Part I: Quarryman Corporation manufactures and sells 50-inch electronic products that can do just about anything any electronic device can do. They use a standard cost system. Actual data relating to January, February, and March 2019 are as follows:

The selling price per unit is $3,500. The budgeted level of production used to calculate the budgeted fixed manufacturing costs was 1,550 units in January, 1,450 units in February, and 1,500 units in March. They were so accurate at predicting their production volumes there are no production volume variances to worry about. Also, there are no price, efficiency or spending variances.

1. Prepare income statements for Quarryman Corporation in January, February, and March 2019 using: (a) variable costing and (b) absorption costing. Prepare your income statement to the nearest dollar.

To keep it simple you can assume that the cost of product sold per unit in February and March is the same as cost of units produced during that month. In other words, you do not need to assume that 100 of the units sold in February were sold at January’s cost per unit, and the same goes for March. This is the same as assuming the firm is using the LIFO inventory assumption.

2. Calculate and explain the difference in operating income for January, February, and March under variable costing and absorption costing. In other words, provide reconciliation between the absorption costing and the variable costing operating income calculations. If the operating profit calculations are different, quantify the difference and explain where it is. Inevitably there may be some very minor rounding issues when you do reconciliation. Do not be concerned with minor rounding issues. I will not deduct any points if your reconciliation is a few dollars off due to rounding.

The Austin, Texas plant of Computer Products produces disk units for personal and small business computers. Gerald Knox, the plant’s production planning director, is looking over next year’s sales forecasts for these products and will be developing an aggregate capacity plan for the plant. The quarterly sales forecasts for the disk units are as follows:

Ample machine capacity exists to produce the forecast. Each disk unit takes an average of 20 labor-hours. In addition, you have collected the following information:

1. Inventory holding cost is $100 per disk unit per quarter. The holding cost is based on the inventory at the end of the quarter.
2. The plant works the same number of days in each quarter, 12 five-day weeks, 6 hours per day.
3. Beginning inventory is 90 (ninety) disk units and these will be used to meet the initial demand in the first quarter and there is no holding cost associated with these units.
4. In a backlog situation, the customer will wait for his order to be filled but will expect a price reduction each quarter he waits. The backlog costs are $300 per disk for the first quarter the customer waits, $700 for the second quarter the customer waits, and $900 for the third quarter the customer waits. In any quarter, if there is a backlog, this backlog will be filled before the demand for that period is fille
5. The cost of hiring a worker is $800 while the cost of laying off a worker is $950.
6. The straight time labor rate is $20 per hour for the first quarter and increases to $22 per hour beginning in the third quarter.
7. Overtime work is paid at time and a half (150%) of the straight time work.
8. Outsourcing (contract work) is paid at the rate of $480 per disk unit for the labor and you provide the material.
1. Demand is projected to increase this year. Demand during the fourth quarter of the prior year was 2,340 units. The demand for the first quarter of the next year (year following the year you are analyzing) is projected to be at the 2,700 unit level.

a) You want to maintain a work force capable of producing 2,520 in a quarter outsourcing any disk units over this quantity. Excess units produced in a quarter would be carried over to meet demand in a subsequent quarter. Any additional demand is met through outsourcing. All workers will be fully utilized each quarter. In other words, there is no under utilization. What is the total cost of this option, excluding the material cost? Be sure to include any hiring and layoff costs.

b) The company will maintain a work force capable of producing 2,430 units in a quarter. It will allow backlogs to occur until the fourth quarter when it will outsource all demand that cannot be met with its own workforce. All workers will be fully utilized each quarter. In other words, there is no under utilization. What is the total cost of this option, excluding the material cost? Be sure to include any hiring and layoff costs.

