For Absorption Costing, I will calculate the Cost of Goods Sold by multiplying the Sales and (Fixed Manufacturing cost per unit + Variable Manufacturing Cost per unit). The reconciliation should be done using this formula: Net Income (Absorption Costing) - Net Income (Variable Costing) = Fixed Overhead in ending balance - Fixed Overhead in opening balance. Thank you.

Tax Case 4

Goodwill Acquired in an Acquisition – Is it Deductible?

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?

Question-3: Arundel Partners are contemplating an investment in Argentina. They gather data to determine the appropriate return to their equity investors. Their data suggest that Argentine equity market is 2.5 times more volatile than the US equity market; they estimate the project beta as 1.5, and the project has 100% exposure to Argentina country risk. Arundel partners assume that US risk-free rate is 3% and US EMRP is 5.5%. Given the volatility of the Peso and difficulty of hedging peso cash flows, Arundel partners think that a 3% additional currency risk premium (ie. Measure of Currency Risk x Unit Price of Currency Risk) is warranted on top of the Country Risk Premium. A. What is the Estimate CRP for Argentina based in relative equity market volatility? B. What should be the required rate of return Arundel shareholders expect in USD terms assuming 100% country risk exposure. C. What should be the required rate of return if the country risk were scaled the same as the market risk of the asset? D. If the Argentine credit default risk premium is 400 bp and equity market volatility to bond market volatility ratio is 1.4, what should be the Argentina Country Risk Premium?

Hint: Review the Nextel Peru case

4. Poway is a town that has 70 families with a child, and 30 without a child. 30 of the families with a child are willing to pay as much as $6,000 to educate their child, and 40 are willing to pay as much as $4,000 to educate their child. Each educated child creates a positive externality of $30 for each family in Poway but the cost of educating a child in Poway is $5,000.

(a) Without regulation, how many residents educate their child?

b) With regulation, how many residents educate their child?

c) What is the change in social profits by regulating the externality?

Residents of the town of Los Locos (population 100) like to drive noisy off-road vehicles, but they hate the disturbance and dust caused by each others’ vehicles. Each vehicle purchased by a resident causes $10 worth of damage to each of the 100 residents. Forty residents are willing to pay up to $3,500 for an off-road vehicle, 20 residents are willing to pay up to $3,000 for an off-road vehicle, and 40 residents are willing to pay up to $2,500 for an off-road vehicle. The price of an off-road vehicle is $2,200.

(a) Without regulation, how many residents buy an off-road vehicle?

(b) With regulation, how many residents buy an off-road vehicle?

(c) What is the change in social profits by regulating the externality?

. A bike shop is selling a fashionable newly designed folding bike. The shop is now considering how many of them to order for the coming season. The supplier requires that orders for the bikes must be placed in quantities of 25. The cost per bike is $820, $790, $750 and $700 for an order of 25, 50, 75 and 100 respectively. The bikes will be sold for $1,200 each. Since there will be a new design for folding bikes next season and there is no spare storage space in the store, any bikes left over at the end of this season will have to be sold at a low price of $450 each to another bike shop. However, if the shop runs out of bikes during the season, it will suffer a loss of goodwill among its customers. The shop estimates this goodwill loss to $60 per customer who is not able to buy a bike. From past experience, the shop estimates that the demand for folding bikes this coming season will be 25, 50, 75 and 100 bikes with probabilities of 0.4, 0.3, 0.2 and 0.1 respectively.

(a) Construct the payoff table for the above situation.

(b) Which alternative should be chosen using each of the maximax, maximin, minimax regret, Hurwicz (take α = 0.6), equal likelihood, expected value, and expected opportunity loss criteria?

(c) Find the expected value of perfect information.

Kip Bowman is owner and sole employee of KB Corporation. He pays himself a salary of $1,500 each week.

Record the payroll entry and payroll tax entry for the pay of the week ended June 7 (his year-to-date pay is $31,500).

If an amount box does not require an entry, leave it blank. Round your answers to the nearest cent.

Corporation has an activity-based costing system with three activity cost pools—Processing, Supervising, and Other. In the first stage allocations, costs in the two overhead accounts, equipment expense and indirect labor, are allocated to the three activity cost pools based on resource consumption. Data used in the first stage allocations follow:

Distribution of Resource Consumption Across Activity Cost Pools:

In the second stage, Processing costs are assigned to products using machine-hours (MHs) and Supervising costs are assigned to products using the number of batches. The costs in the Other activity cost pool are not assigned to products. Activity data for the company's two products follow:

Finally, the costs of Processing and Supervising are combined with the following sales and direct cost data to determine product margins.

A. How much overhead cost is allocated to the Supervising activity cost pool under activity-based costing first stage of allocation?

