Pastina Company manufactures and sells various types of pasta to grocery chains as private label brands. The company’s fiscal year-end is December 31. The unadjusted trial balance as of December 31, 2013, appears below.

May 7, 2015, 3:36 pm

≫ Next: Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

≪ Previous: The Righter Shoe Store Company prepares monthly financial statements for its bank. The November 30 and December 31, 2013, trial balances contained the following account information:

$

0

0

Pastina Company manufactures and sells various types of pasta to grocery chains as private label brands. The company’s fiscal year-end is December 31. The unadjusted trial balance as of December 31, 2013, appears below.

  

Account Title	Debits			Credits
Cash		21,000
Accounts receivable		31,000
Supplies		1,600
Inventory		51,000
Note receivable		11,000
Interest receivable		0
Prepaid rent		2,200
Prepaid insurance		0
Equipment		88,000
Accumulated depreciation—equipment					33,000
Accounts payable					22,000
Wages payable					0
Note payable					41,000
Interest payable					0
Unearned revenue					0
Common stock					51,000
Retained earnings					19,120
Sales revenue					139,000
Interest revenue					0
Cost of goods sold		61,000
Wage expense		18,000
Rent expense		12,100
Depreciation expense		0
Interest expense		0
Supplies expense		1,200
Insurance expense		4,920
Advertising expense		2,100
Totals		305,120			305,120

  

Information necessary to prepare the year-end adjusting entries appears below.

      

1.	Depreciation on the equipment for the year is $11,000.
2.	Employee wages are paid twice a month, on the 22nd for wages earned from the 1st through the 15th, and on the 7th of the following month for wages earned from the 16th through the end of the month. Wages earned from December 16 through December 31, 2013, were $1,600.
3.	On October 1, 2013, Pastina borrowed $41,000 from a local bank and signed a note. The note requires interest to be paid annually on September 30 at 12%. The principal is due in 10 years.
4.	On March 1, 2013, the company lent a supplier $11,000 and a note was signed requiring principal and interest at 9% to be paid on February 28, 2014.
5.	On April 1, 2013, the company paid an insurance company $4,920 for a two-year fire insurance policy. The entire $4,920 was debited to insurance expense.
6.	$700 of supplies remained on hand at December 31, 2013.
7.	A customer paid Pastina $1,100 in December for 1,230 pounds of spaghetti to be manufactured and delivered in January 2014. Pastina credited sales revenue.
8.	On December 1, 2013, $2,200 rent was paid to the owner of the building. The payment represented rent for December and January 2014, at $1,100 per month.

    

Required:

Prepare the necessary December 31, 2013, adjusting journal entries. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.Do not round intermediate calculations. Round your answers to the nearest dollar amount.)   Explanation: Interest expense ($41,000 × 12% × 3/12) = $1,230 Interest receivable ($11,000 × 9% × 10/12) = $825 Prepaid insurance ($4,920 × 15/24) = $3,075 Supplies expense ($1,600 − $700) = $900

---

Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

May 7, 2015, 3:39 pm

≫ Next: Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

≪ Previous: Pastina Company manufactures and sells various types of pasta to grocery chains as private label brands. The company’s fiscal year-end is December 31. The unadjusted trial balance as of December 31, 2013, appears below.

$

0

0

Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

	Product 1			Product 2			Product 3
Cost	$	20		$	90		$	50
Replacement cost		18			85			40
Selling price		40			120			70
Disposal costs		6			40			10
Normal profit margin		5			30			12

Required:

What unit values should Herman use for each of its products when applying the LCM rule to ending inventory?   Explanation: NRV = Selling price less disposal costs. NRV − NP = NRV less normal profit margin. Designated Market Value = [Middle value of (RC), (NRV) & (NRV − NP)] Per Unit Inventory Value = [Lower of (Designated Market Value) and (Cost)]

Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

May 7, 2015, 3:42 pm

≫ Next: Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $58,500. The following information for the month of November was available from company records:

