Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales.

The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $94,500 of manufacturing overhead for an estimated activity level of $45,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

During the year, the following transactions were completed:

1. Raw materials purchased on account, $ 167,000.
2. Raw materials used in production, $150,000 (materials costing $124,000 were charged directly to jobs; the remaining materials were indirect).
3. Costs for employee services were incurred as follows:

4. Rent for the year was $18,800 ($13,100 of this amount related to factory operations, and the remainder related to selling and administrative activities).
5. Utility costs incurred in the factory, $17,000.
6. Advertising costs incurred, $11,000.
7. Depreciation recorded on equipment, $20,000. ($15,000 of this amount related to equipment used in factory operations; the remaining $5,000 related to equipment used in selling and administrative activities.)
8. Record the manufacturing overhead cost applied to jobs.
9. Goods that had cost $228,000 to manufacture according to their job cost sheets were completed.
10. Sales for the year (all paid in cash) totaled $508,000. The total cost to manufacture these goods according to their job cost sheets was $216,000.

Required:

1. Prepare journal entries to record the transactions for the year.

2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts).

3A. Is Manufacturing Overhead underapplied or overapplied for the year?

3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.

Suppose the Occupy South Africa movement is considering a new policy that would slightly raise the marginal income tax for the top 1% and use the resulting revenue to improve the quality and capacity of health clinics for poor and medically underserved populations.

1. Is this policy likely to represent a Pareto improvement? Explain your answer in one or two sentences.

2. Is this policy likely to improve overall social welfare, according to a Rawlsian social welfare function? Explain your answer in one or two sentences.

3. Is this policy likely to improve overall social welfare, according to a utilitarian social welfare function? Explain your answer in one or two sentences.

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company’s financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine. Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opens the mine, it will cost $850 million today, and it will have a cash outflow of $120 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table that follows. Bullock has a 12 percent required return on all of its gold mines.

YEAR CASH FLOW

Questions:
1. Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and the net present value of the proposed mine.

2. Based on your analysis, should the company open the mine?

Gold Nest Company of Guandong, China, is a family-owned enterprise that makes birdcages for the South China market. The company sells its birdcages through an extensive network of street vendors who receive commissions on their sales.

The company uses a job-order costing system in which overhead is applied to jobs on the basis of direct labor cost. Its predetermined overhead rate is based on a cost formula that estimated $105,000 of manufacturing overhead for an estimated activity level of $50,000 direct labor dollars. At the beginning of the year, the inventory balances were as follows:

During the year, the following transactions were completed:

Raw materials purchased for cash, $ 166,000.

Raw materials used in production, $143,000 (materials costing $126,000 were charged directly to jobs; the remaining materials were indirect).

Cash paid to employees as follows:

Cash paid for rent during the year was $18,600 ($13,300 of this amount related to factory operations, and the remainder related to selling and administrative activities).

Cash paid for utility costs in the factory, $11,000.

Cash paid for advertising, $11,000.

Depreciation recorded on equipment, $20,000. ($18,000 of this amount related to equipment used in factory operations; the remaining $2,000 related to equipment used in selling and administrative activities.)

Manufacturing overhead cost was applied to jobs, $ ? .

Goods that had cost $229,000 to manufacture according to their job cost sheets were completed.

Sales for the year (all paid in cash) totaled $505,000. The total cost to manufacture these goods according to their job cost sheets was $215,000.

Required:

1. Prepare journal entries to record the transactions for the year.

2. Prepare T-accounts for each inventory account, Manufacturing Overhead, and Cost of Goods Sold. Post relevant data from your journal entries to these T-accounts (don’t forget to enter the beginning balances in your inventory accounts).

3A. Is Manufacturing Overhead underapplied or overapplied for the year?

3B. Prepare a journal entry to close any balance in the Manufacturing Overhead account to Cost of Goods Sold.

4. Prepare an income statement for the year. All of the information needed for the income statement is available in the journal entries and T-accounts you have prepared.

