Question 6 [24] Hardware House (Pty) Ltd is a retailer of a wide range of hardware products. It has branches throughout the country and its strategy is to increase its sales revenue by opening more stores. The company rents the premises of all its stores. The executive management, however, is concerned that its strategy could be very harmful to operating profits should there be a downturn in the economy, such as a recession. One of the financial tools management wants to use to assess the vulnerability of its profits is to determine the operating leverage of the business. At the last executive management meeting, the following information was tabled, discussed and approved to be used to determine operating leverage: 2019 Actual 2020 projected increase (decrease) Revenue R25 670 000 R30 804 000 Cost of goods sold 17 110 000 20 874 200    Operating expenses 3 523 000 3 748 460 Selling expenses 1 080 000 1 004 400 General and administrative expenses 1 870 000 1 944 800 Property rent expense 350 000 549 500 Depreciation 223 000 1249 760 Required: 6.1. Complete the information in the table for 2019 and 2020, and then use the information in the table to calculate Hardware House’s degree of operating leverage (DOL) and explain its effect on operating profit. (18) 6.2. Should the company be concerned about the possible negative effect that its strategy can have on profits in poor economic conditions? Give reasons for your answer. (6)

Use an appropriate analysis technique of your choosing to evaluate the following three mutually exclusive projects each lasting 6 years. Which project should be selected if MARR = 6%.

Project 1 involves an initial cost of $300,000 and annual costs of $50,000. The project will generate annual revenues of $110,000. At the end of year 6, the project will have a salvage value of $25,000.

Project 2 will require an initial investment of $150,000 and annual costs of $25,000. There will be no revenues in years 1-3, but years 4-6 will have annual revenues of $150,000. There is no salvage value.

Project 3 also has an initial cost of $150,000. Annual costs are 75,000, and annual revenue in year 1 is $90,000, increasing by $10,000 each year through year 6. There is no salvage value.

Use an appropriate analysis technique of your choosing to evaluate the following three mutually exclusive projects each lasting 6 years. Which project should be selected if MARR = 6%. Project 1 involves an initial cost of $300,000 and annual costs of $50,000. The project will generate annual revenues of $110,000. At the end of year 6, the project will have a salvage value of $25,000. Project 2 will require an initial investment of $150,000 and annual costs of $25,000. There will be no revenues in years 1-3, but years 4-6 will have annual revenues of $150,000. There is no salvage value. Project 3 also has an initial cost of $150,000. Annual costs are 75,000, and annual revenue in year 1 is $90,000, increasing by $10,000 each year through year 6. There is no salvage value.

Only labour is used to produce mugs, which sell for $5 each. Labour is hired under perfectly competitive conditions and the market wage is $22.50per hour. Theproductionfunctionfor mugs are given by the following table:

a) Augment the table by calculating the marginal product of labour, total revenue, and marginal revenue product of labour. (Remember to put marginal items in between units.)

b) At the market wage, how many workers will the firm hire in order to maximize profit?

c) Suppose that a shortage of workers causes a competitive wage for workers who can make coffee mugs to rise to $27.50 per hour. Now, how many workers will this firm hire?

d) Suppose that schools that teach pottery skills increase the supply of workers that can make coffee mugs, which lowers the competitive wage for coffee mug workers to $17.50 per hour. Nowhowmanyworkers will the firm hire? Does this represent a shift in the firm’s demand for labour curve or a movement along with the firm’s demand for labour curve?

e) Suppose instead that the demand for coffee mugs rises, pushing up the price of coffee mugs to $10 per mug. If the competitive wage for coffee mug workers remains at $27.50 per hour, how many workers will this firm hire now? Does this represent a shift in the firm’s demand for labour curve or a movement along with the firm’s demand for labour curve?

Suppose two firms, "A" and "B," form a duopoly in the market for a special type of computer chip. Each firm has a constant marginal cost of $2. The daily market demand for this chip is given by the following equation:

P = 8 – 0.005 Q = 8 – 0.005 (qA+qB).

a. Find an expression for firm #A's revenue, as a function of its own quantity and firm B’s quantity: RevA(qA,qB). [Hint: By definition, RevA = P qA. Here, replace P by the equation for the demand curve.]

b. Find an expression for firm A's marginal revenue, as a function of its own quantity and firm B’s quantity: MRA(qA,qB). [Hint: MRA(qA,qB) = d RevA(qA,qB) / dqA., where the derivative is taken holding qB constant.]

c. Find an expression for firm #A's reaction function, showing how much firm A will produce for any given level of quantity set by the other firm: qA* = f(qB). [Hint: Set MRA = MC and solve for qA as a function of qB .]

d. Since both firms have the same cost, you may assume the equilibrium is symmetric (that is, assume qA* = qB*). Compute firm A's equilibrium quantity qA*.

e. Compute total market quantity Q* and the Cournot equilibrium price P*.

f. Assume marginal cost equals average cost and compute the total profit of both firms together.

g. Compute the social deadweight loss. [Hint: Sketch a graph first.]

The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Smitten, a perfectly competitive firm that produces children’s mittens in a competitive market.

Smitten's Production Costs

Instructions: In part a, enter your answer as a whole number. In parts b–d, round your answers to two decimal places.

a. If the market price of children’s mittens is $6.00 per pair, how many pairs of children’s mittens should Smitten produce per week to maximize its profits?

     pairs of mittens

b. What is Smitten’s average total cost at the profit-maximizing quantity of children’s mittens?

   $

c. What are Smitten’s weekly profits if the market price is $6.00 per pair and the firm produces the profit-maximizing quantity of mittens?