≪ Previous: Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

$

0

0

Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

	Product 1			Product 2			Product 3
Cost	$	20		$	90		$	50
Replacement cost		18			85			40
Selling price		40			120			70
Disposal costs		6			40			10
Normal profit margin		5			30			12

Required:

What unit values should Herman use for each of its products when applying the LCM rule to ending inventory assuming it prepares financial statements according to International Financial Reporting Standards?   Explanation: According to IFRS, inventory is valued at the lower of cost and net realizable value. Inventory valuation for the three products would be as follows: Product NRV Cost Lower of Cost or Market 1 $ 34   $ 20   $ 20   2   80     90     80   3   60     50     50   Product 3 would be valued at $50 under IFRS, but $48 according to U.S. GAAP.  The inventory values of the other two products would be the same under U.S. and the international standard.

Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $58,500. The following information for the month of November was available from company records:

May 7, 2015, 3:45 pm

≫ Next: San Lorenzo General Store uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the month of October 2013:

≪ Previous: Herman Company has three products in its ending inventory. Specific per unit data for each of the products are as follows:

$

0

0

Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $58,500. The following information for the month of November was available from company records:

Purchases	$	110,000
Freight-in		3,000
Sales		180,000
Sales returns		5,000
Purchases returns		4,000

In addition, the controller is aware of $8,000 of inventory that was stolen during November from one of the company's warehouses.

Explanation:
 1.

Net purchases ($110,000 – 4,000) = $106,000

Net sales ($180,000 – 5,000) = $175,000

Estimated gross profit of 40% = $70,000

2.

Gross profit as a % of cost ÷ (1 + Gross profit as a % of cost) = Gross profit as a % of sales.

100% ÷ 200% = 50%

   

Net purchases ($110,000 – 4,000) = $106,000

Net sales ($180,000 – 5,000) = $175,000

Estimated gross profit of 50% = $87,500

San Lorenzo General Store uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the month of October 2013:

May 7, 2015, 3:48 pm

≫ Next: Campbell Corporation uses the retail method to value its inventory. The following information is available for the year 2013:

≪ Previous: Royal Gorge Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of October was $58,500. The following information for the month of November was available from company records:

$

0

0

San Lorenzo General Store uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the month of October 2013:

	Cost			Retail
Beginning inventory	$	35,000		$	50,000
Net purchases		19,120			31,600
Net markups					1,200
Net markdowns					800
Net sales					32,000

Required:

Calculate the table to estimate the average cost of ending inventory and cost of goods sold for October. Do not approximate LCM.   Explanation: Cost-to-retail percentage $54120  66% $82,000 Estimated ending inventory at cost = 66% × $50,000 = $33,000

Campbell Corporation uses the retail method to value its inventory. The following information is available for the year 2013:

May 7, 2015, 3:50 pm

≫ Next: Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2013, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company's accounting records:

≪ Previous: San Lorenzo General Store uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the month of October 2013:

$

0

0

Campbell Corporation uses the retail method to value its inventory. The following information is available for the year 2013:

	Cost			Retail
Merchandise inventory, January 1, 2013	$	190,000		$	280,000
Purchases		600,000			840,000
Freight-in		8,000
Net markups					20,000
Net markdowns					4,000
Net sales					800,000

Required:

Determine the December 31, 2013, inventory that approximates average cost, lower of cost or market.   Explanation:   Cost-to-retail percentage: $798,000  = 70% $1,140,000

Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2013, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company's accounting records:

May 7, 2015, 3:52 pm

≫ Next: Business Solutions’ second quarter 2012 fixed budget performance report for its computer furniture operations follows. The $156,000 budgeted expenses include $108,000 in variable expenses for desks and $18,000 in variable expenses for chairs, as well as $30,000 fixed expenses. The actual expenses include $31,000 fixed expenses.

≪ Previous: Campbell Corporation uses the retail method to value its inventory. The following information is available for the year 2013:

$

0

0

Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2013, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company's accounting records:

	Fruit Toppings			Marshmallow Toppings			Chocolate Toppings
Inventory, January 1, 2013	$	10,000		$	6,000		$	2,000
Net purchases through Nov. 17		100,000			26,000			11,000
Net sales through Nov. 17		150,000			45,000			19,000
Historical gross profit ratio		35	%		40	%		40	%

Required:
1.	Calculate the estimated cost of each of the toppings lost in the fire.