Harriet Ltd is a South African company that manufactures commercial buses and trucks. The company’s products are customer-focused, technologically advanced and fuel efficient. This has propelled the company to the forefront of the industry. Harriet Ltd was incorporated in 1974 and has a number of manufacturing facilities around the country.
Harriet Ltd is in the process of finalising management accounts for its financial year ended 30 June 2018. Financial information of the business for the financial year ended 30 June 2018 is provided below:

1. Harriet Ltd does not carry any inventory of raw materials and work in progress. The number of buses and trucks sold by Harriet Ltd and the respective selling prices per unit are provided below:

Number of units sold: 40 Busses and 60 Trucks
Average selling price per unit: R1 280 000 Busses and R1 650 000 Trucks

2. Direct material costs per bus and truck amounted to R350 000 and R430 000 respectively. The number of buses and trucks at the end of each year end were as follows:

30 June 2017: 10 Busses and 20 Trucks

30 June 2018:  10 Busses and 10 Trucks

3. The company employs its direct manufacturing labour force as and when required. Based on past experience, the company requires 650 hours and 800 hours to manufacture a bus and a truck respectively. An hourly wage rate for labour force used in the manufacturing of buses amounts to R350. On the other hand, the hourly wage rate for the labour force involved in the manufacturing of trucks is 40% higher than the wage rate for the manufacture of buses.

4. Harriet Ltd entered into an agreement with its parent company, Harriet International Plc that allows Harriet Ltd to sell commercial buses and trucks under the Harriet International Plc trademark. As a result, Harriet Ltd pays a royalty of R75 000 to the parent company for every bus or truck sold. An advertising agency that handles all advertising, charges the company a 5% commission on each bus or truck sold.

5. Fixed manufacturing overhead costs are allocated to production based on the number of machine hours. The fixed manufacturing costs for the 30 June 2018 financial year amounted to R27 540 000. Information pertaining to the utilisation of the machine for 30 June 2018 financial year is as follows:

Actual number of machine hours: 36000 Busses and 72000 Trucks

6. Fixed administration and distribution costs are allocated to buses or trucks based on the number of buses or trucks sold. The fixed administration and distribution costs for the 30 June 2018 financial year amounted to R22 676 000.

REQUIRED

a) Calculate the unit product cost of the buses and trucks manufactured by Harriet Ltd in the 30 June 2018 financial year.

b) Prepare the income statement of Harriet Ltd for the year ended 30 June 2018 for trucks only using the absorption costing method.

c) Calculate profit for the year ended 30 June 2018 of Harriet Ltd for trucks only that would arise if the variable costing method is used.
Do not prepare the income statement but rather reconcile the profit from the absorption costing method determined in part (b) to the variable costing profit.

d) How many buses and trucks should Harriet Ltd sell in order to break-even if the sales mix does not change?

1. Determine if the following statements are true/false:

a. Singapore and South Korea came up with strong performances in the World Economic Forum’s Annual Competitiveness Report, both benefitting from the US-China Trade War.

b. Theoretically, global capitalism is an economic system that describes the dominance of the international private sector over the government in the control and disposal of the state’s resources to create a ‘multiplier effect’ in boosting the latter’s economy.

c. Based on the figures released by the World Economic Forum, most of the international migrants come from China, India, and Bangladesh as the TOP 3 Exporters of Labor.

d. SGD 2, 3, and 7 were cited by the Sustainable Development Impact Summit to benefit from harnessing technology to achieve the UN’s SD Agenda.

Thank you in advance! ?

Judy Anderson was assigned as a recruiter for South Illinois Electric Company (SIE), a small supplier of natural gas and electricity for Cairo, Illinois, and the surrounding area. The company had expanded rapidly during the last half of 1990s, and the growth was expected to continue. In January 2003 SIE purchased the utility system serving neighbouring Mitchell Country. This expansion concerned Judy. The company workforce had increased by 30 percent the previous year, and Judy had found it a struggle to recruit enough qualified job applicants. She knew that the expansion would intensify the problem.

Judy is particularly concerned about meter readers. The task required in meter reading are relatively simple, a person drives to homes served by the company, finds the gas or electric meter, and records its current reading. If the meter has been tempered with, it is reported. Otherwise, no decision-making of any consequence is associated with the job. The readers perform no calculations. The pay was $8.00 per hour, high for unskilled work in the area. Even so, Judy had been having considerable difficulty keeping the 37 meter readers’ positions filled.

Judy was thinking about how to attract more job applicants when she received a call from a human resource director, Sam McCord. “Judy”, Sam said, “I’m unhappy with the job specification calling for only high school education for meter readers. In the planning for the future, we need better educated people in the company. I’ve decided to change the education requirement for the meter reader job from a high school diploma to a college degree.”

