Assume that a bus company increased costs and fears that it will make a loss. What should it do, if to rise the fares may be a wrong policy.
To help it decide what to do it commissions a survey to estimate passenger demand at three different fares: the current face of 10c per km, a higher fare of 12c per km, and a lower fare of 8c. The results of the survey are shown in the first two columns:

Demand turns to be elastic. TR can be increased by reducing the price from current 10 to 8$.

What will happen to the company profits? Its profit is the difference between the total revenue from passengers and its total costs of operating the service. If buses are currently under-utilised , then is possible that the extra passengers can be carried without the need for extra buses with no extra cost..

At the fare of 10c , old profit was 40000. After the rase, a 10c now gives a loss of 40.000$. By raising the fare to 12c- loss increased to 80000$.

Questions:

1) Estimate the price elasticity of demand between 8c and 10c and between 10c and 12c. Show all detailed calculations.

2) 10c fare the best fare originally? Explain your answer detailed.

3) If the company considers lowering the fare to 6c and estimates the demand will be 8.5 million passenger km. What is your opinion, it is good idea? How should it decide?

Additional Information:

i   Rent expires (is used up) at a rate of $700 per month.

ii   Monthly depreciation on equipment is $300.

iii   Interest on the 6 per cent promissory note is paid quarterly on
1 April, 1 July, 1 October and 1 January.

iv   Performed services for which payment was received in April– $800.

v   Received electricity bill to be paid next month – $500.

vi   Services to customers earned during June but unrecorded at 30 June, $2500

. vii   Supplies on hand totaled $1500 at 30 June. viii Owed employees for salaries for the last week of June to be
paid in July – $800

. ix   Prime Realty prepares adjusting entries each quarter adjustments were last made on 31 march

Required
a   Prepare all adjusting journal entries for the quarter ending 30 June.
b   Post journal entries to T-accounts using totals on the unadjusted trial balance as the opening balances

c   Prepare an adjusted trial balance as of 30 June

The Gourmand Cooking School runs short cooking courses at its small campus. Management has identified two cost drivers it uses in its budgeting and performance reports—the number of courses and the total number of students. For example, the school might run two courses in a month and have a total of 61 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

For example, administrative expenses should be $3,600 per month plus $44 per course plus $5 per student. The company’s sales should average $890 per student.

The company planned to run four courses with a total of 61 students; however, it actually ran four courses with a total of only 59 students. The actual operating results for September appear below:

Required:

Prepare a flexible budget performance report that shows both revenue and spending variances and activity variances for September. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Hermosa, Inc., produces one model of mountain bike. Partial information for the company follows:

  
2. Calculate Hermosa’s contribution margin ratio and its total contribution margin at each sales level indicated in the table assuming the company sells each bike for $700. (Round your percentage answers to 2 decimal places. (i.e. .1234 should be entered as 12.34%.))

4. Calculate Hermosa’s break-even point in units and sales revenue. (Round your answers to the nearest whole number.)

Carr Company has the following ledger accounts and adjusted balances as of December 31, 2019. All accounts have normal balances. Carr’s income tax rate is 20%. Carr has 300,000 shares of Common Stock authorized, 100,000 shares of Common Stock issued, and 95,000 shares of Common Stock outstanding.

Accounts Payable……………………………. 58,500

Accounts Receivable………………………… 405,000

Accumulated Depreciation-Building………… 112,500

Accumulated Depreciation-Equipment………. 90,000

Administrative Expenses……………………. 90,000

Allowance for Doubtful Accounts…………… 45,000

Bonds Payable……………………………….. 400,000

Building……………………………………..1,125,000

Cash…………………………………………. 58,500

Common Stock……………………………… 600,000

Cost of Goods Sold…………………………. 855,000

Discount on Bonds Payable………………… 10,000

Dividends…………………………………… 30,000

Equipment…………………………………… 435,000

Income from Operations of Division X…….. 90,000 (Division X is a component of Carr Company)

Interest Revenue…………………………….. 60,000

Inventory……………………………………...630,000

Land (held for future use)...…………………. 450,000

Land (used for building)…………………….. 247,500

Loss from Sale of Division X...........................180,000 (Division X is a component of Carr Company)

Loss on Sale of Investments.……………….. .. 22,500

Mortgage Payable …………..………………. 562,500*

Paid-In Capital in Excess of Par……………...396,000

Prepaid Rent…………………………………. 22,500**

Retained Earnings, January 1, 2019………… 562,500

Sales Discounts………………………………. 45,000

Sales Returns and Allowances……………….. 75,000

Sales Revenue……………………………...2,302,500

Selling Expenses……………………………. 292,500

Trademark…………………………………… 67,500

Treasury Stock………………………………. 60,000

*$40,000 of the principal comes due in 2019.

**Two years rent on offsite document storage paid in advance.  

Instructions: Use this information to prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.