Business Solutions’ second quarter 2012 fixed budget performance report for its computer furniture operations follows. The $156,000 budgeted expenses include $108,000 in variable expenses for desks and $18,000 in variable expenses for chairs, as well as $30,000 fixed expenses. The actual expenses include $31,000 fixed expenses.

May 11, 2015, 4:04 pm

≫ Next: Tuna Company set the following standard unit costs for its single product.

≪ Previous: Smith Distributors, Inc., supplies ice cream shops with various toppings for making sundaes. On November 17, 2013, a fire resulted in the loss of all of the toppings stored in one section of the warehouse. The company must provide its insurance company with an estimate of the amount of inventory lost. The following information is available from the company's accounting records:

$

0

0

Business Solutions’ second quarter 2012 fixed budget performance report for its computer furniture operations follows. The $156,000 budgeted expenses include $108,000 in variable expenses for desks and $18,000 in variable expenses for chairs, as well as $30,000 fixed expenses. The actual expenses include $31,000 fixed expenses.

	Fixed Budget		Actual Results		Variances
Desk sales (in units)		144		150
Chair sales (in units)		72		80
Desk sales (in dollars)	$	180,000	$	186,000	$	6,000 F
Chair sales (in dollars)	$	36,000	$	41,200	$	5,200 F
Total expenses	$	156,000	$	163,880	$	7,880 U
Income from operations	$	60,000	$	63,320	$	3,320 F

Prepare a flexible budget performance report that shows any variances between budgeted results and actual results. List fixed and variable expenses separately.
 
Explanation:

Supporting computations
Total budgeted desk sales	$	180,000
Total units budgeted		144
Budgeted selling price	$	1,250	per unit
Flexible budget units		150
Flexible budget sales	$	187,500
Total budgeted chair sales	$	36,000
Total units budgeted		72
Budgeted selling price	$	500	per unit
Flexible budget units		80
Flexible budget sales	$	40,000
Total budgeted variable costs for desks	$	108,000
Total units budgeted		144
Budgeted variable expenses per desk	$	750
Flexible budget units		150
Flexible budget variable expenses for desks	$	112,500
Total budgeted variable costs for chairs	$	18,000
Total units budgeted		72
Budgeted variable expenses per chair	$	250
Flexible budget units		80
Flexible budget variable expenses for chairs	$	20,000
Total budgeted variable expenses*	$	132,500
Total actual expenses	$	163,880
Actual fixed expenses		31,000
Actual variable expenses	$	132,880

*($112,500 + $20,000), from calculation above

---

Tuna Company set the following standard unit costs for its single product.

May 11, 2015, 4:09 pm

≫ Next: Kwikeze Company set the following standard costs for one unit of its product.

≪ Previous: Business Solutions’ second quarter 2012 fixed budget performance report for its computer furniture operations follows. The $156,000 budgeted expenses include $108,000 in variable expenses for desks and $18,000 in variable expenses for chairs, as well as $30,000 fixed expenses. The actual expenses include $31,000 fixed expenses.

$

0

0

Tuna Company set the following standard unit costs for its single product.    

Direct materials (26 Ibs. @ $3 per Ib.)	$	78.00
Direct labor (6 hrs. @ $6 per hr.)		36.00
Factory overhead—variable (6 hrs. @ $4 per hr.)		24.00
Factory overhead—fixed (6 hrs. @ $5 per hr.)		30.00
Total standard cost	$	168.00

 

The predetermined overhead rate is based on a planned operating volume of 70% of the productive capacity of 40,000 units per quarter. The following flexible budget information is available.

