It has been argued that Keynes's most significant contribution to macroeconomics is his development (or at least popularizing) of the concept of a multiplier—the notion that one dollar of added spending (let's say government spending) results in an increase in aggregate income of more than one dollar.

Question: What accounts for the multiplier effect? That is, why is the resulting increase in income greater than the initial increase in government spending? Stated differently, what gives the multiplier a value greater than one?

I do not want a mathematical formula here. Answer in plain English.

3. Here are some sample demand elasticity estimates for various goods:

1

st

class plane ticket = -.3

Regular plane ticket = -1.5

Soda = -.8

Coca-Cola = -3.8

A) Provide some rationale for why the two types of plane tickets have different elasticities.

B) Provide some rationale for why the elasticity of soda is lower than Coca-Cola.

C) If the price of all plane tickets rises, indicate what would happen to the revenue generated from

first class tickets versus regular tickets.

D) Would you expect the cross price elasticity between soda and water to be positive or negative?

Explain.

E) Would you expect the income elasticity on 1

st

class plane tickets to be positive or negative?

Explain.

F) If the price of Coca Cola rises from $1 to $1.5, how much would you expect quantity to change?

Your answer should be in %.

Questions 9 and 10

DATE: June 1, 2020

TO: CCSU Consulting

FROM: Mark Swain, President, Tommy’s Box Cars

SUBJECT: Master Budget for the fiscal year July 1, 2020 – June 30, 2021

----------------------------------------------------------------------------------------------------------------------------------

Our controller, Tommy Swain is negotiating with potential new Wood suppliers in Kentucky. We need the Large Box Car Division’s Master Budget for the fiscal year ended (36) June 30, 2021 for our corporate strategic planning process, and we cannot wait for Tommy’s return from Kentucky. We would like you to prepare the Large Box Car Division’s Master Budget for the fiscal year ended June 30, 2021.

The deliverables are as follows:

1. Sales budget, including a schedule of expected cash collections.

2. Production budget.

3. Direct materials budget, including a schedule of expected cash disbursements for materials.

4. Direct labor budget.

5. Manufacturing overhead budget.

6. Ending finished goods inventory budget calculating the expected value of the finished goods inventory as of (36) June 30, 2021. *

7. Selling and administrative expense budget.

8. Cash budget.

9. Budgeted income statement for the year ended (36) June 30, 2021. *

10. Budgeted balance sheet for (36) June 30, 2021. *

All the Master Budget schedules except those marked with an asterisk for the Large Box Car Division should include a column for each quarter and a total column for the fiscal year. We only need annual totals for the budgeted financial statements (schedules 9 and 10) and we only need a year-end total for the value of finished goods inventory (schedule 6).

The hard copies of these budget schedules should be delivered by the company deadline. You can print more than one schedule per page, but do not have a page break in the middle of a budget schedule. I like to be able to view an entire budget schedule without flipping back and forth between pages. Please also use a type font of between 10-12 points for printing. We also need you to submit (via e-mail) the Excel spreadsheet that you used to create the budget schedules you print so we can use the spreadsheet as a starting point for future budgets. Upload the Excel spreadsheet on Blackboard. We need that spreadsheet file the night before the meeting.

I’ve attached a brief description of the Large Box Car Division to the budget data Tommy gave me before he left for Kentucky. We eagerly await your results.

Sincerely,

Mark

Mark Swain

During 2019-20 fiscal year, the average selling price for large box cars is expected to be (1) $130 per car. The Large Box Car Division forecasts the following units of sales.

Quarter First Second Third Fourth

Box Car UNIT Sales (2-5) 65,000 70,000 55,000 60,000

The collection pattern for Accounts Receivable is as follows:

o (6) 30 percent of all sales are collected within the quarter in which they are sold

o (7) 70 percent of all sales are collected in the following quarter.

o There are no bad debts/uncollectible accounts.

