Applehead Technology is a company that purchases a device called the EyePod from a supplier and then sells the devices to retail customers. If the company makes no changes in its operations, the company expects the following for the coming year.

# of units sold                                                              30,000

Price                                                                           $300 per unit

Cost of merchandise                                                 $100 per unit                       

Rent and Salaries for the year                                 $1,300,000

The company is holding a meeting to discuss ways to increase its profit – that is the company’s goal. At that meeting, Maria Garcia, the marketing manager, says “If we make the changes I suggest, I think we can attract more customers and increase our share of the market. Currently, our customers pay for shipping. Market research says customers hate shipping charges, so rather than having customers pay it, we should pay it. Shipping would cost us $3 per unit. Market research also shows that our prices are not competitive. So, we should lower our price to $270. If we take these actions, I estimate we will increase the number of units sold to 32,000.”

1. On the spreadsheet provided labeled “For Problem 3a”, prepare the contribution margin income statements to analyze each of the 2 possibilities for the coming year, namely
   1. Applehead makes no changes
   2.    Applehead adopts Garcia’s proposal

Answer the following questions on the separate answer sheet labeled “For Problem 3b, c, d, e”:

2. Mr. Big, the CEO of the company says to Maria “Clearly your suggestion is a good one. Based on your estimates, we will see an additional 2,000 units. Let’ do it!” How would you answer Mr. Big?
3. Assume Maria’s suggestions are NOT implemented. What is the breakeven point for Applehead? (Can be in $ or in units – your choice.) Show all work.
4. Calculate Applehead’s margin of safety. You can measure it in units or dollars or as a % of sales (your choice, but you only need to compute one of those). In making your margin of safety computation, assume Maria’s suggestions are NOT implemented and that the company sells the 30,000 units. Show all work.
5. Explain briefly what margin of safety tells the company – what is the meaning of the number you computed?

North State Manufacturing is considering a contract for a project to supply Detroit Automotive Solutions with 30,000
tons of machine screws annually for automobile production. North State Manufacturing will need an initial $4,500,000
investment in threading equipment to get the project started; the project will last for six years. The accounting
department estimates that annual fixed costs will be $925,000 and that variable costs should be $280 per ton;
accounting will depreciate the initial fixed asset investment straight-line to zero over the six-year project life. It also
estimates a salvage value of $500,000 after dismantling costs. The initial investment and salvage value are accurate
within +/- 8% of the initial projections. The marketing department estimates that the automakers will approve the
contract at a selling price of $400 per ton. The engineering department estimates that North State Manufacturing will
need an initial net working capital investment of $500,000, but management expects to recover their net working
capital in the terminal year of the project. Consider, the units produced, sales price, variable costs, and fixed costs to
be accurate within +/- 10% of the projections. Also consider, that the North State Manufacturing is offered a similar
contract with Automoville, Inc. that has an expected net present value of $850,000, a payback period of 4.2 years, and
IRR of 25%, but it comes with a non-compete clause that will not allow you to pursue the contract with Detroit
Automotive Solutions. North State Manufacturing requires a return of 13.75 percent and face a marginal tax rate of
30 percent on this project. You are a Financial Analyst in the Corporate Finance Division and have been tasked by
North State Manufacturing’s VP-Capital Projects, Cynthia Barlow, to evaluate this project. The VP would like to
know the following in an executive summary:
What is the base case scenario NPV of the Detroit Automotive Solutions contract? What is the IRR for the base-case
scenario? What is the payback period for the base-case scenario of the Detroit Contract?
What is the sensitivity of the project NPV to changes in the quantity supplied ΔNPV/ΔQ?
What is the sensitivity of the project NPV to changes in the variable costs ΔNPV/ΔVC?
What is the sensitivity of the project NPV to changes in the fixed costs ΔNPV/ΔFC?
Which of these items have the greatest impact on the project’s NPV?

Reporting and Analyzing Derivatives
Assume Johnson & Johnson reports the following schedule of other comprehensive income in its 2011 10-K report ($ millions):

b. How does Johnson & Johnson report its derivatives as cash-flow hedges on its balance sheet?

Cash-flow hedges are reported at Answerfair valuecost on the balance sheet.

Changes in value are recognized on the Answerbalance sheet in AOCIincome statement as earningsnot applicable

c. By what amount have the unrealized gains/losses on the cash flow hedges affected current income?

Current income AnswerincreaseddecreasedN/A by $Answer million.

d. What does the $188 million classified as "Net amount reclassed to net earnings" relate to? How has this affected Johnson & Johnson's profit?

a) The unrealized gain has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by a decrease in net income (and in retained earnings).

b) The unrealized loss has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by a decrease in net income (and in retained earnings).

c) The unrealized gain has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by an increase in net income (and in retained earnings).

d) The unrealized loss has been reclassified from AOCI and recognized in current earnings relating to derivatives for which the underlying transaction concluded in the current year. This increase in AOCI is offset by an increase in net income (and in retained earnings).