 

	Operating Levels
		60%		70%		80%
Production in units		24,000		28,000		32,000
Standard direct labor hours		144,000		168,000		192,000
Budgeted overhead
Fixed factory overhead	$	840,000	$	840,000	$	840,000
Variable factory overhead	$	576,000	$	672,000	$	768,000

 

During the current quarter, the company operated at 80% of capacity and produced 32,000 units of product; actual direct labor totaled 186,000 hours. Units produced were assigned the following standard costs:

 

Direct materials (832,000 Ibs. @ $3 per Ib.)	$	2,496,000
Direct labor (192,000 hrs. @ $6 per hr.)		1,152,000
Factory overhead (192,000 hrs. @ $9 per hr.)		1,728,000
Total standard cost	$	5,376,000

 

Actual costs incurred during the current quarter follow:

   

Direct materials (827,000 Ibs. @ $3.10)	$	2,563,700
Direct labor (186,000 hrs. @ $5.75)		1,069,500
Fixed factory overhead costs		1,649,434
Variable factory overhead costs		1,544,151
Total actual costs	$	6,826,785

1. Compute the direct materials cost variance, including its price and quantity variances

Explanation:  Direct Materials Variances 

Direct materials cost variances
Actual units at actual cost [827,000 lbs. @ $3.10]	$	2,563,700
Standard units at standard cost [832,000 lbs. @ $3.00]		2,496,000
Direct material cost variance	$	67,700	U

 

Direct Materials Price and Quantity Variances
Actual Cost AQ × AP			AQ × SP			Standard Cost SQ × SP
827,000 × $3.10			827,000 × $3.00			832,000 × $3.00
$2,563,700			$2,481,000			$2,496,000
	$82,700 U            (Price variance)			$15,000 F          (Quantity variance)
			$67,700 U (Total materials variance)

2. Compute the direct labor variance, including its rate and efficiency variances.

  Direct Labor Variances

Direct labor cost variances
Actual units at actual cost [186,000 hrs. @ $5.75]	$	1,069,500
Standard units at standard cost [192,000 hrs. @ $6.00]		1,152,000
Direct labor cost variance	$	82,500	F

Direct Labor Rate and Efficiency Variances
Actual Cost AH × AR			AH × SR			Standard Cost SH × SR
186,000 × $5.75			186,000 × $6.00			192,000 × $6.00
$1,069,500			$1,116,000			$1,152,000
	$46,500 F            (Rate variance)			$36,000 F          (Efficiency variance)
			$82,500 F (Total labor variance)

3. Compute the overhead controllable and volume variances.

Explanation:  Overhead Variances 

Controllable variance
Actual overhead [$1,649,434 + $1,544,151]	$	3,193,585
Applied overhead [from flexible budget, 80% capacity]		1,608,000
Controllable variance	$	1,585,585	U

 

Fixed overhead volume variance
Budgeted fixed overhead [given, at 80% capacity]	$	840,000
Fixed overhead cost applied [192,000 hrs. @ $5]		960,000
Fixed overhead volume variance	$	120,000	F

Kwikeze Company set the following standard costs for one unit of its product.

May 11, 2015, 4:21 pm

≫ Next: Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.

≪ Previous: Tuna Company set the following standard unit costs for its single product.

$

0

0

Kwikeze Company set the following standard costs for one unit of its product.  

Direct materials ((4.0 Ibs. @ $6.0 per Ib.)	$	24.00
Direct labor (1.7 hrs. @ $13.0 per hr.)		22.10
Overhead (1.7 hrs. @ $18.50 per hr.)		31.45
Total standard cost	$	77.55

The predetermined overhead rate ($18.50 per direct labor hour) is based on an expected volume of 75% of the factory’s capacity of 20,000 units per month. Following are the company’s budgeted overhead costs per month at the 75% level.

Overhead Budget (75% Capacity)

Variable overhead costs
Indirect materials	$	15,000
Indirect labor		75,000
Power		15,000
Repairs and maintenance		30,000
Total variable overhead costs				$	135,000
Fixed overhead costs
Depreciation—building		24,000
Depreciation—machinery		74,000
Taxes and insurance		20,000
Supervision		218,750
Total fixed overhead costs					336,750
Total overhead costs				$	471,750

The company incurred the following actual costs when it operated at 75% of capacity in October.

