Questions

1. Explain why decreases in income tax, savings and import spending all increase aggregate demand.

2. How does a change in the interest rate influence the aggregate demand curve?

3. If the value of the Canadian dollar decreases, what is the likely impact on aggregate demand?

4. Why is a shift of the aggregate supply curve to the right like an outward shift of the production possibilities curve?

State whether the following represent an injection into the circular flow of income or a withdrawal from it. You have to assume that “other things remain unchanged” (ceteris paribus)

a)         a cut in taxes
b)         BAe Systems (a defence contractor) receives a large order from abroad
c)         central government spending on higher education is cut
d)         retirement pensions are increased

Which of the following is an example of crowding out?

a. An increase in taxes increases interest rates, causing investment to fall.

b. A decrease in private savings increases interest rates, causing investment to fall.

c. An increase in government spending increases interest rates, causing investment to fall.

d. A decrease in the money supply increases interest rates, causing investment to fall.

In 2017, Congress enacted a bill that 1) reduced the corporate tax rate from 35% to 21% and 2) allowed the immediate write-off of capital spending. 3) disallowed the expensing of interest paid on debt. Discuss at a high level, how each of these changes will likely affect your valuations. (e.g. stock price, P/E ratio, ROR, WACC).

Lehighton Chalk Company manufactures sidewalk chalk, which it sells online by the box at $25 per unit. Lehighton uses an actual costing system, which means that the actual costs of direct material, direct labor, and manufacturing overhead are entered into work-in-process inventory. The actual application rate for manufacturing overhead is computed each year; actual manufacturing overhead is divided by actual production (in units) to compute the application rate. Information for Lehighton’s first two years of operation is as follows:

Selected information from Lehighton’s year-end balance sheets for its first two years of operation is as follows:

Required:

Lehighton Chalk Company had no beginning or ending work-in-process inventories for either year.

Prepare operating income statements for both years based on absorption costing.

Prepare operating income statements for both years based on variable costing.

Prepare a numerical reconciliation of the difference in income reported under the two costing methods used in requirements (1) and (2).

In October 2017, Nicole of Nicole’s Getaway Spa (NGS) eliminated all existing inventory of cosmetic items. The trouble of ordering and tracking each product line had exceeded the profits earned. In December, a supplier asked her to sell a prepackaged spa kit. Feeling she could manage a single product line, Nicole agreed. NGS would make monthly purchases from the supplier at a cost that included production costs and a transportation charge. The spa would use a perpetual inventory system to keep track of its new inventory.
  
    On December 30, 2017, NGS purchased ten units at a total cost of $7.00 per unit. NGS purchased thirty more units at $9.00 in February 2018, but returned five defective units to the supplier. In March, NGS purchased fifteen units at $11.00 per unit. In May, fifty units were purchased at $11.00 per unit; however, NGS took advantage of a 2.00/10, n/30 discount from the supplier. In June, NGS sold fifty units at a selling price of $12.90 per unit and thirty-five units at $10.90 per unit.


Required:
1. State whether the transportation cost included in each purchase should be recorded as a cost of the inventory or immediately expensed.

• Immediately expensed

• Inventory cost

2. Compute the Cost of Goods Available for Sale, Cost of Goods Sold, and Cost of Ending Inventory using the first-in, first-out (FIFO) method. (Do not round intermediate calculations. Round final answers to the nearest dollar amount.)

3-a. Calculate the inventory turnover ratio, using the inventory on hand at December 31, 2017, as the beginning inventory. (Round your answer to 1 decimal place.)

I will not give credit for any unsupported answer -- even if it is correct!!. All cash flows are end-of-period unless otherwise stated .

Problems 1 and 2 relate to this information :

The current monthly income statement for JRT, Inc., represents the results of selling 8,000 coffee mugs: Sales (revenue) $56,000 Cost of goods sold (33,000) Gross margin $23,000 S & A expenses (16,000) Income before taxes $ 7,000 Income taxes (@ 30%) (2,100) Net income $ 4,900 Cost of goods sold included fixed manufacturing costs of $5,000, while selling and administrative expenses (“S & A expenses”) included $4,000 of fixed costs. Sales commissions amounting to $0.40 per coffee mug were also included in S & A expenses.

1. How many coffee mugs would JRT need to sell to earn a monthly net income of $7,000?

2. JRT received a special order for 3,000 coffee mugs from the Lyric Opera of Chicago (Lyric). JRT would not have to pay a sales commission on these mugs, but would have to place a special “Lyric” design on each mug at a cost of $0.50 per mug. In addition, the fixed cost of setting up this order would amount to $1,900. If the Lyric agreed to pay only $6.00 per mug, what would be the effect on JRT’s monthly net income if they accepted this order?

3. You are considering purchasing a fifteen-year annuity that offers annual payments of $9,000 with the first payment occurring one year from today. You expect that interest rates will be 5% per annum for the first five-year period, 6.5% per year for the second five-year period, and 8% for the third five-year period. What is the most that you would pay for this investment today, i.e., its present value?

4. You just sold a piece of property. The buyer offers you a choice between accepting $100,000 immediately followed by payments of $50,000 at the end of each year for fifteen years (#1). Alternatively, you could receive $150,000 now and payments of only $43,500 annually for fifteen years ( #2).

a. Which alternative would you prefer a. if your required rate of return is eight percent?

b. If your required rate of return is thirteen percent?

c. At what required rate of return would these two investments have the same present value?