Terry’s auditors have approached the management team with their concern that Terry has not been properly recording deferred taxes. In particular, they are concerned that Terry is simply recognizing 25% as the company’s income tax expense. They have asked the company to make a thorough review of the company’s tax liability utilizing the services of professional tax accountants. The review revealed three book/tax differences in Terry’s financial information: The review revealed three book/tax differences in Terry’s financial information:

1.Terry’s management opened a new life insurance policy this year on the CEO. The premium for this new policy is $917/month. The policy cannot be prepaid.

2. Up through Year 2, Terry had no book/tax differences for amortization and depreciation. This happens when companies use the MACRS tables for determining their depreciation and amortization expenses for both GAAP and tax purposes, a common practice among small companies (like Terry). However, in Year 3, Terry decided to switch to the straight-line depreciation method for GAAP purposes. Since this is a change in estimate, it did not require any special changes to Terry’s GAAP accounting, but it does create a difference for tax purposes. A summary of the book/tax differences will be provided by the instructor after we have completed Terry #3. In addition, the experts feel that Terry’s tax rate will change to 24% in Year 5 and to 23% in Years 6 & 7 due to new tax laws passed and signed into law during Year 3.

CALCULATIONS 1. Make the appropriate journal entry to correctly record income tax expense for Year 3.

1st row for GAAP

2nd row for Tax

Critical Thinking

5. What do you think investors’ reaction will be to the adjustment for deferred taxes (if any)? In other words, based on your changes to the financial statements and the change in the ratios, do you think investors will be happy with these changes? Why or why not?

6. Who might be affected by Terry’s decision not to recognize deferred taxes appropriately in past years? How could this decision affect each individual or group?

Sailing Voyages Inc. is a company operated by an individual as a summer tourist attraction on the Great Lakes. It operates a sailing schooner offering day cruises for individuals and groups. Over the last few years, the average number of tourists per cruise was 30. The average charge per person for the cruise including group discounts was $100. The company operates from mid-May until mid-September. On average, the ship sails 100 days during this period. ‘The Canadian’ (the name of the schooner) requires a crew of 6, and is captained by the owner of the company. University students with extensive sailing experience have been willing to work on a per diem basis of $100. They are paid only if the ship is cruising. The ship provides non-alcoholic refreshments and a light lunch. These are acquired daily from a local delicatessen and cost, on average, $25 per person. The daily operating expenses fuel and miscellaneous supplies average $50 per cruise. The company has a variety of annual expenses including: maintenance, depreciation, marketing, licenses, etc., totaling approximately $85,000. Required: Prepare an Excel Workbook to answer the following questions in a professional manner. Ensure that you are utilizing Excel features (including links between spreadsheets, formulas, formatting, graphing).

1. Compute the revenue and variable costs for each cruise. Use this to compute the contribution margin per cruise.

2. Compute the number of cruises that ‘Canadian’ must have each year to break-even. Use your knowledge gained in this course to show the different formulas, graphs etc for break-even analysis.

3. The owner expects a total return on capital and remuneration of $125,000. Using the concept of ‘contribution margin’, cost-volume-profit, and target profit calculations, estimate how many cruises the Canadian needs to make to reach this objective. Is this a realistic expectation? Add your thoughts, proposals, and recommendations.

4. Prepare a contribution margin income statement for Sailing Voyages Inc. If the owner wishes to adjust or achieve his income goal, what changes can he make? How can these changes be easily estimated and projected to show how these changes affect net income. Use your imagination, and your knowledge of cost-volume-profit analysis. Highlight your ideas by utilizing the various graphing tools in Excel.

Sex Education and Teenage Pregnancy

Santrock (2016) mentions in his text that the United States has one of the highest teenage pregnancy rates of industrialized nations, despite the fact that adolescent sexual activity is no higher in the United States. Why is that? For starters, sex during adolescence is considered a "taboo" subject in our culture. Abstinence is also promoted and touted as the most safest, surefire way to avoid the consequences of early sexual activity. Additionally, we teach teens that sexual activity is an "adult activity" and do not acknowledge that during the adolescent period, when there is an upsurge of hormones and changes in the physiological landscape, teens grow curious about their bodies and that of the opposite sex. Teens are also at a stage in their life where experimentation and identify formation are at its "peak", and questioning, expressing, and exploring their sexual identity is part of that process.

How many people did you know in high school knew what sex was and even had sex? Probably the majority. That is because sexual curiosity during adolescence is part of healthy, typical human development.

What is sex education?