Direct materials (61,500 Ibs. @ $6.20 per lb.)				$	381,300
Direct labor (29,000 hrs. @ $13.20 per hr.)					382,800
Overhead costs
Indirect materials	$	43,250
Indirect labor		177,250
Power		17,250
Repairs and maintenance		34,500
Depreciation—building		24,000
Depreciation—machinery		99,900
Taxes and insurance		18,000
Supervision		218,750			632,900
Total costs				$	1,397,000

Prepare flexible overhead budgets for October showing the amounts of each variable and fixed cost at the 65%, 75%, and 85% capacity levels.   3. Compute the direct materials cost variance, including its price and quantity variances.   Explanation: Direct Materials Variances Preliminary computations Actual material used: 61,500 lbs. (given)  Standard quantity of materials: 15,000 units × 4.0 lb. / unit = 60,000 lb. Actual price: $6.20 / lb. (given) Standard price: $6.00 / lb. (given)     Direct material cost variances         Actual units at actual cost [61,500 lbs. @ $6.20] $ 381,300     Standard units at standard cost [60,000 lbs. @ $6.00]   360,000          Direct material cost variance $ 21,300  U        Direct Materials Price and Quantity Variances Actual Costs AQ × AP   AQ × SP   Standard Costs SQ × SP 61,500 × $6.20   61,500 × $6.00   60,000 × $6.00     lbs.        per lb.       lbs.        per lb.       Lbs.        per lb.       $381,300    $369,000   $360,000                 $12,300 U            (Price variance) $9,000 U          (Quantity variance)                     $21,300 U (Total materials variance)     Compute the direct labor cost variance, including its rate and efficiency variances.   Explanation: Direct labor variances Preliminary computations Actual hours used: 29,000 hours (given) Standard hours: 15,000 units × 1.7 hrs. / unit = 25,500 hours Actual rate: $13.20 / hr. (given) Standard rate: $13.00 / hr. (given)     Direct labor cost variances         Actual units at actual cost [29,000 hrs. @ $13.20] $ 382,800     Standard units at standard cost [25,500 hrs. @ $13.00]   331,500          Direct labor cost variance $ 51,300  U        Direct Labor Rate and Efficiency Variances Actual Costs AH × AR   AH × SR   Standard Costs SH × SR 29,000 × $13.20   29,000 × $13.00   25,500 × $13.00     hours      per hr.       hours      per hr.       hours      per hr.       $382,800    $377,000   $331,500                 $5,800 U            (Rate variance) $45,500 U          (Efficiency variance)                     $51,300 U (Total labor variance)     Prepare a detailed overhead variance report that shows the variances for individual items of overhead.

Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.

May 22, 2015, 9:28 am

≫ Next: Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.

≪ Previous: Kwikeze Company set the following standard costs for one unit of its product.

$

0

0

Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.

 

Investments	Returns: Expected Value			Standard Deviation
Buy stocks	$	9,470		$	6,120
Buy bonds		7,560			2,850
Buy commodity futures		20,400			26,100
Buy options		18,800			16,600

 

a-1.	Compute the coefficients of variation. (Round your answers to 3 decimal places.)

 

	Coefficient of Variation
Buy stocks
Buy bonds
Buy commodity futures
Buy options

 

a-2.	Which one of the following four investments should Tim choose?
	Buy bonds

 
 

b.	Which one of the four investments should Mike choose?
	Buy commodity futures

 
Explanation:

Coefficient of variation (V) = Standard deviation / Expected value

a-1.

Buy stocks	$6,120 / $9,470	=	.646
Buy bonds	$2,850 / $7,560	=	.377
Buy commodity futures	$26,100 / $20,400	=	1.279
Buy options	$16,600 / $18,800	=	.883

a-2.

Tim should buy the bonds because bonds have the lowest coefficient of variation.

b.

Mike should buy the commodity futures because they have the highest coefficient of variation.

 

Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.

May 22, 2015, 9:38 am

≫ Next: Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

≪ Previous: Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.

$

0

0

Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.

