10a) Do customers spend more after the Promotion than they did before (i.e., their Pre versus Post Promotion spending)? Test this question with all the data, then again with only those people who accepted the offer.

10b Does the market research data match the way people really spend in this database? To answer this question, test whether High/Med High spenders actually spend more than Low/Medium Low spenders on the Pre-Promotion values (you can ignore the Average spenders in this analysis). Perform any follow-up tests as appropriate.

Problem 26-01
Investment Timing Option: Decision-Tree Analysis

Kim Hotels is interested in developing a new hotel in Seoul. The company estimates that the hotel would require an initial investment of $16 million. Kim expects the hotel will produce positive cash flows of $2.72 million a year at the end of each of the next 20 years. The project's cost of capital is 12%.

1. What is the project's net present value? A negative value should be entered with a negative sign. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places.
   $ million
   
2. Kim expects the cash flows to be $2.72 million a year, but it recognizes that the cash flows could actually be much higher or lower, depending on whether the Korean government imposes a large hotel tax. One year from now, Kim will know whether the tax will be imposed. There is a 50% chance that the tax will be imposed, in which case the yearly cash flows will be only $1.44 million. At the same time, there is a 50% chance that the tax will not be imposed, in which case the yearly cash flows will be $4 million. Kim is deciding whether to proceed with the hotel today or to wait a year to find out whether the tax will be imposed. If Kim waits a year, the initial investment will remain at $16 million. Assume that all cash flows are discounted at 12%. Use decision-tree analysis to determine whether Kim should proceed with the project today or wait a year before deciding.
   -Select-It makes sense to proceed with the project today.It makes sense to wait a year before deciding.

Perry plc is a large conglomerate company structured on a divisional basis. It seeks to maximise investor wealth. Head office avoids day to day involvement in divisional affairs and only intervenes if performance is considered unsatisfactory. Divisional performance is measured by residual income.

One of Perry’s larger divisions operates a chain of high-class hotels throughout the United Kingdom. The division’s mission statement is ‘To be the hotel of the first choice for business users and tourists’. Although the chain has generally been popular with tourists it is not proving quite so popular with business users and conference organisers. Competition in the top segment of the hotel market is fierce, with customers expecting the highest standards of facilities, service, and catering. Over the last two years, the division has invested a large amount of money in modernising its hotels including the improvement of bedrooms and public rooms, installation of gymnasia and swimming pools and the information technology features required by business travelers. A large amount of money has also been spent on staff training to improve service levels and on a television advertising campaign to promote improved hotels to business users.

Head office is concerned that the performance of the hotel chain appears to have declined over the last few years despite this expenditure.

         The following figures are available

The cost of capital applicable to the hotel division is 20% per annum

Required:

1. Calculate the residual income for the hotel chain for each of the three years.
2. Discuss three advantages and four disadvantages of residual income as a divisional performance measure.                                                                                                     ( 7 marks)

Q1. You are an audit manager of Morline & Co, a Public Accounting firm. The audit engagement partner, Joe Tan, has called you into his office to discuss a new audit client. You have been assigned to take charge of the audit for the financial year end, 31 December 2019 of Crown Hotel Group Bhd. (Crown Group) a listed company. The Group operates a chain of luxury hotels across Malaysia. As part of the expansion strategy, Crown Group has recently acquired a new hotel in Melbourne. You are very excited about auditing this luxury group of hotels, and are hoping that you may get to stay in one of the hotels during the audit.

Recently you had a meeting with Joe Tan, Datuk Paul Wong, the managing director of Crown Group, and Lisa Goh, the finance director of Crown Group. From detailed discussions with them, you note the following information:

Background information:
Crown Group owns four hotels in Malaysia namely Dolce, Corus, Korma, Morib, one hotel, Belux in Singapore and a newly acquired hotel in Melbourne namely Aston, which was acquired in September 2019. Each hotel operates through a separate legal entity, and Crown Group owns 100% of each entity. The Group prepares consolidated financial statements on an annual basis. The Head Office is located in Petaling Jaya, Malaysia.

In 2019, the Crown Group had total revenues of RM 90 million (2018: RM 80 million), and operating profits of RM 8,500,000 (2018: RM 11,000,000).

Lisa Goh explained that all the hotels have been performing well over the last year, with the exception of Hotel Belux. See notes below

Information Technology (IT)

Lisa Goh highlighted that the Crown Group relies heavily on the use of information technology (IT) and noted that approximately 96% of bookings are made online via its website. The Group invested significantly in IT over the last six months, which resulted in an extensive upgrade of its website and the development of a user-friendly app. Datuk Paul Wong said, “We have spent a significant amount of money developing our IT systems and ensuring they are secure, as the rapid increase in cybercrime in Malaysia is frightening.” This development cost was capitalised in Financial Year 2019.

