A home owner has a utility function of U (m) = √m, where m is income. The home owner is considering buying flood insurance because they live near a river that has flooded in the past. If it is a dry year, she will have an income of $60,000 to spend on other things. If it is a rainy year and there is a flood, then she has to pay for repairs to her house. Then her income will only be $20,000 to spend on non-flood costs. The probability of a flood based on historical data is 4%.

(a) (a) If the home owner can buy insurance for a premium of $0.04 per dollar of coverage, how large of an insurance policy should the homeowner buy? Set up the expected utility maximization problem and solve for K, the optimal insurance policy size.

(b) Now suppose we do not know the cost of the insurance policy. But you now know that in the event of a flood, that the insurance policy will pay you 75% of damages. What is the maximum amount the homeowner would be willing to pay for such an insurance policy?

(c) Explain in words how to generally calculate expected utility. What information do you need? What terms do you multiply versus add? Be clear in your explanation.

V & T Faces, Inc., would like to open a retail store in Miami. The initial investment to purchase the building is $420,000, and an additional $50,000 in working capital is required. Since this store will be operating for many years, the working capital will not be returned in the near future. V & T Faces expects to remodel the store at the end of 3 years at a cost of $100,000. Annual net cash receipts from daily operations (cash receipts minus cash payments) are expected to be as follows:

Year 1 $80,000

Year 2 $115,000

Year 3 $118,000

Year 4 $140,000

Year 5 $155,000

Year 6 $167,000

Year 7 $175,000

The company’s required rate of return is 13 percent.

Assume management decided to limit the analysis to 7 years.

Questions:

1) What is the weakness of using the payback period method to evaluate long-term investments?

2)Assume the manager of the company wanted to live in Miami and intentionally inflated the projected annual cash receipts so that the proposal would be accepted. The proposal would otherwise have been rejected. Explain how the company’s use of a post audit would help to prevent this type of unethical behavior.

1. A cafe specializes in short order meals; and, morning and afternoon snack breaks. It is open from 9:00 am until 4:00 pm. An office manager in a nearby high rise office building offers the owner a contract to provide her 50 employees with afternoon snack breaks for $2.00 each. Each employee would receive a drink and a snack item. The shop has an hourly capacity of 50 customers. The owner estimates that the variable costs of the afternoon breaks would be $1.20 each. Currently the afternoon service, starting at 2:00, is running at only 50 percent capacity, although the morning and noon activities are near capacity. At the present level of operations each meal/snack served is allocated a fixed cost of $0.25.

Required:

a. What nonfinancial factors should be considered by the owner?

b. Given your concerns listed in part a. and quantitative analysis, should the offer be accepted? Why or why not?

2. Doggie Dinner, Inc., currently manufactures three different types of scientifically balanced dog food. The firm is considering eliminating one of the three products. What factors should be taken into account in making this decision?

3. Explain the differences between short-run pricing decisions and long-run pricing decisions.

Variables typically included in a multivariate supply function (other than the price and quantity of the item the supply function represents) are prices of other goods that use similar input resources for production, the number of suppliers, techniques of production, taxes and subsidies, prices of input resources, weather, and expectations. Please answer the following questions about the affect changes in other variables might have on the supply of the item. These changes will either cause supply to increase (shift right) or decrease (shift left). Use either word as applicable, for the short answer.

1. If the market price of gasoline returns to the near $4.00 per gallon level then demand for gas-gulping large autos is likely to decrease and manufacturers of these autos are likely to _____________ their supply:

2. A relative increase in the productivity of the technology used to produce the item being considered is likely to _____________________ its supply.

3. Hailstorms have pelted south central Texas grape vineyards, spoiling acres of grapes. This is likely to ______________ the supply of grapes for Texas wine.

4. A manufacturer, operating with a fixed production budget, discovers that the cost of input resources is increasing. The manufacturer is likely to ___________________ the quantity of the product produced.

5. The six-spotted evil weevil has attacked California’s broccoli crops. Their supply of broccoli is thus likely to:

Assume Jinan University and an American Professor signed a contract for a summer business arrangement. In the contract, the professor promised to teach for the summer in Guangzhou, and in return, Jinan University promised to pay the professor $1 million. In preparation for the arrival of the professor, Jinan paid $20,000 for a fancy Guangzhou apartment for the professor. Jinan also bought $2,000 plane tickets, $500 in weekend tours, and $200 in equipment for the professor.