The company is considering the introduction of a new product that is expected to reach sales of $10 million in its first full year and $13 million of sales in the second and third years. Thereafter, annual sales are expected to decline to two-thirds of peak annual sales in the fourth year and one-third of peak sales in the fifth year. No more sales are expected after the fifth year. The CGS is about 60% of the sales revenues in each year. The GS&A expenses are about 23.5% of the sales revenue. Tax on profits is to be paid at a 40% rate. A capital investment of $0.5 million is needed to acquire production equipment. No salvage value is expected at the end of its five-year useful life. This investment is to be fully depreciated on a straight-line basis over five years. In addition, working capital is needed to support the expected sales in an amount equal to 27% of the sales revenue. This working capital investment must be made at the beginning of each year to build up the needed inventory and implement the planned sales program. Furthermore, during the first year of sales activity, a one-time product introductory expense of $200,000 is incurred. Approximately $1.0 million has already been spent promoting and test marketing the new product.

a. Formulate a multiyear income statement to estimate the cash flows throughout its five-year life cycle.

b. Assuming a 20% discount rate, what is the new product’s NPV?

c. Should the company introduce the new product?

1. The entry to record interest expense on a bank loan payable is a

2.Which of the following statements is true?

3.Roofer’s Inc. had an operating line of credit of $100,000 and overdrew its bank balance to result in a negative cash balance of $33,000 at year-end. This would be reported in the statement of financial position as

4.Which of the following statements is true?

PROBLEM ONE The following information pertains to Life Corporation

Month Sales (units) Sales (dollars)

July 1,500 $30,000

August 1,700 34,000

September 1,600 32,000

October 1,700 40,800

November 2,100 54,600

December 2,350 51,700

January 2,300 57,000

February 1,900 51,000

March 1,750 44,000

April 1,600 41,600

May 1,500 30,000

June 1,400 32,200

Of sales, 30% are in cash with the remainder on account.

Accounts Receivable is collected from customers in the following manner:

Month of sale 30%

Month following sale 60%

Second month following sale 10%

Life Corporation desires ending inventory for finished goods to be 30% of next month’s sales.

Each unit requires three pounds of material, each pound costs $2.75. Life Corporation desires ending inventory of raw materials should be 50% of next month’s needs. Materials are purchased on account. Payments are 40% in the month of purchase with the remainder paid in the following month. The previous month’s ending Accounts Payable balance was $11,162. In addition, each unit requires one hour of labor, each labor hour costs $15.

REQUIRED:

1. Prepare a Revenue budget for December, including revenue, cash collections, and accounts receivable.

2. Prepare a Production Budget for December.

3. Prepare a Raw Materials Purchases Budget for December, including cash disbursements.

4. Prepare the Direct Labor Budget including payments.

Your company has spent $250,000 on research to develop a new computer game. The firm is planning to spend $1,400,000 on a machine to produce the new game. Shipping and installation costs for the new machine total $200,000 and these costs will be capitalized and depreciated together with the cost of the machine. The machine will be used for 3 years, has a $200,000 estimated resale value at the end of three years, and will be depreciated straight line over 4 years. Revenue from the new game is expected to be $1,200,000 per year, with costs of $500,000 per year. The firm has a tax rate of 35 percent, a cost of capital (discount rate) of 6 percent, and it expects net working capital (NWC) to increase by $150,000 at the beginning of the project. This investment in NWC will be wholly recouped at the end of the project. . a) Complete the table below. b) In the second table below calculate the Net Present Value (NPV) of the project. c) Calculate the Profitability Index (PI) of the project. d) Is the Internal Rate of Return (IRR) of the project greater than, equal to, or less than the cost of capital (discount rate)? e) Should your company proceed with this project? Explain based on the decision criteria for NPV, PI, and IRR. Year 0 1 2 3 Revenue Costs Depreciation EBIT Taxes Net Income Operating Cash Flow Change in Net Operating Working Capital Change in Gross Fixed Assets Total Free Cash Flow Net Present Value Profitability Index Internal Rate of Return >, =, or < the cost of capital (discount rate)? Proceed with the project? Explain.

McAdams Company had the following inventory cost values for one item of inventory for April:

Available for sale: Units purchased = 4,000; Total cost = $67,600

Sales Activity:

Apr. 19.....1,200 units

Apr. 26.....1,400 units

Units sold = 2,600

Units remaining in EI

Available for sale..........4,000 units

Units sold.....................2,600

Ending inventory in units.....1,400

Instructions

Determine both Ending Inventory (EI) and Cost of Goods Sold (COGS) under each of the following methods and then calculate gross profit under each, assuming that the selling price per unit was $25 for all units sold.

Weighted-average cost per unit = 67,600/4,000 = $16.90

Sales Revenue = 2,600 units sold * 25 = 65,000

Sales revenue - COGS = Gross Profit