“but, Mr. McCord”, protested Judy, “the company is growing rapidly. If we are to have enough people to fill those jobs, we just can’t insist on finding college applicants to perform such a basic task. I don’t see how we can meet our future needs for this job with such an unrealistic job qualification.”

Sam terminated the conversation abruptly by saying, “No, I don’t agree. We need to upgrade all the people in our organization. This is just part of a general effort to do that. Anyway, I cleared this with the president before I decided to do it.”

To share 3 points, 3 paragraphs on your opinion about Sam's effort to upgrade the people in the organisation.

Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. He has estimated that the mine would be productive for eight years, after which the gold would be completely mined. Dan has taken an estimate of the gold deposits to Alma Garrett, the company's financial officer. Alma has been asked by Seth to perform an analysis of the new mine and present her recommendation on whether the company should open the new mine.

Alma has used the estimates provided by Dan to determine the revenues that could be expected from the mine. She has also projected the expense of opening the mine and the annual operating expenses. If the company opes the mine, it will cost $850 million today, and it will have a cash outflow of $120 million nine years from today in costs associated with closing the mine and reclaiming the area surrounding it. The expected cash flows each year from the mine are shown in the table that follows. Bullock has a 12 percent required return on all of its gold mines.

Construct a spreadsheet to calculate the payback period, internal rate of return, modified internal rate of return, and net present value of the proposed mine.

Based on your analysis, should the company open the mine?

Melrose is a major retail clothing shop based in South Africa. It caters for all individuals, ranging from kids’ wear to corporate wear. Recently Melrose’s receivables book has been growing excessively due to a higher demand for shopping on credit. Melrose’s management is happy with the current credit facilities, as it keeps the stock on the floor moving, but the financial management team is concerned, as there is a growing number of defaults in credit payments. The management team is therefore considering tightening their credit standards in order to mitigate the risk of loss in income from customers defaulting on their credit balances. All sales by Melrose are on credit.

The average selling price of an item of which Melrose sells 2 million items a year is R250. The average variable cost per item is R100. Total fixed costs of Melrose amount to R50 million per year. Melrose currently allows a 90-day interest-free credit period. Any unpaid amounts after 90 days are written off as bad debts. The proposed tightening of credit standards is a 60-day interest-free credit period. This proposal will result in an estimated 10% loss in sales. However, bad debts will be reduced from 10% of credit sales to 2%. There are 365 days in a year. Melrose has a WACC of 16%.

6. 6 Calculate the impact of the change in sales revenue due to the new credit policy:

   (2)

   1. a) R30 000 000 profit gain.

   2. b) R30 000 000 profit loss.

   3. c) R20 000 000 profit gain.

   4. d) R20 000 000 profit loss.

7. 7 Calculate the investment in accounts receivable under the current policy: (2)

   1. a) R1 369 863,01

   2. b) R123 287 670,90

   3. c) R13 698 630,10

   4. d) R15 000 540

8. 8 Calculate the investment in accounts receivable under the new policy: (3)

   1. a) R1 369 863,01.

   2. b) R123 287 670 90.

   3. c) R73 972 602,60.

   4. d) R1 232 876,71.

9. 9 Calculate the cost of marginal investment in accounts receivable: (3)

   1. a) R13 767 663,29

   2. b) R60 273 972,50

   3. c) -R7 890 410,93.

   4. d) R7 890 410,93.

10. 10 Calculate the bad debts under the current policy: (2)

    1. a) R50 000 000

    2. b) R9 000 000

    3. c) R500 000 000

    4. d) R90 000 000

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Assignment Two: 1st Semester 2020

FM202B

© IMM Graduate School

11. 11 Calculate the bad debts under the new policy: (2)

    1. a) R50 000 000

    2. b) R9 000 000

    3. c) R500 000 000

    4. d) R90 000 000

12. 12 Calculate the cost of marginal bad debts: (2)

    1. a) R410 000 000

    2. b) -R41 000 000

    3. c) R41 000 000

    4. d) -R410 000 000

13. 13 Calculate the overall effect of tightening credit standards for Melrose Ltd: (4)

    1. a) R78 273 972,50

    2. b) R119 273 972,50

    3. c) R18 890 410,93

    4. d) R331 726 027,50

14. 14 Advise Melrose Ltd in the light of the calculations you conducted from Question

    6–13: (2)

    1. a) Should not implement the proposed credit policy

    2. b) Reject both policies

    3. c) Sunk costs are difficult to access, therefore irrelevant to the decision

    4. d) Should implement the proposed credit policy

Use the following information to answer questions 15–20

The existing capital structure of Leeds (Ltd) is as follows:

Notes:

•  The ordinary shares are currently trading at R46,45. A dividend of 80 cents per share has just been paid and the directors estimate that the dividends will increase by 8% each year in perpetuity.