B. The activity rate for the Supervising activity cost pool (per batch) under activity-based costing is?

C. What is the overhead cost assigned to Product H3 under activity-based costing?

D. What is the product margin for Product H3 under activity-based costing?

10. A college raises its annual tuition from $23,000 to $24,000, and its student enrollment falls from 4,877 to 4,705. Compute the price elasticity of demand. (Would demand be elastic or inelastic?) a. 1.25 b. .84 c. .56 d. 2.34 11. As the price of good X rises from $10 to $12, the quantity demanded of good Y rises from 100 units to 114 units. Are X and Y substitutes or complements? What is the cross elasticity of demand? a. .72 which would make them substitutes b. 1.34 which would make them substitutes c. -.96 which would make them complements d. -.34 which would make them substitutes

12. The quantity demanded of good X rises from 130 to 145 units as income rises from $2,000 to $2,500 a month. What is the income elasticity of demand? a. 1.56 b. .34 c. 1.10 d. .491

13. The quantity supplied of a good rises from 120 to 140 as price rises from $4 to $5.50. What is price elasticity of supply? a. 1.21 b. .487 c. .678 d. 5.45

14. On average, total utility rises as marginal utility declines. T/F T F

15. The law of diminishing marginal utility is consistent with the fact that people trade. Do you agree or disagree. Be able to explain your answer. a. Yes, I agree because people are prone to trade something of lesser value to them for something that has greater value to them. b. No, I disagree because people are prone to trade something of greater value to them for something that has lesser value to them.

16. Assume the marginal utility of good A is 4 utils, and its price is $2, and the marginal utility of good B is 6 utils, and its price is $1. Is the individual consumer maximizing (total) utility if she spends a total of $3 buying one unit of each good? (Be able to explain your answer). a. Yes b. No

Garner Industries manufactures precision tools. The firm uses an activity-based costing system. CEO Deb Garner is very proud of the accuracy of the system in determining product costs. She noticed that since the installment of the ABC system 10 years earlier, the firm had become much more competitive in all aspects of the business and earned an increasing amount of profits every year.

In the last two years, the firm sold 0.658 million units to 2,500 customers each year. The manufacturing cost is $700 per unit. In addition, Garner has determined that the order-filling cost is $51.16 per unit. The $960.00 selling price per unit includes 20% markup to cover administrative costs and profits.

The order-filling cost per unit is determined based on the firm’s costs for order-filling activities. Order-filling capacity can be added in blocks of 60 orders. Each block costs $120,000. In addition, the firm incurs $1,300 order-filling costs per order.

Garner serves two types of customers designated as PC (Preferred Customer) and SC (Small Customer). Each of the 100 PCs buys, on average, 5,000 units in two orders. The firm also sells 158,000 units to 1,000 SCs. On average each SC buys 158 units in 10 orders. Ed Cheap, a buyer for one PC, complains about the high price he is paying. Cheap claims that he has been offered a price of $800 per unit and threatens to take his business elsewhere. Garner does not give in because the $800 price Cheap demands is below cost. Besides, she has recently raised the price to SC to $908.86 per unit and experienced no decline in orders.

Required: 1. Demonstrate how Garner arrives at the $51.16 order-filling cost per unit.

2. What would be the amount of loss (profit) per unit if Garner sells to Cheap at $800 per unit?

3. What is the amount of loss (profit) per unit at the $908.86 selling price per unit for units sold to SC?

You’re Too Old! “I’m going to be blunt about it,” Dr. Carl McKensie said. “You are fifty-five, and that’s far too old to have a child.” “You’re not trying to tell me it’s impossible, are you?” Kisha Clare asked. “I’ve read that you can use donated eggs and donated sperm to fertilize them outside the body, then implant them and have a normal pregnancy. I’m sure it’s expensive, but Tom and I have got enough money, and I want to have a baby.” “Oh, it’s possible ,” Dr. McKensie admitted, “but it’s a bad idea because you’ll be too old to take care of a child properly. When he starts first grade, you’ll be sixty-two and when he graduates from high school, you’ll be seventy-four, if you are still alive!” McKensie shook his head. “You should have thought of having a child earlier.” “I had a career to work on and a lot of personal issues to deal with.” Clare frowned, remembering the long hours in the office and how relieved she was when she finally left her first husband. “I can be a better mother now than I could have been when I was thirty or even forty. I’m financial secure, I’m happy with myself, and I really want a child.” She shook her head. “Statistically, I’m going to live for another twenty-four years, and that’s enough to raise a child.” “But is it fair to a child to be raised by an old person?” “Grandparents raise children all the time.” Clare glared at Dr. McKensie. “And men have children whenever they want to, no matter how old they are. They don’t have to get permission from some doctor.” “But an older man can have children only if he has some younger woman as a partner.” Dr. McKensie glared back at Clare. “That way the child has one younger parent.” “I think you are discriminating against me,” Clare said in a flat voice. “I am,” Dr. McKensie nodded his head. “But it’s justifiable. There are compelling reasons why an older, postmenopausal woman, even if she has the money, should not be allowed to become a mother, just because she wants to. It’s unfair to society, to younger women with fertility problems, and to the child.”

1. Should we impose some age threshold, i.e. some age at which we do not allow older men to donate sperm?

2. What if Clare was a 32-year-old single woman? (Replace ‘old’ with ‘single.’) Should she receive artificial reproductive assistance?

3. What if Clare was a 35-year-old woman in a same –sex relationship? (Replace ‘old’ with ‘lesbian.’) Should she receive artificial reproductive assistance?