The Austin, Texas plant of Computer Products produces disk units for personal and small business computers. Gerald Knox, the plant’s production planning director, is looking over next year’s sales forecasts for these products and will be developing an aggregate capacity plan for the plant. The quarterly sales forecasts for the disk units are as follows:

Ample machine capacity exists to produce the forecast. Each disk unit takes an average of 20 labor-hours. In addition, you have collected the following information:

1. Inventory carrying cost is $100 per disk unit per quarter. The cost is applied to all units in inventory at the end of a quarter.
2. The plant works the same number of days in each quarter, 12 five-day weeks, 6 hours per day.
3. Beginning inventory is 150 disk units. These will be used to help satisfy the 1^st Quarter demand.
4. In a backlog situation, the customer will wait for his order to be filled but will expect a price reduction each quarter he waits. The backlog costs are $300 per disk for the first quarter the customer waits, $700 for the second quarter the customer waits, and $900 for the third quarter the customer waits. In filling orders, backlogged items will always be filled before current quarter items,
5. The cost of hiring a worker is $800 while the cost of laying off a worker is $950.
6. The straight time labor rate is $20 per hour for the first quarter and increases to $22 per hour in the fourth quarter.
7. Overtime work is paid at time and a half (150%) of the straight time work.
8. Outsourcing (contract work) is paid at the rate of $475 per disk unit for the labor and Computer Products provides the material.
1. Demand during the fourth quarter of the prior year was 1,800 units and was fulfilled using a workforce working at full utilization. The demand for the first quarter of the next year (year following the year you are analyzing) is projected to be at the 2,340 unit level.

Compare the following two sales and operations plans.

i) The company will use a matching (chasing) demand strategy for the first two quarters. For quarters three and four, it will use a level production strategy with no overtime, no shortages during these quarters and no inventory leftover at the end of the fourth quarter. What is the total cost of this option, excluding the material cost?

ii) The company will establish in quarter one and then maintain a workforce capable of producing 2,160 units in a quarter. If there are more workers in a quarter than required to produce the demand for that quarter, only the units required will be produced in that quarter and there will be underutilization. If demand is greater in a quarter than can be produced by the available workforce using straight time labor, the excess units will be outsourced. What is the total cost of this option, excluding the material cost?

The price per share of stock for a sample of 25 companies was recorded at the beginning of 2012 and then again at the end of the 1st quarter of 2012. How stocks perform during the 1st quarter is an indicator of what is ahead for the stock market and the economy. The sample data are provided below. Construct a spreadsheet to answer the following questions.

a. Let di  denote the change in price per share for company i where di = 1st quarter of 2012 price per share minus the beginning of 2012 price per share. Use the sample mean of these values to estimate the dollar amount a share of stock has changed during the 1st quarter

$ blank (to 2 decimals)

b. What is the 95% confidence interval estimate of the population mean change in the price per share of stock during the first quarter? Interpret this result.

The mean price per share has increase between blank % and blank % over the three-month period (to 1 decimal).

Simnet Solutions Inc. manufactures and sells cell phones. For the 2020 business plan, the company estimated the following:

Selling Price per Unit   $750
Variable Cost per Unit   $450
Annual Fixed Cost   $180,000
Net Income After Tax   $360,000
Tax Rate   25%
The January financial statements reported that sales were not meeting expectations. For the first 3 months of the year, only 400 units had been sold at the established price. With variable cost staying as planned, it was clear that 2020 after tax projection would not be reached unless some action was taken. A management committee presented the following mutually exclusive alternatives to the president.
Reduce the selling price by $60. The sales team forecast that with a significantly reduced selling price 3,000 units can be sold in the remainder of the year. Total fixed and variable unit cost will stay as budgeted.
Lower variable cost per unit by $20 through the use of less expensive direct materials. The selling price will also be reduced by $40, and sales of 2,800 units are expected for the remainder of the year.
Cut fixed costs by $20,000 and lower the selling price by 5%. Variable cost per unit will be unchanged and sales of 2,500 units are expected for the remainder of the year.
PROBLEM 3 INSTRUCTIONS
Under the current production, policy determines the number of units that the company must sell to:
break-even
achieve its desired operating income
Determine which alternative the company should select to achieve its desired operating income.