Projects	Returns: Expected Value			Standard   Deviation
A	$	294,000		$	197,000
B		767,000			430,000
C		185,000			137,000
D		155,000			252,000

a-1.	Compute the coefficients of variation. (Round your answers to 3 decimal places.)

	Coefficient of Variation
Project A
Project B
Project C
Project D

a-2.	Which projects should Mountain Ski Corp. choose?
	Project D

 

b.	Which one of the four projects should Lakeway Train Co. choose based on the same criteria of using the coefficient of variation?
	Project B

 
Explanation:

Coefficient of variation (V) = Standard deviation / Expected value

a-1.

Project A	$	197,000 / $294,000	=	.670
Project B	$	430,000 / $767,000	=	.561
Project C	$	137,000 / $185,000	=	.741
Project D	$	252,000 / $155,000	=	1.626

a-2.
 

Mountain Ski Corp should choose Project D because it has the largest coefficient of variation.

b.
 

Lakeway Train Co. should choose Project B because it has the smallest coefficient of variation.

Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

May 22, 2015, 9:41 am

≫ Next: X-treme Vitamin Company is considering two investments, both of which cost $11,000. The cash flows are as follows:

≪ Previous: Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway Train Co. is more typical of the average corporation and is risk-averse.

$

0

0

Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

Year	Inflow
1	$ 12,000
2	14,000
3	18,000
4	22,000
5	26,000

 

The internal rate of return is 12 percent.

 

a.	If the reinvestment assumption of the net present value method is used, what will be the total value of the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round intermediate calculations and round your answer to 2 decimal places.)

  

Total value of inflows

$

  

b.	If the reinvestment assumption of the internal rate of return method is used, what will be the total value of the inflows after five years? (Use the given internal rate of return. Do not round intermediate calculations and round your answer to 2 decimal places.)

    

Total value of inflows

$

    

c.	Which investment assumption is better?
	Reinvestment assumption of NPV

 
Explanation:

a.

FV of cash inflows	=	($12,000 × 1.094) + ($14,000 × 1.093) + ($18,000 × 1.092) + ($22,000 × 1.09) + $26,000
	=	$106,435.19

b.

FV of cash inflows	=	($12,000 × 1.124) + ($14,000 × 1.123) + ($18,000 × 1.122) + ($22,000 × 1.12) + $26,000
	=	$111,770.42

c.

The net present value method is preferable. This is especially true if a project has a high IRR as it may be unrealistic to assume that reinvestments can earn an equally high rate.

a.

Calculator Solution:

Press the following keys: CF, 2nd, CLR WORK.

Calculator displays CF0, enter 0, press the Enter key.

Press down arrow, enter 12,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 14,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 18,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 22,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 26,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press NPV; calculator shows I = 0; enter 9 and press Enter.

Press down arrow; calculator shows NPV = 0.

Press CPT; calculator shows NPV = 69,175.57.

Next, find the FV of the $69,175.57 as of year 5 at an annual rate of 9 percent.

	N			I/Y			PV			PMT			FV
5			9			69,175.57			0			CPT FV − 106,435.19

  

Answer:     $106,435.19

  

If your calculator will solve for a net future value you can compute the answer directly without going through this last step.

 
b.

Calculator Solution:

Press the following keys: CF, 2nd, CLR WORK.

Calculator displays CF0, enter 0, press the Enter key.

Press down arrow, enter 12,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 14,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 18,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 22,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 26,000, and press Enter.

Press down arrow, enter 1, and press Enter.

Press NPV; calculator shows I = 0; enter 12 and press Enter.

Press down arrow; calculator shows NPV = 0.

Press CPT; calculator shows NPV = 63,421.54.

Next, find the FV of the $63,421.54 as of year 5 at an annual rate of 12 percent.

	N			I/Y			PV			PMT			FV
5			12			63,421.54			0			CPT FV − 111,770.42

  

Answer:     $111,770.42

  

If your calculator will solve for a net future value you can compute the answer directly without going through this last step.

 

Appendix Solutions:

a.