   $

d. What are Smitten’s weekly profits if the market price is $5.50 per pair and the firm produces the profit-maximizing quantity of mittens?

     $

e. The price at which Smitten would earn a normal profit is where:

• average cost equals average revenue at the minimum of average cost.

• marginal cost equals average cost.

• marginal cost equals average cost at the minimum of average cost.

• marginal cost equals marginal revenue at the minimum of marginal cost.

The table below shows the weekly marginal cost (MC) and average total cost (ATC) for Smitten, a perfectly competitive firm that produces children’s mittens in a competitive market.

Smitten's Production Costs

Instructions: In part a, enter your answer as a whole number. In parts b–d, round your answers to two decimal places.

a. If the market price of children’s mittens is $6.00 per pair, how many pairs of children’s mittens should Smitten produce per week to maximize its profits?

________ pairs of mittens

b. What is Smitten’s average total cost at the profit-maximizing quantity of children’s mittens?

   $ ________

c. What are Smitten’s weekly profits if the market price is $6.00 per pair and the firm produces the profit-maximizing quantity of mittens?

   $ ________

d. What are Smitten’s weekly profits if the market price is $5.50 per pair and the firm produces the profit-maximizing quantity of mittens?

     $ ________

e. The price at which Smitten would earn a normal profit is where:

• marginal cost equals average cost.

• marginal cost equals marginal revenue at the minimum of marginal cost.

• marginal cost equals average cost at the minimum of average cost.

• average cost equals average revenue at the minimum of average cost.

The unadjusted trial balance of Ayayai Enterprises for the year ending December 31, 2021, follows:

Additional information:

Assume Abbee Industries (AI) starts the current year, 2016, with a deferred tax asset balance of $2,000 and a deferred tax liability balance of $4,000. The current statutory tax rate, which is projected to be in effect when temporary differences reverse, is 30%. The reported pre-tax accounting income is $250,000. Analyze the following items to determine taxable income and income taxes payable, the change in deferred taxes payable (future taxable and deductible amounts), and tax expense for 2016. Assume there is no need for a valuation allowance (provision) for deferred tax assets

1. AI's book income includes an $7,000 deduction for premiums paid on executive life insurance in which the company is named the beneficiary.
2. AI collected $24,000 of rent for a warehouse it leases to a local fabricator. Of this amount, $6,000 is unearned and will be recognized as revenue (for book purposes) in 2017.
3. Bad debts written off in the current period totaled $12,000 and provision (expense) for bad debts (under the allowance method) for book purposes amounted to $9,000. AI uses the direct write-off method for tax and the "allowance method" for book purposes.
4. AI's straight-line depreciation for book purposes is $80,000 in the current year and $150,000 is deductible for tax purposes under the MACRS method.
5. AI accrued $7,000 for estimated future warranty costs in 2016 and paid $4,000 in the current period for warranty defects.
6. AI's book income included $5,000 of interest revenue from municipal bonds.

AI's effective tax rate for 2016 is:

30.5%

45.6%

30.2%

31.0%

37.7%

) The balance in Prepaid insurance represents a 24-month policy that went into effect on December 1, 2019. Review the unadjusted balance in Prepaid insurance, and prepare the necessary adjusting entry, if any. 2) Based on a physical count, supplies on hand total $3,600. Review the unadjusted balance in Supplies, and prepare the necessary adjusting entry, if any. 3) The equipment is expected to have a 5-year useful life, and be worth about $11,000 at the end of five years. Review the unadjusted balance in Accumulated depreciation, and prepare the necessary adjusting entry to record the monthly depreciation, if any. 4) On December 26, the client paid a $12,000 60-day fee in advance, covering December 27 to February 24. Review the unadjusted balance in Unearned Consulting Revenue, and prepare the necessary adjusting entry, if any. 5) Landscape Dreams's employee earns $170 per day for a five-day workweek beginning on Monday and ending on Friday. The employee was last paid on Friday, December 26. Review the unadjusted balance in Salaries expense, and prepare the necessary adjusting entry, if any. 6) In the second week of December, Landscape Dreams agreed to provide 30 days of consulting services to a local fitness club for a fixed fee of $5,100. The terms of the initial agreement call for Landscape Dreams to provide services from December 12, 2019, through January 10, 2020, or 30 days of service. The club agrees to pay Landscape Dreams $5,100 on January 10, 2020, when the service period is complete. Review the unadjusted balance in Consulting revenue, and prepare the necessary adjusting entry, if any

Parker Products manufactures a variety of household products. The company is considering introducing a new detergent. The company’s CFO has collected the following information about the proposed product.

 The project has an anticipated economic life of 4 years.  The company will have to purchase a new machine to produce the detergent. The machine has an up-front cost (t = 0) of $2 million. The machine will be depreciated on a straight-line basis over 4 years. The company anticipates that the machine will last for four years, and that after four years, its salvage value will equal zero.  If the company goes ahead with the proposed product, it will have an effect on the company’s net operating working capital. At the outset, t = 0, inventory will increase by $140,000 and accounts payable will increase by $40,000. At t = 4, the net operating working capital will be recovered after the project is completed.  The detergent is expected to generate sales revenue of $1 million the first year (t = 1), $2 million the second year (t = 2), $2 million the third year (t = 3), and $1 million the final year (t = 4). Each year the operating costs (not including depreciation) are expected to equal 50 percent of sales revenue.  The project will not increase fixed costs of the company.  The company’s overall WACC is 10 percent. However, the proposed project is riskier than the average project for Parker; the project’s WACC is estimated to be 12 percent.  The company’s tax rate is 40 percent

Please calculate NPV and IRR of the proposed project and help the company decide whether the company should accept it or not?