The accountant for Bright Products, Inc., has analyzed the manufacturing overhead costs for the company’s assembly department. The fixed and variable costs follow:

Required:

1. Prepare a flexible budget for the department for the month of May 2019, assuming that the expected production is for 2,100 direct labor hours. Show costs for production levels of 90 percent and 110 percent of the expected production level of 2,100 hours.
2. Assume that during the month of May, actual production was 1,500 hours. Actual costs for the month were as follows:

Prepare a departmental monthly overhead performance report comparing actual costs with the budget allowance for the total number of hours worked.


Analyze:
If Bright Products, Inc., operates at the expected production level of 2,100 direct labor hours, what total manufacturing overhead cost is projected per direct labor hour?

Prepare a flexible budget for the department for the month of May 2019, assuming that the expected production is for 2,100 direct labor hours. Show costs for production levels of 90 percent and 110 percent of the expected production level of 2,100 hours. (Round your answer to 2 decimal places.)

b.

Prepare a departmental monthly overhead performance report comparing actual costs with the budget allowance for the total number of hours worked. (Enter all amounts as positive values. Round amounts to the nearest dollar.)

c.

If Bright Products, Inc., operates at the expected production level of 2,100 direct labor hours, what total manufacturing overhead cost is projected per direct labor hour? (Round your answer to 2 decimal places.)

_________

PART A

GanJee Pty Limited (GanJee) owns and develops properties in the Gosford CBD on the Central Coast of NSW. Upon completion of construction the company leases the apartments and retail space and provides tennants services including waste removal, maintenance and shared facilities like airconditioning. All leases are signed for a period of less than 5 years and are then reviewed before renewal or extension. You wish to establish the fair value of one of GanJee’s Gosford properties using AASB 13/IFRS 13. GanJee purchased the property in 2001 when the Gosford CBD was in decline. At the time, GanJee was able to snap up the property for $0.5 million. In 2015, existing property was demolished and GanJee constructed two impressive tower block buildings with retail space below. The property also includes a hotel, office space and apartments. Construction was expensive, costing $400 million. You have ascertained the following information for your assessment: • The company commissioned the expert opinion of two reputable independent expert appraisers. These appraisers delivered valuation A and valuation B. Valuation A contained the appraiser’s opinion that the property value for GanJee’s Gosford holding had a fair value of $1.3 billion based upon earnings before interest and tax multiplied by a conservative earnings multiple of 6 which is more likely to be considered fair by a potential buyer for the properties. The second valuer in providing valuation B expressed the opinion that the properties had a fair value of $2.75 billion based upon earnings before interest and tax multiplied by an earnings multiple of 8 which is more likely to be considered fair by a potential seller of the property. Both appraisers acknowledged that valuing the property in the current economic climate was difficult as generally there are very few sales of comparable properties. The appraisers communicated that they used their experience in observing valuations of residential rather than commercial and residential properties.  The directors estimate that the current cost of replacing the property would be $1.8 billion based on the current design with today’s construction costs, including labour, materials and overheads. Property prices in the Gosford CBD have increased substantially since 2001. The CBD went through a rapid growth phase in 2017 but there is currently a lull as the City Council does not wish to have new development. The GanJee property is surrounded by fairly derelict buildings which makes valuation difficult. • Present value of future cash flows: The directors have calculated net cash inflows over the next 20 years estimated to be $300 million per year, based on projected cash flows from rental income, tax savings and expenditures. The directors expect that the building will need substantial renovation in 20 years’ time. The directors based their valuation on the following factors: ✓ discount rate of 11.5% to 14.5%; ✓ average subsequent tenure period of ten years for retail units (ILU) and four years for serviced apartments (SA).

Required

Discuss each of the above four values as a basis for establishing a fair value for the property. In accordance with AASB 13/IFRS 13 which methodology do you believe is most appropriate? What additional information if any would you wish to obtain to make a better estimate?

PART B

Walkabout Park wants to determine fair value of the animals in their zoo. They hold the animals primarily for breeding and preservation of native species but also for the benefit of the local population and school group visits.

Required

Provide your recommendation for how the entity should go about measuring the biological assets’ fair value. In your response provide an explanation of possible alternatives and justify your recommendation.

1.) When the production of a good results in a positive externality, the social value curve is

A below the demand curve, indicating that the total value to society is less than the private benefit.

B above the demand curve, indicating that the total value to society is greater than the private benefit.

C identical to the demand curve, indicating that the total cost to society is the equal to the private benefit.

