Constraints Exercise

1.      Rank the products in order of profitability based on contribution margin per unit.

2.      Assume that the same raw materials are used in all the products and is available in limited quantities at $8 per pound. There is a limited quantity of material on hand for production for the current month, and there is a backlog on the orders for each product. If the company cannot buy additional material this month, which product should it concentrate on first? Second? Third? Why?

3. Now let’s change the facts. Assume that the company has only 3,000 lb of material on hand for this month’s production and has order backlogs as follows:

Product A          200 units

Product B.         300 units

Product C         150 units

There is not enough material on hand available to clear the entire backlog of orders; however, the company can buy the same material at a premium price from a foreign supplier. What is the maximum price per lb. that the company would be willing to pay to acquire enough material to complete all the backlog of orders this month?

Step 1.      Which product is affected by the shortfall?

Step 2.      Maximum price per lb computation.

Suppose that, prior to the passage of the Truth in Lending Simplification Act and Regulation Z, the demand for consumer loans was given by Qdpre-TILSA = 6 -100P (in billions of dollars) and the supply of consumer loans by credit unions and other lending institutions was QSpre-TILSA = 5 + 100P (in billions of dollars). The TILSA now requires lenders to provide consumers with complete information about the rights and responsibilities of entering into a lending relationship with the institution, and as a result, the demand for loans increased to Qdpost-TILSA = 20 -100P (in billions of dollars). However, the TILSA also imposed “compliance costs” on lending institutions, and this reduced the supply of consumer loans to QSpost-TILSA = 3 + 100P (in billions of dollars). Based on this information, compare the equilibrium price and quantity of consumer loans before and after the Truth in Lending Simplification Act.(Note: Q is measured in billions of dollars and P is the interest rate).

Instruction: Enter your responses for the equilibrium price in percentage terms, and round all responses to one decimal place.

Equilibrium price (interest rate) before TILSA: 0.5 percent

Equilibrium quantity (in billions of dollars) before TILSA: $ 5.5 billion

Equilibrium price (interest rate) after TILSA: __ percent

Equilibrium quantity (in billions of dollars) after TILSA: $ __ billion

(first two answers are correct, I just need help with parts 3 and 4)

BestBuy plans to have an end of the season sale on videogames and High Definition TVs. After a focus group study, their marketing team found that they have four different types of customers, each with their own respective reservation price. The reservation prices are as listed below:

For simplicity, assume that the marginal cost for producing any of these products is $0, and there is only one representative customer of each type.

(a) If BestBuy were to sell TV and videogames separately, what price should it set for each product in order to maximize its profit?

(b) BestBuy paid an outside consulting firm about its marketing strategy. The consultant recommended that BestBuy bundle TV and videogame as a package rather than selling them separately. Is the consultant correct? Why or why not? What is the profit of pure bundling? Is it higher or lower compared with the separate selling scenario in (A)? Are customers’ reservation prices of TV and videogames negatively or positively correlated?

(c) Suppose BestBuy has perfect information about the reservation price of each customer. It adopts a first-degree (perfect) price discrimination policy. What prices should it charge to maximize profit? What is the profit under this strategy? Is this higher than the profit in (a) or (b)?

please help Thank you

Describe impacts on the 3 financial statements (balance sheet, income statement and cash flow statement) of:

a. An increase of accounts receivables by $100 b. An increase of accrued expenses by $100
c. A decrease of prepaid expenses by $100
d. An increase in inventory by $100 (paid in cash)

e. An increase in depreciation by $100

f. A sale of equipment for $200 (value on the balance sheet: $170)

Remark: consider all above questions as independent of each other.

Break-Even Point and Target Profit Measured in Sales Dollars (Multiple Products). Hi-Tech Incorporated produces two different products with the following monthly data (these data are the same as the previous exercise).

Assume the sales mix remains the same at all levels of sales.

Required:

Round your answers to the nearest hundredth of a percent and nearest dollar where appropriate. (An example for percentage calculations is 0.434532 = 0.4345 = 43.45 percent; an example for dollar calculations is $378.9787 = $379.)

Using the information provided, prepare a contribution margin income statement for the month similar to the one in Figure 6.5 "Income Statement for Amy’s Accounting Service".

