Purl of Great Price Company

Maria Young is the sole stockholder of Purl of Great Price Company (POGP Company), which produces high-end knitted sweaters and sweater vests for sale to retail outlets. The company started in January of the current year, and employs three knitters (each of whom work 40 hours per week) and one office manager/knitting supervisor (this employee works 20 hours per week as office manager, and 20 hours per week as knitting supervisor). All wages are paid in cash at the end of each month.

Each knitter has a knitting machine that is used about 2/3 of the knitter’s time, the rest of the knitter’s time being involved in hand knitting and piecing together the garments. The company also has a packaging machine used to wrap the garments in plastic for shipping, which is operated by the office manager/knitting supervisor approximately 5 hours per week.

The knitting machines were purchased on January 1 of the current year, and cost $2,400 each, with an anticipated useful life of 10 years and no salvage value. The packaging machine was purchased on the same date and cost $4,800, with the same anticipated useful life and salvage value.

Nov. 30 Trial Balance

POGP Company
Trial Balance
November 30, 20Y8

Account TitleDebitCredit

Cash20,000

Accounts Receivable1,000

Supplies200

Materials5,000

Work in Process5,404

Equipment12,000

Accumulated Depreciation-Equipment825

Accounts Payable150

Common Stock10,000

Retained Earnings12,000

Dividends18,096

Sales307,500

Cost of Goods Sold255,040

Factory Overhead15

Wages Expense13,750

330,490330,490

Predetermined Factory Overhead Rate

Since the company is more reliant on labor than machines, Maria decides to use direct labor hours (DLH) as the activity base for her predetermined factory overhead rate, rather than machine hours (MH).

Estimated Selected Amounts for the Year

Estimated depreciation on equipment$1,200

Estimated total Office Manager/Knitting Supervisor wages$36,000

Estimated office utilities$5,000

Estimated factory utilities$4,800

Estimated factory rent$12,000

Activity Base Data

Estimated number of DLH for the year6,250

Estimated number of MH for the year4,375

Compute the predetermined factory overhead rate for the current year.

$5.76 per DLH

Feedback

Review the definitions of items that are included in factory overhead for the computation of estimated total factory overhead costs.

Materials RequisitionDate: Dec. 10

Req. No. 12255Job No. 83

DescriptionQty. IssuedUnit PriceAmount

Yarn type B600 skeins$5$3,000

Total issued$3,000

Time TicketNo. 1255Name:Susan Blake

Work Description:Knitting/piecing

DatesJob No.Hours WorkedUnit PriceAmount

12/01-12/1562       65       $15       $975

12/16-12/3183       103       15       1,545

Total Cost$2,520

Time TicketNo. 2274Name:Josh Porter

Work Description:Knitting/piecing

DatesJob No.Hours WorkedUnit PriceAmount

12/01-12/156275$15$1,125

12/16-12/318388151,320

Total Cost$2,445

Time TicketNo. 3923Name:Mary Jones

Work Description:Knitting/piecing

DatesJob No.Hours WorkedUnit PriceAmount

12/01-12/1562       60       $15$900

12/16-12/3183       109       151,635

Total Cost$2,535

Job Cost Sheets

On December 10, POGP Company receives an order for 200 sweater vests and assigns Job 83 to the order. Review the Materials Requisition table to add the materials to the Job Cost Sheet for Job 83.

On December 15, review the Time Ticket tables to add the appropriate amount of direct labor and factory overhead costs to the Job Cost Sheet for Job 62 for the period December 1 through December 15.

On December 31, the last work day of the year for the knitters, review Time Ticket tables to add the appropriate amount of direct labor and factory overhead costs to the Job Cost Sheet for Job 83 for the period December 16 through December 31.

If there is no amount or an amount is zero, enter "0". If required, round your answers to the nearest cent.

Job 62100 units:Sweaters

Direct MaterialsDirect LaborFactory OverheadTotal

Balance Dec. 1$5,000$300$104$5,404

Dec. 15

Total Cost$$$$

Unit Cost$

Job 83200 units:Sweater vests

Direct MaterialsDirect LaborFactory OverheadTotal Job Cost

Balance Dec. 1$0$0$0$0

Dec. 10

Dec. 31

Total Cost$$$$

Feedback

Recall that the factory overhead is applied for this company using direct labor hours (DLH).

Journal

On December 10, POGP Company receives an order for 200 sweater vests and assigns Job 83 to the order. Review the Materials Requisition table to journalize the entry to record the addition of the materials to Work in Process. If an amount box does not require an entry, leave it blank.

Dec. 10Work in Process

Materials

Feedback

Think about the flow of costs incurred to do a job and the accounts affected by sales to customers.

On December 15, review the Time Ticket tables to journalize the entry to record the addition of direct labor to Work in Process for the period December 1 through December 15. If an amount box does not require an entry, leave it blank.

Dec. 15Work in Process

Wages Payable

Feedback

Partially correct

On December 15, review the Time Ticket tables to journalize the entry to record the addition of factory overhead to Work in Process for the period December 1 through December 15. If an amount box does not require an entry, leave it blank.