Due to high demand last year, the Large Box Car Division expects to have (8) zero finished box cars in inventory on (35) July 1, 2020, the beginning of the first quarter of the new fiscal year (i.e. Beginning Finished Goods Inventory is (8) Zero). To avoid having that problem in the coming fiscal year, the Large Box Car Division would like to have the ending inventory of Box Car at the end of each of the first three quarters equal to (9) 30% of the budgeted sales for the next quarter. They would like to have (10) 35,000 finished Box Cars on hand on (36) June 30, 2021.

Quarter First Second Third Fourth

Ending FG inventory of Box Cars as a

% of the next quarter’s budgeted

sales (9) 30% 30% 30% ?

Ending FG inventory of Box Cars (10) ? ? ? 35,000

Each large box car requires an average of (11) 5.0 feet of wood. The Large Box Car Division buys wood for (13) $4.00 per foot and they expect the price to remain constant throughout the year. They expect to have (12) 50,000 feet of wood (RAW MATERIALS) on hand as of July 1, 2019 ((12) 50,000 * ((13) $4.00 = (14) $200,000 - This is beginning Direct Material Inventory), the beginning of the first quarter of the fiscal year. At the end of each of the first three quarters, the Large Box Car Division would like to have their direct materials inventory quantity to equal (15) 25 percent of the amount required for the following quarter’s planned production. On (33) June 30, 2020, the end of the fiscal year, Large Box Car Division would like to have (16) 60,000 feet of wood on hand (This is ending Direct Material Inventory)..

Quarter First Second Third Fourth

Ending DM inventory as a % of the

next quarter’s production

requirement (15) 25% 25% 25% ?

Ending DM inventory in feet (16) ? ? ? 60,000

The Large Box Car Division buys its wood on account. It pays for (17) 35% of its purchases of direct materials in the quarter in which they were purchased and (18) 65% in the quarter after they were purchased.

Each large box car requires (19) 5 hours of direct labor. Employees engaged in direct labor will be paid an estimated (20) $10.00 per labor hour. Wages and salaries are paid on the 15th and 30th of each month.

Variable manufacturing overhead is estimated to be (21) $4.50 per direct labor hour for the coming fiscal year. All variable manufacturing overhead expenses are paid for in the quarter incurred.

Fixed manufacturing overhead is estimated to total (22) $120,000 each quarter, with (23) $40,000 out of the total amount of (22) $120,000 representing depreciation on machinery, equipment and the factory. All other fixed manufacturing overhead expenses are paid in cash in the quarter they occur. The fixed manufacturing overhead rate will be computed by dividing the year’s total fixed manufacturing overhead by the year’s budgeted direct labor hours. Round the fixed overhead rate to the nearest penny.

Variable selling and administrative expenses are estimated to be (24) $12.00 per box car sold. Fixed selling and administrative expenses are expected to total (25) $95,000 each quarter, with (26) $30,000 out of the total amount of (25) $95,000 representing depreciation on the office space, furniture and equipment. Other than depreciation, all selling and administrative expenses are paid for in the quarter they occur.

On (33) June 30, 2020 the Large Box Car Division plans to buy new machinery and equipment for (27) $1,000,000. The new machinery and equipment will be acquired at the very end of the fiscal year, so it will not be used in production and sales during the coming year and it will not be depreciated until the following year. The Large Box Car Division expects to pay (28) 40% down in cash and finance the remaining (29) 60% of the equipment cost with a note payable from a local bank with whom they do business with. No interest payable will accrue on the equipment note payable until after (33) June 30, 2020.