•  Preference shares are trading at R2,75 and have a par value of R2,40.

•  The debentures have a par value of R50 and are currently trading at R45. The

  debentures are redeemable at R55 in ten years’ time.

•  The company tax rate is 28%.

  As an alternative to the existing capital structure for Leeds (Ltd), an outside consultant has suggested the following modifications:

Page 5 of 6

Under this new and more debt-orientated arrangement, the after-tax cost of debt is 10,8%, the cost of preference shares is 11% and the cost of equity is 15,6%.

15. 15 Under the CURRENT capital structure (before the suggested change) of Leeds Ltd, calculate the cost of equity: (3)

    1. a) 10,00%

    2. b) 9,86%

    3. c) 9,00%

    4. d) 9,43%

16. 16 Under the CURRENT capital structure (before the suggested change) of Leeds Ltd, calculate the cost of preference shares: (3)

    1. a) 9,43%

    2. b) 9,60%

    3. c) 10,00%

    4. d) 12,67%

17. 17 Under the CURRENT capital structure (before the suggested change) of Leeds Ltd, calculate the cost of debt. (3) a) 11,68%

    2. b) 9,67%

    3. c) 9,40%

    4. d) 9,43%

18. 18 Using your calculated cost of capital calculated in Question 1.15–1.17, calculate Leeds’s weighted average cost of capital (WACC) using the current capital structure. (3)

    1. a) 9,40%

    2. b) 9,60%

    3. c) 9,67%

    4. d) 9,00%

19. 19 Calculate Leeds’s weighted average cost of capital (WACC) using the ALTERNATIVE capital structure and alternative costs of capital. (3)

    1. a) 12,49%

    2. b) 13,00%

    3. c) 12,50%

    4. d) 20,00%

20. 20 If you owned your own organisation that was funded by your own capital, would the concept of WACC apply to you? (2)

    1. a) There would be no WACC as there would not be any form of a pool of

       external capital that would exist. However, your ‘own’ cost of funding (equity)

       will need a return level that will be set by yourself.

    2. b) Yes, there will be WACC as there would a pool of external capital that would

       exist.

    3. c) WACC is irrelevant to how capital is funded.

    4. d) Not necessarily, it depends on the company in question.

The ozone dataset gives a sample of ozone measurements (in partial pressures) taken over the South Pole on September 18, 1997 at altitudes above 10km.

mPa:

1.828, 2.652, 3.307, 3.855, 4.021, 4.173, 4.316, 4.951, 4.787, 4.554, 4.333, 4.039, 4.48, 4.739, 4.791, 5.213, 5.75, 5.79, 5.656, 5.464, 5.092, 3.135, 2.754, 3.14, 5.213, 5.831, 5.736, 5.333, 4.797, 6.704, 6.493, 5.746, 6.31, 6.53, 6.63, 6.071, 5.706, 4.951, 4.392, 4.619, 5.029, 5.302, 5.151, 3.474, 3.285, 3.232, 3.4, 3.503, 3.649, 3.828, 4.235, 4.781, 5.096, 5.262, 5.411, 5.439, 5.08, 4.719, 4.519

1. Compute the five-number summary and sketch the boxplot. Identify any outliers.

2. Compute the mean and standard deviation of the sample.

3. Construct the probability plot of the data. A hypothesis test could be used to compare the mean ozone level on September 18, 1997 to a specified baseline level.

4. Are the assumptions for an hypothesis test of the mean reasonably satisfied?

5. Test to see if the mean ozone amount on September 18 was below 5 mPa, at the 5% level of significance.

6. Construct a line graph of the data in the table. Note any trends that you see.

7. Does it make sense to apply inferential methods (of the type we have studied) to the mean size of the ozone hole over time? Explain.

In addition to plotting the ozone concentration versus time, create a linear regression model for it and interpret the slope and comment on how well the model fits the data using the coefficient of variation.

(IF POSSIBLE INCLUDE R CODES WITH THE ANSWERS FOR EACH QUESTION)