D above the supply curve, indicating that the total cost to society exceeds the private cost.

2.) When Lisa drives to work every morning, she drives on a congested highway. What Lisa does not realize is that when she enters the highway each morning she increases the travel time of all other drivers on the highway. In this case, the external cost of Lisa’s highway trip

A increases the social cost above the private cost.

B lowers the social cost below the private cost.

C increases the social value above the private benefit.

D decreases the social value below the private benefit.

3.) Suppose that a steel factory emits a certain amount of air pollution, which constitutes a negative externality. If the market does not internalize the externality,

A the supply curve would adequately reflect the marginal social cost of production.

B consumers will be required to pay a higher price for steel than they would have if the externality were internalized.

C the market equilibrium quantity will not be the socially optimal quantity.

D producers will produce less steel than they otherwise would if the externality were internalized.

4.) Flu shots provide a positive externality. Suppose that the market for vaccinations is perfectly competitive. Without government intervention in the vaccination market, which of the following statements is correct?

A At the current output level, the marginal social benefit exceeds the marginal private benefit.

B The current output level is inefficiently low.

C A per-shot subsidy could turn an inefficient situation into an efficient one.

D All of the above are correct.

5.) A local manufacturing plant that emitted sulfur dioxide was forced to stop production because it did not comply with local clean air standards. This decision provides an example of

A a direct regulation of an externality.

B corrective taxes.

C a Coase theorem solution to an externality.

D the misuse of a subsidy.

Calculate Equivalent Units, Unit Costs, and Transferred Costs—Weighted Average Method

Kipling Manufacturing, Inc., operates a plant that produces its own regionally-marketed Super Salad Dressing. The dressing is produced in two processes, blending and bottling. In the Blending Department, all materials are added at the beginning of the process, and labor and overhead are incurred evenly throughout the process. Kipling uses the weighted average method. The Work in Process—Blending Department account for January 2016 follows:

Required

Calculate the following amounts for the Blending Department:

Number of units in the January 31 inventory.

Equivalent units for materials cost and conversion costs.

January cost per equivalent unit for materials and conversion costs.

Cost of the units transferred to the Bottling Department.

Cost of the incomplete units in the January 31 inventory.

Round average cost per equivalent unit to four decimal places. Use rounded answers for subsequent calculations. Round other answers to the nearest whole number.

Scenario 1 – Robert Morris Health

Robert Morris Health (RMH) is a 9-hospital integrated delivery network based in the Pittsburgh area in the United States. Currently each hospital orders its own supplies and manages the inventory. A common item used is a sterile Intravenous (IV) Starter Kit. Weekly demand for the IV Starter Kit is 600 units. (We assume that one year is 52 weeks.) The unit cost of an IV Starter Kit is $1.50. Robert Morris has estimated that the physical holding cost (operating and storage costs) of one unit of medical supply is about h = 6 percent per year. In addition, the hospital network's annual cost of capital is r = 12 percent. Note that H = (h + r)*C. Each hospital incurs a fixed order cost of $150 whenever it places an order, regardless of the order size. The supplier takes one week to deliver the order. Currently, each hospital places an order of 6,000 units of the IV Starter Kit whenever it orders. Robert Morris has recently been concerned about the level of inventories held in each of the hospitals and is exploring strategies to reduce them.

The director of materials management is considering the following options:

1) Increase the frequency of ordering by reducing the current order size

2) Centralize the order process across all 9 hospitals and perhaps serving all the hospitals from a single warehouse

1.1 (1 point) What is the economic order quantity? Answer: Q^* =                   units/order.

1.2 (1 point) What is the economic-like order quantity Q^# in a multiple of 500?

Answer: Q^#=                             units/order.

1.3 (2 points) Compare the total annual costs of one Robert Morris hospital at the economic order quantity Q^* and at the economic-like order quantity Q^# in a multiple of 500 units?

Answer:

1.4 (2 points) Compare the total annual order and holding costs and the inventories across all the Robert Morris hospitals at their economic order quantities before and after centralization.

Answer:

principles of corporate finance chapter 9

1. Suppose a firm uses its company cost of capital to evaluate all projects. Will it underestimate or overestimate the value of high-risk projects?

2. A company is 40% financed by risk-free debt. The interest rate is 10%, the expected market risk premium is 8%, and the beta of the company’s common stock is .5. What is the company cost of capital? What is the after-tax WACC, assuming that the company pays tax at a 35% rate?