Finance team

Each hotel has a finance team, including a financial controller. At the end of every month, a reporting pack is prepared by the financial controller, including a copy of the management accounts, key completed reconciliations and detailed commentary on how the hotel has met the key performance indicators for that particular month. Each reporting pack is submitted to the head office, and the group financial controller reviews them and performs additional reconciliations. The group financial controller also prepares the year-end consolidated financial statements. Lisa Goh has, however, informed you that the group financial controller resigned in November 2019 because he could not cope with the pressure of the job. She has not been able to find a suitable replacement as to date. Lisa has asked if your firm would be able to help with the finalisation of the consolidated financial statements for the year ended 31 December 2019, as her team is currently struggling to find the time needed.

New acquisition

The hotel in Melbourne, Aston was acquired in September 2019 for RM 8,500,000, and will be included in the consolidated financial statements at 31 December 2019. The purchase of the hotel was financed by a bank loan. Datuk Paul Wong explained this was a significant investment for the Crown Group and that a further RM 2 million has since been spent on capital expenditure to ensure it meets the exceptionally high standards of the Group. Datuk Paul Wong has invited the entire audit team to travel to Melbourne for the opening of the hotel in June 2020 as his guests. He has also assured the team will be treated very well while there.

Valuation of the hotel properties

The group policy is to value Land and Buildings at fair value. The calculation of fair value and the allocation of fair value to Land and Buildings requires significant judgement. Datuk Paul Wong confirmed professional valuation experts were appointed to value Land and Buildings at 31 December 2019. Land and Buildings at that date were valued at RM 110 million, representing a revaluation increase of RM 12 million.

Loans and Borrowings
During the financial year to 31 December 2019, the Group borrowed RM 10,500,000 in order to finance the purchase of the Aston, and to complete the renovation work required. The loan is repayable over 10 years and the Group must adhere to strict loan covenants. The bank requires the Group to provide management accounts on a quarterly basis, if a loan covenant is breached, the loan may be due for repayment immediately. Lisa Goh has informed you that the group is also struggling to ensure management accounts for the quarter ended 31 December 2019 will be submitted within the allocated timeframe. The amount of interest paid was extremely significant

Bonus
During the year, a new bonus scheme was introduced for both managers and directors for all the hotel within the group in order to increase revenue. The bonus is directly linked to revenue.

Advance payment
Advance deposits of 50% are collected for those booking for conferences and wedding packages.

Hotel Belux
The hotel Belux is one of the biggest in the Group, and contributes 25% of total revenue is located in Singapore. Although revenue has increased in 2019, profit has fallen significantly due to a number of “special offers” in both accommodation rates and the restaurant. Datuk Paul Wong believes the main causes for this fall are reduced gross margins (due to the successful uptake of the various special offer promotions during the year) and increasing costs (mainly driven by payroll). The number of special offers were approved by management in a bid to counter the tough economic environment within which the hotel operates and thereby increase revenue.

Required:
(i) Identify and explain to the audit partner SEVEN (7) key audit risks in respect of Crown Group.
(ii) Describe the matters Morline & Co should consider in the context of ISA 620 in order to evaluate the adequacy of the expert’s work in relation to engaging the services of a property expert to value Land and Buildings.
(iii) Evaluate the ethical issues(s) if any in respect of the Crown Group audit engagement and recommend appropriate safeguard(s).

Rebecca wishes to estimate the mean number of miles that her Nissan Versa can drive on a full tank of gas. She fills up her car with regular unleaded gasoline from the same station 9 times and records the number of miles that she drives until her low tank indicator light comes on. Construct a 96% confidence interval for the mean number of miles that she can drive on a full tank of gas until the low tank indicator light will turn on. Round to the nearest 0.1 miles

203 325 119 345 405 300 450 267 472

1. Toyota has been manufacturing small automobiles that have averaged 50 miles per gallon of gasoline in highway driving. The company has developed a more efficient engine for its small cars and now advertises that its new small cars average more than 50 miles per gallon in highway driving. An independent testing service road-tested 36 of the automobiles. The sample showed an average of 51.5 miles per gallon. The population standard deviation is 6 miles per gallon.

1. With a 0.025 level of significance, test to determine whether or not the manufacturer's advertising campaign is legitimate.

1. Use critical value approach

2. Use p value approach

3. State a type 1 error for this problem

4. State a type 2 error for this problem

1. Toyota has been manufacturing small automobiles that have averaged 50 miles per gallon of gasoline in highway driving. The company has developed a more efficient engine for its small cars and now advertises that its new small cars average more than 50 miles per gallon in highway driving. An independent testing service road-tested 36 of the automobiles. The sample showed an average of 51.5 miles per gallon. The population standard deviation is 6 miles per gallon.

1. With a 0.025 level of significance, test to determine whether or not the manufacturer's advertising campaign is legitimate.

1. Use critical value approach

2. Use p value approach

3. State a type 1 error for this problem

4. State a type 2 error for this problem

Developing an Equation from Average Costs The America Dog and Cat Hotel is a pet hotel located in Las Vegas. Assume that in March, when dog-days (occupancy) were at an annual low of 500, the average cost per dog-day was $14. In July, when dog-days were at a capacity level of 4,000, the average cost per dog-day was $7. (a) Develop an equation for monthly operating costs. (Let X = dog-days per month) Total cost = Answer + Answer * X (b) Determine the average cost per dog-day at an annual volume of 24,000 dog-days.

