is currently producing 56 units of kerosene and 42 units of silk, and decides instead to produce 69 units of silk; how much kerosene will it produce?___

2) Consider the production possibility curves for England and Portugal. Each country can produce cloth or wine. England can produce at most 10 units of cloth or at most 10 units of wine. Portugal can produce at most 4 units of cloth or 8 units of wine. Which country has a comparative advantage in the production of wine?

1. England
2. Portugal

3. The Excess Capacity theorem asserts that because a monopolistic competitor produces an output that is smaller than what it would to minimize costs of production, and therefore has

1. no right to export its good.
2. excess capacity.
3. a tendency to charge a price that is less than average total cost.
4. an incentive to lobby for lower import tariffs.

4. A monopolist that practices first degree price discrimination

1. charges the highest price each buyer is willing to pay.
2. charges one price for a certain quantity, and another price for a different quantity.
3. charges a different price depending on the type of buyer.
4. charges a random price for each buyer.

5. The Running for Life Centre is considering replacing its treadmills and is faced
with a choice between two models: the Track model costing £800 per
machine and the Pro model costing £1,400 per machine. The Pro model is
sturdier and the cost of maintenance per machine is £50 per year. The Track
model is less robust and requires more maintenance costing £75 per machine
per year. The Track model is also less durable. The Running for Life Centre
estimates that it would need to replace the Track machines after 3 years of
use and that it would need to buy 30 machines to ensure that enough are
working at any particular time. The Pro model would last 4 years and only 25
machines would be needed. All other revenue and costs for the Running for
Life Centre would remain the same. The required discount rate for this project
is 10%.

Required:
a) On the basis of the information provided, which machine should the Running
for Life Centre buy? Explain.

[15 marks]
b) What other information would you consider before taking a decision?
[5 marks]
[Total 20 Marks]

Homewards Pty Ltd, a resident company, is a retailer specialising in building materials and household items.

During the income year, Homewards Pty Ltd incurred the following expenses:

- $ 150,000 Wages

- $ 5,000 Local government fines

- $ 80,000 Interests repayments for a loan to pay running expenses

- $ 30,000 Super contributions for employees

a) Advise Homewards Pty Ltd whether or not it may deduct any of the above expenditures? Homewards Pty Ltd incurred the following expenses in relation to its business premises (the Building):

• Painting of the exterior of the Building at a cost of $30,000. The original paintwork had deteriorated significantly since it was previously painted four years ago and the new paintwork looked fresh and inviting.

• Re-surfacing of the loading dock area of the Building to make the floor significantly more durable and skid resistant. The cost of re-surfacing was $12,000.

• Replacement of 20% of the roofing tiles on the roof of the Building. Part of the roof was damaged during a freak summer storm. The cost of the replacement was $55,000 and the tiles used were very similar to the original tiles on the roof.

b) Advise Homewards Ltd whether or not it may deduct any of the above expenditures under section 25-10 ITAA97?

iROBOT: HOW TO BE A SUSTAINABLE INNOVATOR?

            iRobot, founded in 1990 in Delaware, designs and builds a vast array of behavior-based robots for home, military, and industrial uses. It is among the first companies to introduce robotic technology into the consumer market. Home care robots have been iRobot’s most successful products, with over 5 million units sold worldwide and accounting for over half of its total annual revenue. iRobot has a long-standing contractual relationship with the US government to produce robots for military defense.

            iRobot is fully gauged towards first mover radical innovation with an extensive R&D budget. Made up of over 500 of the most distinguished robotics professionals in the world, it aims at leading the robotics industry. By forming alliances with companies like Boeing and Advanced Scientific Concepts, it is able to develop and improve upon products that it otherwise is incapable of obtaining using only its own technology. The company also has a healthy financial position with an excellent cash and long-term debt rate.

            Despite these competences, iRobot still has serious concerns. Although the robotics industry is not highly competitive, iRobot needs more competition to help build up the total scale and visibility of the fledgling industry it has pioneered. Home care robots, its biggest revenue source, are a luxury supplemental good. Times of economic recession could prove to be a problem for the sales of iRobot’s consumer goods given that discretionary budgets are likely decreased. Although iRobot has over 70 patents, many of which will begin to expire in 2019. In a rapidly advancing industry, technology can also become obsolete quickly and render patents useless. Additionally, iRobot is highly dependent on several third-party suppliers to manufacture its consumer products. It also depends on the US government for the sales of its military products. Any volatility in its supply chain or government fiscal policy will have grave consequences for the company’s future.

Case Study Questions (25 marks each):

1. Prepare a SWOT Analysis for iRobot.

2. What can iRobot “strategically” do to deal with the potential threats? Explain.

3. Under which strategic type, can iRobot fall? Elaborate.

4. In the long run, would iRobot be better served to exit the home consumer products market and concentrate on military and industrial robots where profit margins are better? Discuss.

Electro Motors (Electro) is considering a new project to produce electric vehicles for the

Australian domestic market and international markets. It has identified a property/plant that was formerly used to build petrol-fuelled motor vehicles that could be refitted at minimal cost to manufacture the new electric vehicles. Electro is targeting Australian metropolitan centers for initial sales and expanding into regional centers over the next five years. International demand for electric vehicles is being driven by China and Electro has been in negotiation to provide vehicles to the Chinese market in 2025.

Electro has made the following projections:

• In the first year, 2,000 units will be sold and growing at 10% pa.
• The price for each unit in the first year will be AU$50,000. This price will increase by 5% pa.
• Variable costs are 70% of the sales price in the first year’s total revenue and grow by 8% each year.
• Fixed costs are $5 million pa, which is expected to grow by 4% each year.
• The project is for a term of 5 years. The projected growth of the electric car line is expected to outgrow the plant at this time, hence the plant will be sold at the end of 5 years.
• Initial investment into manufacturing equipment will be $100 million.
• The equipment may be depreciated at 20% straight-line (prime cost) method to zero.
• In 5 years, the plant will be worth 10% of the purchase price.
• Working capital will be $3 million.
• Electro's required rate of return is 10%.
• The tax rate for Electro is 30%.
• Required payback is three (3) years.

a. Prepare an excel spreadsheet calculating:

1. After-tax cash flows (in table format)
2. Payback period
3. Net present value
4. Profitability index   

b. You are asked to present a report on your findings regarding the upgrade proposal. Make a recommendation to management on whether they should proceed with the project or not. Explain the criteria on which you have based your decision.

c. It has come to your attention that variable costs are anticipated to rise by 12% per annum due to the prospective growth within the industry. Would you recommend to proceed with the project? (Show all calculations).

d. You have been asked to provide a further evaluation regarding the alternative use of the plant for the purpose of manufacturing electric self-driving cars, however, the project life will be for 10 years. Explain how financial managers may evaluate both projects that are of unequal lives. (10 marks)

should the government provide public goods