Briefly, sex education is about instilling accurate, scientific-based information and spreading awareness about the following:

1. The physiological changes that occur in the body due to pubertal/hormonal changes.

2. The risks and consequences involved in sexual activity such as contracting sexually transmitted diseases or pregnancy.

3. It involves teaching youngsters how to set boundaries with others when it comes to their own body and other people's bodies (i.e."No means NO!").

4. Contraception options-how to be "sex smart" such as the benefits of using protection.

5. A discussion about knowing when they are "ready" to have sex.

6. Define rape and sexual assault and how to know if you are about to be a victim.

Put it in Perspective...

Answer the Following Discussion Questions:

1. What was your experience with 'sex education'? Did you take a class in school? Did you learn from your caregivers? Include points that you remember learning. And how has that served you as a teenager?

2. According to the film "Inside the Teenage Brain" and your textbook readings, what are some effective ways to approach a conversation with teenagers about 'safe sex'?

As a star ages, it will undergo a variety of changes. One of the last phases of a large star's life is to gravitationally collapse its mass into a black hole of the same mass. Assuming the Sun was capable of becoming a black hole (it isn't), was would happen to the orbits of planets in our solar system if it becomes a black hole.

(Of course, this assumes that the planets are unaffected by prior stages of the Sun's evolving stages and that the Sun retains all of it's mass)

explain your answer.

Select one:

a. The orbits stay the same, but everything would be pulled closer to the Sun.

b. The orbits of the small planets would be sucked closer to the Sun, but the large planets would be unaffected.

c. The orbits of the small planets would be unaffected, but the large planets would be flung off into outer space.

d. The orbits would change, but the planets would remain in orbit around the Sun.

e. The orbits would remain the same, nothing would happen.

f. The orbits would change and the planets would be flung off into outer space.

2)

State the Reaction force for each.

a) A person pushes on a wall and exerts a force of 25 N [N]

b) A 2545 kg car is placed on a level surface.

3) Your car has a mass of 2400 kg.What is its weight?

4)Calculate the force between a 40.0 kg ballerina and the earth. (The mass of the earth is 5.98 x 10²⁴kg and the radius of the earth is 6.38 x 10⁶m)

5)Mars (mass of 6.39 x 10²³kg) orbits the Sun (mass of 1.99 x 10³⁰kg) at a distance of 227.9 million km. At what speed does Mars orbit the Sun?

Problem 5-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO5-4, LO5-5, LO5-7, LO5-8]

Morton Company’s contribution format income statement for last month is given below:

The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

Required:

1. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $7.50 per unit. However, fixed expenses would increase to a total of $580,500 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased.

2. Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage.

3. Refer again to the data in (1). As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that enough funds are available to make the purchase.)

4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company’s new monthly fixed expenses would be $411,725; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.

Problem 5-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO5-4, LO5-5, LO5-7, LO5-8]

Morton Company’s contribution format income statement for last month is given below:

The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

Required:

1. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $6.90 per unit. However, fixed expenses would increase to a total of $534,060 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased.

2. Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage.

3. Refer again to the data in (1). As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that enough funds are available to make the purchase.)

4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company’s new monthly fixed expenses would be $378,787; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.

Problem 5-29 Changes in Cost Structure; Break-Even Analysis; Operating Leverage; Margin of Safety [LO5-4, LO5-5, LO5-7, LO5-8]

Morton Company’s contribution format income statement for last month is given below:

The industry in which Morton Company operates is quite sensitive to cyclical movements in the economy. Thus, profits vary considerably from year to year according to general economic conditions. The company has a large amount of unused capacity and is studying ways of improving profits.

Required:

1. New equipment has come onto the market that would allow Morton Company to automate a portion of its operations. Variable expenses would be reduced by $8.10 per unit. However, fixed expenses would increase to a total of $714,420 each month. Prepare two contribution format income statements, one showing present operations and one showing how operations would appear if the new equipment is purchased.

2. Refer to the income statements in (1). For the present operations and the proposed new operations, compute (a) the degree of operating leverage, (b) the break-even point in dollar sales, and (c) the margin of safety in dollars and the margin of safety percentage.

3. Refer again to the data in (1). As a manager, what factor would be paramount in your mind in deciding whether to purchase the new equipment? (Assume that enough funds are available to make the purchase.)

4. Refer to the original data. Rather than purchase new equipment, the marketing manager argues that the company’s marketing strategy should be changed. Rather than pay sales commissions, which are currently included in variable expenses, the company would pay salespersons fixed salaries and would invest heavily in advertising. The marketing manager claims this new approach would increase unit sales by 30% without any change in selling price; the company’s new monthly fixed expenses would be $506,709; and its net operating income would increase by 20%. Compute the company's break-even point in dollar sales under the new marketing strategy.