1. Use this data table for the bromination of acetone to answer the following questions;

a) Determine the reaction order with respect to each of the three reactants and write the rate law.

b) What is the value of the rate constant including proper units?

Pleasanton Studios Kersten Brown, the CEO of Pleasanton Studios, is having a tough week - all three of her top management level employees have dropped in with problems. One executive is making questionable decisions, another is threatening to quit, and the third is reporting losses (again). Kersten is hoping to find simple answers to all her difficulties. She is asking you (her accountant) for some advice on how to proceed. Pleasanton Studios owns and operates three decentralized divisions: Entertainment, Streaming, and Parks. Pleasanton Studios has a decentralized organizational structure, where each division is run as an investment center. Division managers meet with the CEO at least once annually to review their performance, where each division manager's performance is measured by their division's return on investment (ROI). The division manager then receives a bonus equal to 10% of their base salary for every ROI percentage point above the cost of capital. The Entertainment division manager, John Freeman, was the first to knock on Kersten's door this morning. Entertainment, Pleasanton Studios' first endeavor, produces movies for the big screen. Entertainment has been in operation since 1965. Last month, John had mentioned a proposal to build a new animation studio. The build would cost $4,910,000 with an estimated life of 20 years and no salvage value and would allow Entertainment to start producing animated movies. Animated movies were projected to bring in an additional $1,210,000 in revenues each year, but would increase annual production costs by $574,000. John had dropped in to let Kersten know he had decided not to move forward with the animation studio. This surprised Kersten - her quick mental calculation indicated that the studio would have a payback period of 8 years, much shorter than the expected life of the studio. Not entirely sure that her quick assessment was valid, Kersten needed to check with her accountant on the matter. Next to Kersten's door was the manager of Streaming, which produces short-form (30 minute to one hour) episodes in addition to streaming the movies developed by Entertainment. Customers then buy subscriptions to the service. Run by division manager Reyna Imanah, Streaming was introduced in 2016 and has increased subscriptions by 20% every year since. Reyna's complaint was that, based on the current bonus payout schedule, John Freeman's bonus last year was significantly higher than hers. She points to the increasing subscription rates at Streaming, and says that her division is being punished for having opened so recently (her division's facilities are much more recent than those in Entertainment). She currently has an employment offer from another company at the same base pay rate, and stated that she will accept this offer unless she feels her performance is being appropriately acknowledged and compensated. Kersten needs to look at the relative performance across divisions to determine how to proceed with Reyna. Pleasanton Parks is a theme park based on the movies from Entertainment and the series from Streaming. For many years, it was a popular year-round destination, with characters, rides, and a hotel. This park has lost popularity in recent years, and has been 'in the red' for the past two years. If the park is not profitable this year, you will need to decide whether to permanently close that division. Included in the 'Fixed COGS' for Parks is an annual $1,650,000 mortgage payment on the land and buildings for the park, which would still need to be paid (as a corporate level cost) if the park is closed and that segment is removed from the financial statements. Incidentally, you recently had a conversation with a Marriott Hotels executive, who would like to expand into the area. If you decided to close Parks, you are fairly certain that you could lease the hotel facilities to Marriott for $650,000 annually. A partial report of this year's financial results for Pleasanton Studios can be found in Table 1 below. The 'Selling and admin costs' listed in Table 1 are directly incurred by each division, and are determined at the beginning of each year (that is, they do not change with increased/decreased production). In addition to the divisional information above, there are $2,000,000 in corporate costs that are currently allocated evenly between the three divisions. These costs are primarily due to employee benefits costs, which are billed at the corporate level. If the Parks division is closed, the decreased employee base would reduce allocated corporate costs by $500,000. Pleasanton Studios has a cost of capital of 12 percent (and Kersten uses the cost of capital as their required rate of return) and are subject to 32% income taxes. Before she can make any decisions, Kersten needs to evaluate this year's performance results. She sets off to see you, the company's accountant, for answers.

Table 1: Pleasanton Studios current year data Experience Streaming Parks Revenues $54,583,520 $30,184,570 $7,564,270 Fixed COGS $3,356,850 $4,074,530 $3,159,430 Variable COGS $40,257,310 $22,020,695 $3,698,928 # of customers 15,264,200 1,420,060 30,240 # of employees 11,562 1,954 1,378 Average net operating assets $29,014,000 $19,252,000 $420,000 Selling and admin costs $3,259,520 $944,620 $231,900  

b. Evaluate Entertainment's decision not to invest in the new animation studio (i.e., was the decision appropriate and in the best interests of Pleasanton Studios), including the appropriate financial analyses to support your evaluation. c. Evaluate the validity of Reyna Imanah's complaint regarding her evaluated performance. Explain why it is (or is not valid), and what further information would be necessary. d. Provide a recommendation on whether to close the Parks division, including all necessary financial analyses.