Process Activity Analysis for a Service Company

Statewide Insurance Company has a process for making payments on insurance claims as follows:

An activity analysis revealed that the cost of these activities was as follows:

This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted.

The process received, adjusted, and paid 3,800 claims during the period. All claims were treated identically in this process.

To improve the cost of this process, management has determined that claims should be segregated into two categories. Claims under $1,000 and claims greater than $1,000: claims under $1,000 would not be adjusted but would be accepted upon the insured's evidence of claim. Claims above $1,000 would be adjusted. It is estimated that 70% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 5% to the "receiving claim" activity cost.

a. Develop a table showing the percent of individual activity cost to the total process cost. Round the percents to the nearest whole number, if required.

b. Determine the average total process cost per claim payment, assuming 3,800 total claims. Round to the nearest whole dollar.
$________ per paid claim

c. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. If an amount is zero, leave the entry box blank. Use the minus sign to indicate an additional cost in the last column.

d. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 3,800 total claims. Round to the nearest cent.

$__________ per paid claim

Why the aggregate supply curve slopes upward in the short run

In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen.

For example, the misperceptions theory asserts that changes in the price level can temporarily mislead firms about what is happening to their output prices. Consider a soybean farmer who expects a price level of 100 in the coming year. If the actual price level turns out to be 90, soybean prices will ______ , and if the farmer mistakenly assumes that the price of soybeans declined relative to other prices of goods and services, she will respond by   the quantity of soybeans supplied. If other producers in this economy mistake changes in the price level for changes in their relative prices, the unexpected decrease in the price level causes the quantity of output supplied to______ the natural level of output in the short run.

Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation:

The Greek letter αα represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α=$2 billionα=$2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion.

Suppose the natural level of output is $50 billion of real GDP and that people expect a price level of 100.

On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 90, 95, 100, 105, and 110.

ASLRAS01020304050607080901001251201151101051009590858075PRICE LEVELOUTPUT (Billions of dollars)

The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level   the price level that people expected.

Process Activity Analysis for a Service Company

Statewide Insurance Company has a process for making payments on insurance claims as follows:

An activity analysis revealed that the cost of these activities was as follows:

This process includes only the cost of processing the claim payments, not the actual amount of the claim payments. The adjusting activity involves verifying and estimating the amount of the claim and is variable to the number of claims adjusted.

The process received, adjusted, and paid 5,000 claims during the period. All claims were treated identically in this process.

To improve the cost of this process, management has determined that claims should be segregated into two categories. Claims under $1,000 and claims greater than $1,000: claims under $1,000 would not be adjusted but would be accepted upon the insured's evidence of claim. Claims above $1,000 would be adjusted. It is estimated that 70% of the claims are under $1,000 and would thus be paid without adjustment. It is also estimated that the additional effort to segregate claims would add 15% to the "receiving claim" activity cost.

a. Develop a table showing the percent of individual activity cost to the total process cost. Round the percents to the nearest whole number, if required.

b. Determine the average total process cost per claim payment, assuming 5,000 total claims. Round to the nearest whole dollar.
$ per paid claim

c. Prepare a table showing the changes in the activity costs as a result of the changes proposed by management. If an amount is zero, leave the entry box blank. Use the minus sign to indicate an additional cost in the last column.

d. Estimate the average cost per claim payment, assuming that the changes proposed by management are enacted for 5,000 total claims. Round to the nearest cent.
$ per paid claim

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelly Couts, who inherited the company. The company originally repaired radios and other household appliances when it was founded more than 70 years ago. Over the years, the company expanded, and it is now a reputable manufacturer of various specialty electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company in its finance department. One of the major revenue-producing items manufactured by Conch Republic is a smartphone. Conch republic currently has one smartphone model on the market and sales have been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with new models. Conch Republic spent $1.2 million to develop a prototype for a new smartphone that has all the features of the existing one but adds new features such as Wifi tethering. The company has spent a further $250,000 for a marketing study to determine the expected sales figures for the new smartphone. Conch Republic can manufacture the new smartphone for $210 each in variable costs. Fixed costs for the operation are estimated to run $5.3 million per year. The estimated sales volumes are 64,000, 106,000, 87,000, 78,000, and 54,000 per year for each of the next five years, respectively. The unit price of the new smartphone will be $515. The necessary equipment can be purchased for $38.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $5.8 million. Net working capital for the smartphones will be 20 percent of sales and will occur with the timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC thus will occur first in year 1 with the first year’s sales. Conch Republic has a 22 percent corporate tax rate and a required return of 12 percent. Shelly has asked Jay to prepare a report that answers the following questions:

10) How sensitive is the NPV to changes in the price of the new smartphone?

11) How sensitive is the NPV to changes in the quantity sold?

12) Should Conch Republic produce the new smartphone?

When answering the provided questions, you must ensure that your answers address the questions, that your answers have an Australian accounting/financial reporting focus, that your answers are internally consistent, and that the individual components of your answers provide a well-rounded argument that is easy to follow.

The Chief Financial Officer (CFO) of Large Mart has been unable to find answers for two accounting problems. He has asked you to investigate the following questions and to write a report (including relevant references to source materials and accounting standards) that will provide him with a sufficient understanding of these issues to allow a well-supported decision to be made. To achieve this, the CFO seeks you to answer specific questions, but also to outline the development of your answers sufficiently to allow a reader to understand why you have developed your answers.

Question:

The Chief Executive Officer (CEO) of Large Mart has asked the CFO if it is possible to change the cost flow assumption that is used to value Large Mart’s inventory. At the moment, Large Mart is using the First-In-First-Out (FIFO) cost flow assumption (in a perpetual inventory accounting system) and although the CEO would like to retain a perpetual inventory accounting system, she would prefer the application of a different cost flow assumption. The CEO would like to make this change because she believes that this could potentially improve Large Mart’s financial position in the balance sheet.

The CFO asks you to investigate, and write a report about, the following questions:

a)     What are the legal requirements in relation to changes in inventory cost flow assumptions for reporting entities in Australia? In your answer, you should discuss (1) whether or not changes to cost flow assumptions are permissible in principle and why, and (2) what valuation options (other than FIFO) may be available to Large Mart. (500 Words)

b)     What are the legal limitations to changes in cost flow assumptions for reporting entities in Australia? In your answer, you should discuss (1) what legal restrictions would limit Large Mart’s ability to make changes to their inventory cost flow assumptions, and (2) whether or not the reason why the CEO would like to make this change may have any impact on Large Mart’s ability to make such a change. (500 Words)

To investigate the fluid mechanics of swimming, twenty swimmers each swam a specified distance in a water-filled pool and in a pool where the water was thickened with food grade guar gum to create a syrup-like consistency. Velocity, in meters per second, was recorded and the results are given in the table below.

The researchers concluded that swimming in guar syrup does not change mean swimming speed. Are the given data consistent with this conclusion? Carry out a hypothesis test using a 0.01 significance level. (Use

μ_d = μ_water − μ_{guar syrup}.)

State the appropriate null and alternative hypotheses.

H₀: μ_d = 0

H_a: μ_d > 0

H₀: μ_d ≠ 0

H_a: μ_d = 0

H₀: μ_d = 0

H_a: μ_d < 0

H₀: μ_d < 0

H_a: μ_d = 0

H₀: μ_d = 0

H_a: μ_d ≠ 0

Find the test statistic and P-value. (Round your test statistic to one decimal place and your P-value to three decimal places.)

t=

P-value=

State the conclusion in the problem context.

We reject H₀. The data do not provide convincing evidence that swimming in guar syrup changes mean swimming speed.

We fail to reject H₀. The data do not provide convincing evidence that swimming in guar syrup changes mean swimming speed.   

We fail to reject H₀. The data provide convincing evidence that swimming in guar syrup changes mean swimming speed.

We reject H₀. The data provide convincing evidence that swimming in guar syrup changes mean swimming speed.

1.

An increased interest rate will cause residential and business investment spending to______, leading to______in the quantity of output demanded in the economy.