4. Define the following terms: a. Cost of debt b. Cost of equity c. After-tax WACC d. Equity beta e. Asset beta f. Pure-play comparable g. Certainty equivalent

5. Asset betas EZCUBE Corp. is 50% financed with long-term bonds and 50% with common equity. The debt securities have a beta of .15. The company’s equity beta is 1.25. What is EZCUBE’s asset beta?

9. True or false?

a. The company cost of capital is the correct discount rate for all projects because the high risks of some projects are offset by the low risk of other projects.

b. Distant cash flows are riskier than near-term cash flows. Therefore long-term projects require higher risk-adjusted discount rates.

c. Adding fudge factors to discount rates undervalues long-lived projects compared with quick-payoff projects.

10. A project has a forecasted cash flow of $110 in year 1 and $121 in year 2. The interest rate is 5%, the estimated risk premium on the market is 10%, and the project has a beta of .5. If you use a constant risk-adjusted discount rate, what is a. The PV of the project? b. The certainty-equivalent cash flow in year 1 and year 2? c. The ratio of the certainty-equivalent cash flows to the expected cash flows in years 1 and 2?

12. Nero Violins has the following capital structure:

a. What is the firm’s asset beta? (Hint: What is the beta of a portfolio of all the firm’s securities?) b. Assume that the CAPM is correct. What discount rate should Nero set for investments that expand the scale of its operations without changing its asset beta? Assume a risk-free interest rate of 5% and a market risk premium of 6%.

16. What types of firms need to estimate industry asset betas? How would such a firm make the estimate? Describe the process step by step.

17. Binomial Tree Farm’s financing includes $5 million of bank loans. Its common equity is shown in Binomial’s Annual Report at $6.67 million. It has 500,000 shares of common stock outstanding, which trade on the Wichita Stock Exchange at $18 per share. What debt ratio should Binomial use to calculate its WACC or asset beta? Explain.

5. Costs in the short run versus in the long run

Ike’s Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company’s short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.)

Suppose Ike’s Bikes is currently producing 100 bikes per month in its only factory. Its short-run average total cost is

per bike.

Suppose Ike’s Bikes is expecting to produce 100 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using   .

On the following graph, plot the three SRATC curves for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Ike’s Bikes using the blue points (circle symbol).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

SRATC1SRATC2SRATC3LRATC05010015020025030035040036032028024020016012080400AVERAGE TOTAL COST (Dollars per bike)QUANTITY (Bikes)

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production.

Costs in the short run versus in the long run

Ike’s Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company’s short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.)

Suppose Ike’s Bikes is currently producing 100 bikes per month in its only factory. Its short-run average total cost isper bike.

Suppose Ike’s Bikes is expecting to produce 100 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using .

On the following graph, plot the three SRATC curves for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Ike’s Bikes using the blue points (circle symbol).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

SRATC1SRATC2SRATC3LRATC0100200300400500600700800720640560480400320240160800AVERAGE TOTAL COST (Dollars per bike)QUANTITY OF OUTPUT (Bikes)

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production.

5. Costs in the short run versus in the long run

Ike’s Bikes is a major manufacturer of bicycles. Currently, the company produces bikes using only one factory. However, it is considering expanding production to two or even three factories. The following table shows the company’s short-run average total cost (SRATC) each month for various levels of production if it uses one, two, or three factories. (Note: Q equals the total quantity of bikes produced by all factories.)

Suppose Ike’s Bikes is currently producing 50 bikes per month in its only factory. Its short-run average total cost is

per bike.

Suppose Ike’s Bikes is expecting to produce 50 bikes per month for several years. In this case, in the long run, it would choose to produce bikes using   .

On the following graph, plot the three SRATC curves for Ike’s Bikes from the previous table. Specifically, use the green points (triangle symbol) to plot its SRATC curve if it operates one factory (SRATC1SRATC1); use the purple points (diamond symbol) to plot its SRATC curve if it operates two factories (SRATC2SRATC2); and use the orange points (square symbol) to plot its SRATC curve if it operates three factories (SRATC3SRATC3). Finally, plot the long-run average total cost (LRATC) curve for Ike’s Bikes using the blue points (circle symbol).

Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.

SRATC1SRATC2SRATC3LRATC05010015020025030035040036032028024020016012080400AVERAGE TOTAL COST (Dollars per bike)QUANTITY OF OUTPUT (Bikes)

In the following table, indicate whether the long-run average cost curve exhibits economies of scale, constant returns to scale, or diseconomies of scale for each range of bike production.