Question 4

Consider the market for potatoes. You can assume perfect competition.

It is known that the market equilibrium price is $3 per kg and the market equilibrium quantity is 100,000 kg. It is known that when the price is $3 price elasticity of demand is 0.4 and price elasticity of supply is 1.1.   Assume that initially the market for potatoes is in equilibrium.

1. Draw a diagram with (downward-sloping) demand and (upward-sloping) supply schedules. Indicate the market equilibrium, consumer surplus, producer surplus and the dead-weight loss. (Remember the relation between elasticity and the absolute slope of the demand and supply schedules. You do not have to be precise, just make sure it is clear which schedule is steeper).

You answer.

2. If the price increases by 5% what would be the percentage change of quantity demanded? What would be the new quantity demanded? If the price increases from $3 to $3.03 what would be the new quantity producers would be willing to supply?

You answer.

3. The government decides to introduce a 10% tax on the price of potatoes. How would such a decision affect the equilibrium price (paid by consumers) and the equilibrium quantity? Explain using a clearly labelled graph. (Note that you are not required to calculate anything in this question.)

You answer.

4. What would happen to consumer surplus, producer surplus, government revenue and the dead-weight loss when the 10% tax on the price of potatoes is implemented. Explain.   Show the new consumer surplus, producer surplus, government revenue and the dead-weight loss on the graph in part c). Who bears higher tax burden, consumers or producers? Explain.

You answer.

Answer T or F

1. The ending merchandise inventory for 2005 is the as the beginning merchandise inventory or 2006.
2. In a multi-step income statement the dollar amount for income from operations is always the same as net income.
3. Net sales are equal to sales minus cost of merchandise sold.
4. Gross profit minus selling expenses equals net income.
5. The form on the balance sheet in which asserts, liabilities, and owner’s equity are presented in a downward sequence is called the report form.
6. On the income statement in the single-step form, the total of all expenses is deducted from the total of all revenues.
7. The single-step income statement is easier to prepare, but a criticism of this format is that gross profit and income from operations are nor readily available.
8. Income that cannot be associated definitely with operations, such as gains from the sale of a fixed asset, is listed as Other Income on the multi-step income statement.
9. Under the perpetual inventory system, when a sale is made, both the retail and cost values are recorded.
10. Under perpetual inventory system, the cost of merchandise sold is recorded when sales are made.
11. If payment is due by the end of the month in which sale is made, the invoice terms are expressed as n/30.
12. When merchandise that was sold is returned, a credit to sales returns and allowances is made.
13. In perpetual inventory system, when merchandise is returned to the seller, Cost of Merchandise Sold is one to the accounts debited to record the transaction.
14. Sales return is a contra-revenue account.
15. Sales Discounts is a revenue account with a credit balance.
16. Sales to customers who use bank credit cards, such as MasterCard and Visa, are generally treated as credit sales.

Key objective: exemplifying the limitations of the power of oligopoly due to short-term and long-term elasticities.

Setting: Imagine you are representing one of the members of the OPEC, and you are motivated by an increase of your revenue from the sale of crude oil. You have to compromise on current decision on possible output decrease as to stimulate the world price of gas. Please consider the historical relation of the reaction of the gas price at the pump to the world price of the crude oil per barrel. Please resort to the NYU STERN case on The Petroleum Market: 1970 – 2000 (via link provided below the assignment), but most of all to the research on the following issues in the summer of 2008 in the US and now, and the political debate on the energy crisis, environmental protection and renewable sources of energy.  

Instruction: As usually, please complete the assignment discussing the relevant economics concepts and applying economic tools with supporting data for problem solving in this real-life imitating simulation, and include also a memo summarizing the points of agreement to be reached and followed by OPEC unanimously, and with the compliance in the forthcoming months.

Outline: Include in the discussion the following issues with data, as the basis for your common decision to be made:

•      demand patterns for crude oil in the World

•      the price elasticity of demand for gas in the US

•      the factors influencing the price elasticity of demand for gas in the US, and possible changes in this respect (behavioral patterns)

•      the impact of price changes (on different price levels) on the revenue of crude oil exporters

•      the income elasticity of demand for gas

•      the price elasticity of supply of gas

•      the effect on the market outcome, on the market equilibrium, and on the efficiency of the market

•      the effect on the international trade, state policies, and on the economy.

Consider the world oil market, in which a cartel (OPEC) and a competitive fringe (rest of the world) are operating. Suppose that global oil demand and the supply of the competitive fringe are given by the following functions:

Qw=80-P

Qf=-60+p

suppose the cartel is comprised of 2 countries, let each countries marginal cost function be as follows:

MC1=5+2Q2

MC2=5+2Q2

1. Derive the marginal cost function (?C?) of the cartel. (2 pt)

2. Calculate the price at which the competitive fringe would be driven out of the

market (?1) and the price at which the cartel would be driven out of the market

(?2). (2 pt)

c. Due to the presence of the competitive fringe in the market, there will be a kink

point in the demand curve of the cartel. Calculate the price (?) and quantity (?) at

which this kink occurs. (2 pt)

d. Derive the demand function of the cartel to the left of the kink point quantity (i.e.,

for ?? ≤ ??�) and to right of the kink point (i.e., ?? ≥ ?). (2 pt) ????