In addition, Jinan spent $12,000 in advertising, showing possible students that the professor was coming to teach. 500 students saw the advertising. Each paid $20,000 to Jinan to enroll. The students gave up the opportunity to attend a different program in Guangzhou. The other program would have cost each student $30,000.

All of the students fly to Guangzhou, spending $2,500 on airfare. Each also paid $10,000 for excellent apartments near the university. The university was ready to go.

Then the night before classes start, the professor calls and says he decided not to come. In the above story, who can sue whom? What will each party argue in each case? What legal concepts are involved from our class? Discuss how much (if anything) different parties would pay. Explain. Be thorough. Please also be specific.

Assume Jinan University and an American Professor signed a contract for a summer business arrangement. In the contract, the professor promised to teach for the summer in Guangzhou, and in return, Jinan University promised to pay the professor $1 million. In preparation for the arrival of the professor, Jinan paid $20,000 for a fancy Guangzhou apartment for the professor. Jinan also bought $2,000 plane tickets, $500 in weekend tours, and $200 in equipment for the professor.

In addition, Jinan spent $12,000 in advertising, showing possible students that the professor was coming to teach. 500 students saw the advertising. Each paid $20,000 to Jinan to enroll. The students gave up the opportunity to attend a different program in Guangzhou. The other program would have cost each student $30,000.

All of the students fly to Guangzhou, spending $2,500 on airfare. Each also paid $10,000 for excellent apartments near the university. The university was ready to go. Then the night before classes start, the professor calls and says he decided not to come.

In the above story, who can sue whom? What will each party argue in each case? What legal concepts are involved from our class? Explain. Be thorough.

Please be specific on bold font questions !!

Given the following information for Maynor Company in 2011, calculate the company's ending inventory, cost of goods sold and gross profit, using the following inventory costing methods, assuming the company uses a periodic inventory system: (Note: The sum of cost of goods sold and ending inventory might not add up due to rounding.)

LeMans Company produces specialty papers at its Fox Run plant. At the beginning of June, the following information was supplied by its accountant:

During June, direct labor cost was $134,500, direct materials purchases were $339,500, and the total overhead cost was $369,600. The inventories at the end of June were:

Required:

1. Prepare a cost of goods manufactured statement for June.

2. Prepare a cost of goods sold schedule for June.

Problem 4-16 Comprehensive Problem-Weighted-Average Method [LO4-2, LO4-3, LO4-4, LO4-5]

Builder Products, Inc., uses the weighted-average method in its process costing system. It manufactures a caulking compound that goes through three processing stages prior to completion. Information on work in the first department, Cooking, is given below for May:

Required:

1. Compute the equivalent units of production for materials and conversion for May.

2. Compute the cost per equivalent unit for materials and conversion for May.

3. Compute the cost of ending work in process inventory for materials, conversion, and in total for May.

4. Compute the cost of units transferred out to the next department for materials, conversion, and in total for May.

5. Prepare a cost reconciliation report for May.

ADA Pharmaceutical produces 3 drugs..Diomycin, Homycin, and Addolin.

Here is the budget information

Cost of direct materials. Diomycin $205,000. Homycin $265,000. Addolin $258,000

Cost of Direct Labor: $250,000 $234,000 $263,000

# of direct labor hours 7,200 6,800 2,000

Number of Capsules 1,000,000 500,000 300,000

ADA has identified the following activities and cost drivers and has assigned them a total overhead cost of $200,000

ACTIVITY: COST DRIVER Budgeted Overhead Cost Budgeted Cost Driver Volume

Machine Set-Up Set up hours. $16,000 1,600

Plant Management Number of Workers $36,000 1,200

Supervision of Direct Labor Direct Labor Hours $46,000 16,000

Quality Inspection Inspection Hours $50,400. 1,050

Order Expediting Customers Served $51,600 645

Total Overhead   $200,000

The following information was gathered about the cost-driver volume for each product

Diomycin Homycin Addolin

Set up hours 200 600 800

# of workers 200 400 600

Direct Labor Hours 7,200 6,800 2,000

Inspection Hours 150 200 700

Customers Served 45 100 500

Use activity based cost system to calculate the cost of each product.