Dec. 15Work in Process

Factory Overhead

Feedback

Partially correct

On December 21, Job 62 is completed. Review the Job Cost Sheets and your journal entries. Journalize the entry to move the associated costs to the finished goods account. If an amount box does not require an entry, leave it blank.

Dec. 21Finished Goods

Work in Process

Feedback

Partially correct

On December 22, 75 of the 100 sweaters from Job 62 are sold on account for $125 each. Journalize the following transactions:

a. The entry to record the sale.

b. The entry to record the transfer of costs from Finished Goods to Cost of Goods Sold.

If an amount box does not require an entry, leave it blank.

Dec. 22Accounts Receivable

Sales

Dec. 22Cost of Goods Sold

Finished Goods

1.

Which of the following statements is false about a binding price ceiling?

2.

Which of the following is the explicit cost?

3.

An increase in the labor force that can produce all goods would be reflected in a society’s production possibilities frontier (PPF) by an:

4.

If marginal cost is equal to average total cost at a given level of output, then we know that at that level of output

5.

Should a firm always produce the level of output where marginal cost is lowest?

6. Mac Laptops and Windows Computers are subsitutes. If the price of Mac Laptops decreases, we will see that the demand for Windows Computers will ______ because the cross price elasticity between the two goods is _____.

7. At a production level of Q=10, the average total cost for a firm is $20 with an average variable cost of $14. What is the average fixed cost for this firm?

Governments commonly uses price floors. One of the most classic examples of a price floor is a minimum wage policy in a labor market. Minimum wages laws date from 1894 in New Zealand, 1909 in the United Kingdom, and 1912 in Massachusetts. Minimum wage policies, however, often create unintended consequences. The original 1938 U.S. minimum wage law, for example, caused massive unemployment in Puerto Rico. Suppose the following demand and supply curves describe the labor market in Puerto Rico before 1938: Demand: P = 20 – Q Supply: P = 2 + 0.5Q where P is the wage per hour, and Q represents the number of workers hired, in thousands (e.g. Q = 1 means that 1,000 workers have been hired). The 1938 U.S. minimum wage laws artificially required that all workers earned at least $10 per hour in Puerto Rico. So, how many workers would be employed under the minimum wage policy? Illustrate on a graph. Calculate the equilibrium wage and the number of workers hired before the 1938 minimum wage laws. Illustrate on a graph.

1. Taxes drive a wedge between the:

• quantity bought and the price received by sellers.

• price paid by buyers and the quantity received by sellers.

• income of the buyers and the incomes received by sellers.

• price paid by buyers and the price received by sellers.

2. Which of the following explains why most people’s marginal tax rate is higher than their average tax rate?

• The average tax rate is the tax you pay on your last dollar earned, while the marginal rate is the overall proportion of income paid in taxes.

• The marginal tax rate is the tax you paid on economic activities such as stock and bond trading, while the average rate is the overall proportion of income paid in taxes.

• Marginal tax is only paid by high-income households who earn more than the national average income. Households earning less than the average pay the average tax rate.

• The marginal tax rate is the tax you pay on your last dollar earned, while the average rate is the overall proportion of income paid in taxes.

A system in which average tax rates are higher than marginal tax rates is called:

• regressive.

• progressive.

• proportional.

3. The concept of incidence is used to describe:

• the geographic area where the tax applies.

• who bears the burden of any sort of tax.

• who receives the revenue of any sort of tax.

• who administers any tax.

An unfavorable materials price variance could be resulted from:

purchases made with a discount price.

an increased wage of workers.

poor-trained workers.

an unexpected increase in the purchase prices of raw materials.

The price of a one-year zero-coupon bond is $943.396, the price of a two-year zero is $873.439, and the price of a three-year zero-coupon bond is $793.832. The bonds (each) have a face value of $1,000. Assume annual compounding.

a) Come the yield to maturity (YTM) on the one-year zero, the two-year zero, and the three-year zero.

b) Compute the implied forward rates for year 2 and for year 3.

c) Assume that the expectations hypothesis is correct. Based on your answers to parts a) and b), can you conclude that interest rates are expected to rise? Explain.

d) If the expectations hypothesis is correct, what will the pure yield curve be next year? [In other words, compute the yields on both a one-year zero and a two-year zero in one year from today.] Use the data from your answers to parts a) and b).

1. The government is currently considering setting a maximum price (price ceiling) for basic goods to ensure that people can get access to these goods at this current time. Fully explain your answer and also use a single diagram to demonstrate the likely outcomes of this policy if the maximum price is set:

1. Below the current free market price                                              

2. Above the current free market price

3. At the current free market price      

Consider an option on a dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months. The present value of the dividend to be paid in 3 months is $1. (20 points) a. What is the price of the option if it is a European call? b. What is the price of the option if it is an American call? c. What is the price of the option if it is a European put?

Consider an option on a dividend-paying stock when the stock price is $30, the exercise price is $29, the risk-free interest rate is 5% per annum, the volatility is 25% per annum, and the time to maturity is four months. The present value of the dividend to be paid in 3 months is $1. (20 points) a. What is the price of the option if it is a European call? b. What is the price of the option if it is an American call? c. What is the price of the option if it is a European put?