1. decrease; increase

2. decrease; decrease

3. increase; decrease

4. increase; increase

2.

Which of the following statements about aggregate supply is correct?

1. All of the above

2. Shifts in aggregate supply can cause stagflation

3. Shifts in aggregate supply can cause a recession

4. Shifts in aggregate supply can cause a fall in output and a rise in prices

3.

The new classical misperceptions theory states that:

1. changes in the overall price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve

2. changes in the relative price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve

3. changes in the overall price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve

4. changes in the relative price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve

4.

Out of the following list, choose the item that would be included in the expenditure approach to calculating GDP

1. the purchase of 30 litres of petrol for your car

2. a $200 cheque from your Uncle Arthur

3. an unemployment cheque from the Government to R. Smith

4. the cost of the second-hand mountain bike you bought from your flatmate

5.

If a minimum wage law is passed imposing a price floor above the equilibrium price of unskilled labor and employers increasingly used efficiency wages, it would ___ structural unemployment and ____ the natural rate of unemployment:

1. Increase; not change

2. Do none of the above

3. Increase; increase

4. Not change, increase

6.

Fill up the blanks by typing in your answer. Do not type in the quotation mark "".

Applying the aggregate demand/aggregate supply model, describe the impact of the following event on GDP and prices in the short run:

Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment, in teh short run,

Blank 1 (type in "AD" or "AS") will shift to the Blank 2 (type in "right" or "left").

Output will Blank 3 (type in "increase" or "decrease") and price will Blank 4 (type in "increase" or "decrease").

On January 1, 2021, Labtech Circuits borrowed $300,000 from First Bank by issuing a three-year, 6% note, payable on December 31, 2023. Labtech wanted to hedge the risk that general interest rates will decline, causing the fair value of its debt to increase. Therefore, Labtech entered into a three-year interest rate swap agreement on January 1, 2021, and designated the swap as a fair value hedge. The agreement called for the company to receive payment based on an 8% fixed interest rate on a notional amount of $300,000 and to pay interest based on a floating interest rate tied to LIBOR. The contract called for cash settlement of the net interest amount on December 31 of each year.

Floating (LIBOR) settlement rates were 8% at inception and 9%, 7%, and 7% at the end of 2021, 2022, and 2023, respectively. The fair values of the swap are quotes obtained from a derivatives dealer. These quotes and the fair values of the note are as follows:

Required:
1. Calculate the net cash settlement at the end of 2021, 2022, and 2023.
2. Prepare the journal entries during 2021 to record the issuance of the note, interest, and necessary adjustments for changes in fair value.
3. Prepare the journal entries during 2022 to record interest, net cash interest settlement for the interest rate swap, and necessary adjustments for changes in fair value.
4. Prepare the journal entries during 2023 to record interest, net cash interest settlement for the interest rate swap, necessary adjustments for changes in fair value, and repayment of the debt.
5. Calculate the book values of both the swap account and the note in each of the three years.
6. Calculate the net effect on earnings of the hedging arrangement in each of the three years. (Ignore income taxes.)
7. Suppose the fair value of the note at December 31, 2021, had been $287,000 rather than $296,241 with the additional decline in fair value due to investors’ perceptions that the creditworthiness of Labtech was worsening. How would that affect your entries to record changes in the fair values?

·         What were the companies’ cash flows from operations? Were they positive?

·         Were operating cash flows smaller or larger than net income?

·         What are the major differences between operating cash and net income?

·         Did the company purchase new property and equipment (‘Capital expenditures’) during the years?

·         Did the company issue new debt during the year or was the debt repaid? (Hint: We must sometimes sum one or more-line items on this statement to determine total net debt activity.)

·         Did the company issue new stock?

·         Did the company pay dividends?

Ghost, Inc., has no debt outstanding and a total market value of $369,600. Earnings before interest and taxes, EBIT, are projected to be $51,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 percent higher. If there is a recession, then EBIT will be 24 percent lower. The company is considering a $185,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 8,400 shares outstanding. Ignore taxes for questions a and b. Assume the company has a market-to-book ratio of 1.0 and the stock price remains constant.