Calculate the weighted average contribution margin ratio.

Find the break-even point in sales dollars.

What amount of sales dollars is required to earn a monthly profit of $540,000?

Assume the contribution margin income statement prepared in requirement a is the company’s base case. What is the margin of safety in sales dollars?

As the CFO of General Dynamo, you are very excited as you have just completed the negotiations related to the purchase of Apex Systems, a complimentary business to General Dynamo.  The sole shareholder of Apex has agreed to either of the following purchase offers:

            A:  General Dynamo will pay $10,000,000 for 100% of the outstanding stock of Apex

                                                OR

B:  General Dynamo will pay $11,000,000 for 100% of the “net assets” of Apex, which includes all tangible and intangible assets as well as all recorded liabilities.

The fair value of the acquired assets and liabilities is as follows:

Current Assets (Tangible)                      $2,500,000

Long Term Assets (Tangible)                  $4,000,000

Liabilities                                              $3,500,000

Net Tangible Assets Acquired                $3,000,000

Based solely on the “net after-tax” cost of the acquisition, which purchase offer should you choose: A or B?  Why?  

Why does the seller require a higher price to be paid for acquiring “net assets” versus “stock”?  What internal revenue service code section addresses how sales of assets versus sales of stock are taxed?  What are the significant differences?  What period may the goodwill be deducted for tax purposes?  Why do you think the Internal Revenue Service treats these two purchase offers differently?

As the CFO of General Dynamo, you are very excited as you have just completed the negotiations related to the purchase of Apex Systems, a complimentary business to General Dynamo.  The sole shareholder of Apex has agreed to either of the following purchase offers:

            A:  General Dynamo will pay $10,000,000 for 100% of the outstanding stock of Apex

                                                OR

B:  General Dynamo will pay $11,000,000 for 100% of the “net assets” of Apex, which includes all tangible and intangible assets as well as all recorded liabilities.

The fair value of the acquired assets and liabilities is as follows:

Current Assets (Tangible)                      $2,500,000

Long Term Assets (Tangible)                  $4,000,000

Liabilities                                              $3,500,000

Net Tangible Assets Acquired                $3,000,000

Based solely on the “net after-tax” cost of the acquisition, which purchase offer should you choose: A or B?  Why?  

Why does the seller require a higher price to be paid for acquiring “net assets” versus “stock”?  What internal revenue service code section addresses how sales of assets versus sales of stock are taxed?  What are the significant differences?  What period may the goodwill be deducted for tax purposes?  Why do you think the Internal Revenue Service treats these two purchase offers differently?

Bieber Inc. is a retailer operating in Calgary, Alberta. Bieber Inc. uses the perpetual inventory method. Assume that there are no credit transactions; all amounts are settled in cash. You are provided with the following information for Bieber Inc. for the month of January 2017.

Calculate average cost for each unit. (Round answers to 3 decimal places, e.g. 5.125.)

eTextbook and Media

List of Accounts

For each of the following cost flow assumptions, calculate (i) cost of goods sold, (ii) ending inventory, and (iii) gross profit. (Round answers to 0 decimal places, e.g. 125.)

Mr. Agirich of Aggie Farms is considering the purchase of 100 acres of prime ranch land that is adjacent the ranch he now owns. Mr. Agirich can operate the additional 100 acres with present labor, machinery and breeding livestock. The land is selling for $400 per acre.   Mr. Agirich believes that the operating receipts per acre of land per year will $450 and operating expenses will be $420 in present dollars. Mr. Agirich expects that the inflation rate will be 3% and operating receipts and expenses per acre will increase at the rate of inflation. The farmer will sell the land in three years and he anticipates that land prices will increase at the rate of inflation (from a base price of $400). A bank will loan him $350 per acre of land and the loan will be fully amortized over 15 years at 10% (annual payments). The outstanding balance of the loan will be paid at the end of the third year (balloon payment). Assume that the marginal tax rate is 30% and that Mr. Agirich requires at least a 6% pre-tax, risk-free return on capital and a 4% risk premium on projects of comparable risk. (Do the analysis on a per acre basis.)

Calculate the net present value. [NPV=$6.12]