The Division must maintain a minimum cash balance of (30) $100,000. If after accounting for cash receipts and disbursements (including dividends) in the cash budget, the budgeted cash available cash falls below (30) $100,000 in any quarter, the Division will need to borrow cash. They have arranged a line of credit allowing it to borrow in $10,000 increments (i.e. they can borrow $10,000 or $20,000 etc. but not an odd amount). Assume borrowing will take place at the beginning of any quarter in which the available cash would otherwise be below (30) $100,000 so that at no time during the quarter will the cash balance fall below (30) $100,000 (after payment of interest). If there is extra cash at the end of the quarter and there is borrowing outstanding, the division should pay down principal (also in increments of $10,000). The bank charges the Division interest at the rate of (31) 3% per quarter. Interest accrued in the quarter will be paid the first day of the next quarter (e.g. Q1’s interest is not paid in cash until Q2 and Q2’s Interest will be paid in Q3).

As a fully owned subsidiary, the Large Box Car Division does not pay income taxes. All income taxes are charged to Tommy’s Box Car’s, the parent company. Large Box Car Division will pay dividends of (32) $50,000 each quarter to its corporate parent, Tommy’s Box Car’s. The dividends must be paid, even if the Large Box Car Division has to borrow on its line of credit to make the payment

The budgeted balance sheet for the Large Box Car Division on (34) June 30, 2020 (which is the same as the budgeted balance sheet at the beginning of business (35) July 1, 2020) is presented below. Tommy’s Box Cars owns 100% of the Capital Stock of the Large Box Car Division.

LARGE BOX CAR DIVISION – TOMMY’S BOX CARS

BUDGETED BALANCE SHEET

(34) JUNE 30, 2020

ASSETS LIABILITIES & EQUITY

Cash $1,450,000 Accounts Payable $450,000

Accounts Receivable 3,900,000 Notes Payable 0

Raw Material Inventory (14) 200,000 Capital Stock 3,500,000

Plant and Equipment 8,900,000 Retained Earnings 10,550,000

TOTAL ASSETS $14,450,000 TOTAL LIAB. & SE $14,550,000

The Affordable Care Act (aka Obamacare) was signed into law in March 2010. Did it “bend the health care cost curve downward” as its supporters promised it would?

A. Social Security recipients receive annual adjustments in their benefits (COLAs) based on year-to-year changes in the CPI-W. (Actually, the Social Security annual COLA is tied to the third quarter to third quarter change from year to year, but let’s just use March to March, 2010 to 2018). Calculate the increase over that eight year period.

B. And finally, what about the average worker? For that, calculate the percent increase in compensation—using the index of hourly compensation, business sector of the economy—over the period from first quarter 2010 to first quarter 2018.

Patrick Inc. makes industrial solvents. In the first 4 months of the coming year, Patrick expects the following unit sales:

Patrick's policy is to have 23% of next month's sales in ending inventory. On January 1, it is expected that there will be 4,500 drums of solvent on hand.

Required:

Prepare a production budget for the first quarter of the year. Show the number of drums that should be produced each month as well as for the quarter in total. If required, round your answers to the nearest whole unit.

A lottery offers the chance to win a prize of receiving payments forever starting with $200 for the first payment followed by each consecutive payment increasing by $250 until the payment size reaches $700. If you receive a payment every quarter, with the first in one quarter and interest is earned at j₄ = 5%, what amount must the lottery have in the account today to fund the prize?

The company has just hired a new marketing manager who insists that unit sales can be dramatically increased by dropping the selling price from $8 to $7. The marketing manager would like to use the following projections in the budget:

Questions:

1. What are the total expected cash collections for the year under this revised budget?

2. What is the total required production for the year under this revised budget?

3. What is the total cost of raw materials to be purchased for the year under this revised budget?

4. What are the total expected cash disbursements for raw materials for the year under this revised budget?

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company now is planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

1. The finished goods inventory on hand at the end of each month must equal 4,000 units of Supermix plus 25% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 18,250 units.

2. The raw materials inventory on hand at the end of each month must equal one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 87,375 cc of solvent H300.

3. The company maintains no work in process inventories.

A monthly sales budget for Supermix for the third and fourth quarters of the year follows.

Required:

1. Prepare a production budget for Supermix for the months July, August, September, and October.

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

Require 1) prepare a production budget for Supermix for the months July, August, September, and October.

Required 3) Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.