5. You plan on retiring forty years after you begin your first job and wish to have $2,500,000 at retirement. You intend to make your first payment at the end of your first year on the job and then increase your payments by 3 percent annually thereafter. If you invest in a fund paying an annual percentage rate (APR) of six percent, compounded semiannually, what is the amount of the first payment necessary to reach your objective ?

6. Fast forward: You have just retired and reached your objective (see above) of accumulating $2,500,000 in your retirement fund. You expect to live for another thirty years (exactly) and wish to leave $1,000,000 to Illinois Tech when you are gone. What is the most that you could withdraw from this fund at the end of each month and still leave the money to Tech? The fund is expected to return eight per annum, compounded monthly?

7. You have been following a company, AmazingDotCom, Inc., that is about to go public this afternoon. You believe that the company will not pay any dividends for the first eight years of its operations. At the end of the ninth year, you foresee receiving $1 per share as a dividend. You forecast that the tenth year’s dividend will be $1.75 per share and after that dividends will grow at an annual rate of 2-1/2 percent forever. What would you pay for a share of this stock today if you wished to earn twenty percent per annum on your investment?

8. On June 30, 2018, you closed on your new condominium and obtained a $250,000 thirty year mortgage at an APR of 4.32%. The first monthly payment was due at that time (June 30, 2018), and then on the last day of each month thereafter (this is an “annuity in advance” or an “annuity due”).

a. What was the amount of your required monthly payment?

b. Assuming that you made all payments exactly when due, how much interest would you have paid on the mortgage in the year ending December 31, 2018?

c. How much interest would you pay in 2019 if you made all of your scheduled payments exactly when due?

d. If the interest rate were to increase to 4.62% after sixty payments, what would be the amount of your new monthly payment? (the life of the mortgage would be unchanged).

9. You are working on your income taxes and want to figure your mortgage interest deduction for the previous year. Unfortunately someone inadvertently ran your mortgage documents through a shredder. You were able to discover fragments of the amortization schedule that showed elements from a row from that schedule:

Payment# =100

Amount = $1,932.90

Interest = ???

Principal = $709.30

Balance = $244,010.90

a. Determine the APR of this mortgage (two three decimal places);

b. Determine the original amount of the mortgage;

c. Determine the original term (length) of the mortgage; d. Complete the following row of the mortgage’s amortization schedule:

Payment # = 200

Amount = ??

Interest = ??

Principal = ??

Balance = ??

10. You are considering lending some money to a company that offers to make semiannual payments of $4,000 to you for thirty years and then pay you $100,000 at the end of the thirtieth year. How much would you lend to this company if

a. you required an APR of ten percent compounded semiannually?

b. you required an APR of six percent compounded semiannually?

c. you required an APR of eight percent compounded semiannually?

Calgary Paper Company produces paper for photocopiers. The company has developed standard overhead rates based on a monthly capacity of 80,000 direct-labor hours as follows:

During April, 35,000 units were scheduled for production: however, only 29,000 units were actually produced. The following data relate to April.

Actual direct-labor cost incurred was $1,869,000 for 89,000 actual hours of work.

Actual overhead incurred totaled $1,390,100, of which $525,100 was variable and $865,000 was fixed.

Required:

Prepare two exhibits similar to Exhibit 11-6 and Exhibit 11-8, which show the following variances. State whether each variance is favorable or unfavorable, where appropriate.

Variable-overhead spending variance.

Variable-overhead efficiency variance.

Fixed-overhead budget variance.

Fixed-overhead volume variance.

Variable-Overhead Spending and Efficiency Variances. (Select "None" and enter "0" for no effect (i.e., zero variance). Round "Actual Rate" and "Standard Rate" to 2 decimal places.)

1. Suppose commercial banks borrow from Federal Reserve Banks at the discount rate. What is the impact of this transaction on commercial bank reserves?

a. Commercial bank reserves will increase.

b. Commercial bank reserves will decrease.

c. Commercial banks reserves will be unchanged.

2. Suppose the Fed reduces the reserve ratio. What impact will this transaction have on commercial bank reserves?

a. Commercial bank reserves will increase.

b. Commercial bank reserves will decrease.

c. Commercial bank reserves will be unchanged.

3. Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes in the reserve ratio should you recommend?

a. I should recommend increasing the reserve ratio to reduce lending and reduce spending.

b. I should recommend decreasing the reserve ratio to increase lending and increase spending.

4. Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes in the discount rate should you recommend?

a. I should recommend increasing the discount rate to reduce lending to reduce spending.and demand-pull inflation.

b. I should recommend decreasing the discount rate to increase lending and increase spending real GDP.

c. I should recommend making no change to the discount rate as it does not affect borrowing or spending.

5. Suppose that you are a member of the Board of Governors of the Federal Reserve System. The economy is experiencing a sharp and prolonged inflationary trend. What changes in open market operations should you recommend?

a. I should recommend open market sales to reduce the money supply and reduce demand-pull inflation.

b. I should recommend open market purchases to increase the money supply to increase real GDP.

c. I should recommend open market sales to increase the money supply to increase real GDP.

d. I should recommend no change in open market operations.

6. The liquidity trap occurs when

a. The reserve ratio is increased and borrowing must be reduced.

b. Increased money supply or reduced interest rates fail to encourage increased demand.

c. People decide to hold more of their personal financial assets in cash instead of as checkable deposits.

d. Monetary policy fails to reduce inflation.

1. August Street, Inc. wants to have $7,500,000 in an account exactly 16 years from today. They will make equal quarterly payments of $50,000 beginning next quarter and ending in 16 years. The account earns 8.00% p.a., compounded quarterly. August Street must have $_______ in its account today.