e. Using the inverse demand function of the cartel, derive the corresponding marginal revenue function to the left of the kink point and to the right of the kink point. (2 pt)

f. Using the inverse demand and marginal revenue functions that you obtained in parts d. and e., calculate the cartel’s output (?? ) and the price charged per unit of output (??). ?? (2 pt)

7. Calculate the output of the fringe (?f ) at this price, along with the total output (?? + ?? ) supplied in the global oil market. (2 pt)

8. Calculate the output of each of the two members of the cartel; Q1 and Q2

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 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 62 students enrolled in those two courses. Data concerning the company’s cost formulas appear below:

For example, administrative expenses should be $3,800 per month plus $43 per course plus $6 per student. The company’s sales should average $900 per student.

The company planned to run four courses with a total of 62 students; however, it actually ran four courses with a total of only 54 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.)

One of the audit clients Airtel has presented the income statement below to the audit firm Earnest and Young where you work as an assistant auditor.

Airtel Income Statement for the year ended December 31, 2018                                   ZMK

Revenue                                                                                                                          1,392,000

Cost of goods sold                                                                                                              680,480

Gross profit                                                                                                                         711,520

Distribution Administration expenses                                                                                367,200

Profit from Operation                                                                                                         344,320

Other income

Gain on sale of equipment                                                                                                   56,000

Income before taxes                                                                                                           400,320

Income taxes                                                                                                                      118,400

Net income                                                                                                                         281,920

The audit partner has decided that 5% income before taxes benchmark is appropriate for overall materiality and tolerable misstatement has been estimated to be 60% of overall materiality.

Required

a) Explain what overall materiality is and state some factors that the partner would have considered in deciding the 5 percent benchmark

b) Explain what tolerable misstatement is and state some factors that the partner would have considered in deciding the 60 percent benchmark.

c). Calculate the overall materiality, and tolerable misstatement.

d). During the course of the audit, the auditors discover that the revenue account has an invoice which was misstated by K8,200 explain the action that the auditors will take

e) Further, the auditors discover that in the distribution and Administration expenses account some invoices have been misstated by K17, 500.Explain the action that the auditors will take

f) Taking into account the two errors in (d) and (e) above, state the recommendations and explain the final decision that the auditor will make

Washington County’s Board of Representatives is considering the construction of a longer runway at the county airport. Currently, the airport can handle only private aircraft and small commuter jets. A new, long runway would enable the airport to handle the midsize jets used on many domestic flights. Data pertinent to the board’s decision appear below.

In addition to the preceding data, two other facts are relevant to the decision. First, a longer runway will require a new snowplow, which will cost $165,000. The old snowplow could be sold now for $16,500. The new, larger plow will cost $14,000 more in annual operating costs. Second, the County Board of Representatives believes that the proposed long runway, and the major jet service it will bring to the county, will increase economic activity in the community. The board projects that the increased economic activity will result in $72,000 per year in additional tax revenue for the county.

In analyzing the runway proposal, the board has decided to use a 10-year time horizon. The county’s hurdle rate for capital projects is 11 percent.

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

1. 1. Prepare a net-present-value analysis of the proposed long runway.

Badlands, Inc. manufactures a household fan that sells for $20 per unit. All sales are on account, with 45 percent of sales collected in the month of sale and 55 percent collected in the following month. The data that follow were extracted from the company’s accounting records.

• Badlands maintains a minimum cash balance of $30,000. Total payments in January 20x1 are budgeted at $205,000.
• A schedule of cash collections for January and February of 20x1 revealed the following receipts for the period:

  	Cash Receipts
  	January			February
  From December 31 accounts receivable	$	110,000
  From January sales		96,000		$	154,000
  From February sales					64,800

• March 20x1 sales are expected to total 11,000 units.
• Finished-goods inventories are maintained at 20 percent of the following month’s sales.
• The December 31, 20x0, balance sheet revealed the following selected figures: cash, $24,500; accounts receivable, $110,000; and finished goods, $25,350.

Required:

1. Determine the number of units that Badlands sold in December 20x0.

2. Compute the sales revenue for March 20x1.

3. Compute the total sales revenue to be reported on Badlands’ budgeted income statement for the first quarter of 20x1.

4. Determine the accounts receivable balance to be reported on the March 31, 20x1, budgeted balance sheet.

5. Calculate the number of units in the December 31, 20x0, finished-goods inventory.

6. Calculate the number of units of finished goods to be manufactured in January 20x1.

7. Calculate the financing required in January, if any, to maintain the firm’s minimum cash balance.

Lavage Rapide is a Canadian company that owns and operates a large automatic carwash facility near Montreal. The following table provides data concerning the company’s costs:

For example, electricity costs are $1,100 per month plus $0.07 per car washed. The company expected to wash 8,200 cars in August and to collect an average of $6.60 per car washed. The company actually washed 8,300 cars.

The actual operating results for August appear below.

Required:

Compute the company's activity variances for August. (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.)