Problem #1

You have a construction project that requires 12,000 man-hours at a rate of $60 per hour. The estimated duration of the project is 7 months and the total cost of the materials was estimated at $250,000. The scheduled percent complete (PC) of the work and the material consumption for each month is as follows:

This means on month 1, 10% of the work and materials is supposed to be used, on month 2 another 10% and so on and on.     

At the end of month #5, earned value analysis is performed and it is found that only 35% of the work has been completed. The other available information is as follows:

• 60% of the man-hours were spent by the end of the 5^th month.
• 40% of the materials were consumed by the end of the 5^th month.
• A change order estimated at $30,000 was issued and approved at the end of month # 6^.
• The material costs escalated by 35% after the 5^th month.
• 30% of the cost of material consumed by the end of the 4^th month was escalated by 20%.
  

Using the above-mentioned information, calculate the following:

1. Original BAC
2. BCWS
3. BCWP
4. ACWP
5. SV
6. CV
7. DCWP
8. Expenditure variance
9. SPI
10. EAC considering the same rate of progress

Cost Volume Profit Analysis

Sports Company manufactures basketballs. The company has a standard ball that sells for $25. The variable cost are $ 15 per ball. Last year the company sold 30,000 balls. The fixed expenses are $ 210,000.

Required.

1. Prepare a Contribution Income Statement
2. Compute the Contribution Margin per Unit, Variable Expense Ratio and Contribution Margin Ratio
3. Compute the Break Even Point in dollars and units
4. Compute the Margin of Safety
5. Due to a increase in labor rates, the company estimates that variable costs will increase by $3 per ball next year. If this change takes place and the selling price per ball remains constant at $25, what will be the new Contribution margin ratio and Break Even Point in balls.
6. Refer to data in (4) above. If the expected change in variable expense takes place, how many balls will have to be sold next year to earn the net income of $100,000 .

7. Refer to the original data. The company is discussing the construction of a new automated plant to manufacture the balls.. The new plant would slash variable expenses per ball by 40%, but it would cause fixed expenses to double in amount per year. If the new plant is built, what would be the company's new Contribution Margin Ratio and new Break-Even Point.

Rooney Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and Rooney does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with each job follow.

Required

1. Assume that Rooney has decided to accept one of the two jobs. Fill in the information relevant to selecting one job versus the other. Recommend which job to accept.

2. Assume that Job A is no longer available. Rooney's choice is to accept or reject Job B alone. Fill in the information relevant to this decision. Recommend whether to accept or reject Job B.

A business investor is considering a new food venture on an isolated construction site. He has been given permission to operate on the site for a period of 15 years. He has compiled the following information about the new proposed business venture:

Startup equipment: $450,000

Working capital required for new kitchen: $105,000

Expected annual cash inflow from food sales: $375,000

Expected annual cash expenses associated with the new business: $250,000

Restaurant upgrade required after 5 years: $55,000

At the end of the 15-year period, the equipment would be sold for its salvage value of $125,000. The company is required to pay taxes at the rate of 30%. It will calculate depreciation using the straight-line method, but it will not use the salvage value when computing depreciation for tax purposes.

Required:

a) Assuming a 15% after-tax cost of capital, compute net present value (NPV) of the new venture.

b) On the basis of your computations should this business be opened or not.

Average Weekly Earnings (2011)
• Mining, oil, and gas $1,737
• Utilities $1,644
• Professional, scientific, technical services $1,213
• Public administration $1,114
• Construction $1,091
• Finance and insurance $1,064
• Manufacturing $982
• Logging and forestry $974
• Education and related services $956
• Transportation and warehousing $919
• Health and social services $809
• Arts, entertainment, and recreation $551
• Retail trade $513
• Accommodation/food/beverage services $357

1. Examine the list of industries and pay rates above. Provide two possible reasons WHY each
industry has the relative pay level that it does.
Compensating differential
• Seasonal employment
• Cost of living
• Poor working conditions
• Poor industry reputation
2. Based on the concept of “compensating differentials,” develop a list of job/organizational
characteristics that would make you willing to work for less money. Then develop a list of
job/organizational characteristics that would cause you to want more money to accept a
given job.

CJ Corporation manufactures steel rebar for use in construction. The accounting staff is currently preparing next year’s budget. Bob Johnson is new to the firm and is interested in learn-ing how this process occurs. He has lunch with the sales manager and the production manager to discuss further the planning process. Over the course of lunch, Bob discovers that the sales manager adjusts sales projections between a flexible amount and a static amount based on which will reflect the lowest variance from actual results. The production manager does the same for cost estimates. Both managers’ year-end bonus is determined based on how low of a variance is achieved. When Bob asks about why they adjust their projections between flexible and static budgets, the response is simply that everyone around here does it. Required

a. What do the sales and production managers hope to accomplish by their methods?b. How might this backfire and work against them?c. Are the actions of the sales and production managers unethical

The Third Question: Answer the following Cases                                             

1- Calculate the required rate of return for Ali Inc., assuming that :

1. Investors expect a 8% rate of inflation in the future.
2. The real risk free rate is 6%.
3. The market risk premium is 10%.
4. The firm has a beta of 2
5. Its realized rate of return has averaged 30% over the last 10 years.

2) Nader Construction Co. is considering a new inventory system that will cost $1500,000. The system is expected to generate positive cash flows over the next four years in the amounts of $750,000 in year one, $650,000 in year two, $300,000 in year three, and $360,000 in year four. Nader's required rate of return is 16%. What is the net present value of this project?

3) What is the payback period for a project with an initial investment of $90,000 that provides an annual cash inflow of $20,000 for the first three years and $12500 per year for years four and five, and $25000 per year for years six through eight?

Eastman Publishing Company is considering publishing an electronic textbook about spreadsheet applications for business. The fixed cost of manuscript preparation, textbook design, and web-site construction is estimated to be $155,000. Variable processing costs are estimated to be $6 per book. The publisher plans to sell single-user access to the book for $47.

Through a series of web-based experiments, Eastman has created a predictive model that estimates demand as a function of price. The predictive model is demand = 4,000 - 6p, where p is the price of the e-book.