All calculations are Semi Annual!! ABC Inc. has three different types of bonds outstanding. Bond X carries a 6.25% coupon and has 8 years to maturity, Bond Y is a zero coupon bond also with 8 years to maturity, and Bond Z is a 6.25% coupon bond with 15 years to maturity. All three bonds currently have a YTM =10%. 1.What is today’s market price for Bond X? Bond Y? Bond Z? 2.What is the true annualized yield of Bond X? Of Bond Y? Of Bond Z? (i.e., find their EARs) 3.Suppose interest rates suddenly drop, such that the yield on all three bonds declines by 200 basis points. What is the new price for each of these bonds? What is the percentage change in price of the three bonds? Explain why the percentage change in the price of Bond X is different than that of the other two bonds. 4.Suppose in the previous problem that yields increase by 200 basis points instead. Without performing any calculations, do you expect the percentage price change in the bonds to be of greater or lesser magnitude than what you calculated in problem #3? Why? What principle lies behind your answer? 5. Suppose you decide to sell Bond X 4 years from now for $880.00. What is your HPY? When you first bought the bond 4 years ago, what did you expect would to be its year 4 price?

Scenario

The Department of Technology is planning to replace the packaging machine in the graphic communication lab in the Spring of 2021. The one currently in use was purchased from ESKO in 2011 for $100,000. The installation of the machine was done by the facility department on campus with a price tag of $5,000, including the labor and all the necessary harness. The new machine to be purchased has a cutting table doubles the size of the old one, with a throughput capacity four times of the old machine.

Q1. According to the vendor, ESKO, the price for the new machine for academic usage is directly related to the machine’s throughput capacity (not its physical size). If the cost-capacity factor between 2011 and 2021 is 0.85, what will be the estimated purchase price of the new machine?

Hint. No cost indexing information is needed here as the vendor has already incorporated the time-related cost change into the price they charge for the new machine.

Q2. In order to estimate the cost of operations, the graphic communication area coordinator needs to estimate the time of usage in the class setting. If it takes 45 minutes to set up and finish cutting the first box, and the learning curve slope is 0.75 according to the past experience, how long will it take to set up and finish cutting the third box?

Suppose that a monopoly sells its product in a market with 10 identical consumers. Each consumer has an individual demand given by P = 30 − 2y, where y is the individual quantity demanded at price P. The firm has no fixed costs and a constant marginal cost equal to 5. a) Show that the aggregate inverse market demand is given by P(Y ) = 30 − Y /5, where Y is total quantity demanded in the market. b) First, assume that the monopolist can’t price discriminate. i. compute the firm’s profit function π(Y ), ii. compute the monopoly’s profit-maximizing quantity Ym and price Pm . 8 iii. determine the implied consumer surplus and deadweight loss. Show them on a graph. c) Assume now that the firm decides to use two-part tariff. i. compute the optimal two-part tariff. 9 ii. compute the total quantity produced by the firm, and determine the firm’s profits. iii. compute the implied consumer surplus and deadweight loss. d) Compute the quantity produced and the consumer surplus if the firm uses perfect price discrimination. Compare the implied consumer’s welfare (as measured by the consumer surplus) to the one you found in (c)

36

The Internal Revenue Service is a good example of a government for-profit entity that is always trying to proactively maximize their MC=MR.   

True or False

38

If the market price for a product is just one dollar above the average fixed cost curve, but still way below the average variable cost curve, then this should make the small business owner feel better. Standard microeconomic theory would recommend that they should still stay open for business until they can figure out how to become more profitable.   

True or False

39

What exactly does elasticity mean in microeconomics?

Multiple Choice

• The demand curve must first shift before we can determine the elasticity of demand.

• It measures the satisfaction of the consumer when they purchase items at different prices.   

• When we change quantity (the cause), then we will determine the price (the effect).

• When we change the price (the cause), then we will determine the quantity (the effect).

40

Let’s suppose that the state government orders that the minimum wage will be cut from $15.00 per hour to $4.00 per hour. We can probably assume that the new wage is a price ceiling and that the supply of labor will shrink, which will probably lead to a shortage of labor.

True or False