Reinvestment assumption of NPV:

Year	Inflows		Rate	No. of Periods		Future Value Factor		Value
1	$	12,000	9%	4		1.412		$	16,944
2		14,000	9%	3		1.295			18,130
3		18,000	9%	2		1.188			21,384
4		22,000	9%	1		1.090			23,980
5		26,000	–	0		1.000			26,000
								$	106,438

   
b.

Reinvestment assumption of IRR:

Year	Inflows		Rate	No. of Periods		Future Value Factor		Value
1	$	12,000	12%	4		1.574		$	18,888
2		14,000	12%	3		1.405			19,670
3		18,000	12%	2		1.254			22,572
4		22,000	12%	1		1.120			24,640
5		26,000	–	0		1.000			26,000
								$	111,770

X-treme Vitamin Company is considering two investments, both of which cost $11,000. The cash flows are as follows:

May 22, 2015, 9:49 am

≫ Next: The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $180,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years:

≪ Previous: Turner Video will invest $52,500 in a project. The firm’s cost of capital is 9 percent. The investment will provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer using the formula and financial calculator methods.

$

0

0

X-treme Vitamin Company is considering two investments, both of which cost $11,000. The cash flows are as follows:

 

Year	Project A			Project B
1	$	15,000		$	8,000
2		6,000			5,000
3		5,000			10,000

Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

a-1.	Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal places.)

	Payback Period
Project A	year(s)
Project B	year(s)

a-2.	Which of the two projects should be chosen based on the payback method?
	Project A

b-1.	Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent.(Do not round intermediate calculations and round your final answers to 2 decimal places.)

	Net Present Value
Project A	$
Project B	$

 

b-2.	Which of the two projects should be chosen based on the net present value method?
	Project A

 

c.	Should a firm normally have more confidence in the payback method or the net present value method?
	Net present value method

 
Explanation:

a-1.
 

Project A:

  

	Cash flows			Amount yet to be Recovered
Initial investment				$	11,000
Year 1	$	15,000			0
Year 2		6,000			0
Year 3		5,000			0

 

The initial investment is fully recovered between Year 0 and Year 1. The partial year is computed as the amount that still needs to be recovered at the end of Year 0 divided by the Year 1 cash flow, so:

 

Payback periodA	= 0 + ($11,000 / $15,000)
	= .73 year(s)

Project B:

  

	Cash flows			Amount yet to be Recovered
Initial investment				$	11,000
Year 1	$	8,000			3,000
Year 2		5,000			0
Year 3		10,000			0

The initial investment is fully recovered between Year 1 and Year 2. The partial year is computed as the amount that still needs to be recovered at the end of Year 1 divided by the Year 2 cash flow, so:

Payback periodB	= 1 + ($3,000 / $5,000)
	= 1.60 year(s)

a-2.

Under the payback method, you should select Project A because of the shorter payback period.

b-1.
 

Net present valueA	=	−$11,000 + ($15,000 / 1.08) + ($6,000 / 1.082) + ($5,000 / 1.083)
	=	$12,002.08
Net present valueB	=	−$11,000 + ($8,000 / 1.08) + ($5,000 / 1.082) + ($10,000 / 1.083)
	=	$8,632.42

b-2.

Under the net present value method, you should select Project A because of the higher net present value.

c. 

A firm should normally have more confidence in the net present value method because it considers all of a project's cash flows and also the time value of money.

 

Calculator Solution:

b-1.

Project A:

Press the following keys: CF, 2nd, CLR WORK.

Calculator displays CF0, enter 11,000 +|- key, press the Enter key.

Press down arrow, enter 15,000 and press Enter.

Press down arrow, enter 1 and press Enter.

Press down arrow, enter 6,000 and press Enter.

Press down arrow, enter 1 and press Enter.

Press down arrow, enter 5,000 and press Enter.

Press down arrow, enter 1 and press Enter.

Press NPV; calculator shows I = 0; enter 8 and press Enter.

Press down arrow; calculator shows NPV = 0.

Press CPT; calculator shows NPV = 12,002.08.

b-2.

Project B:

Press the following keys: CF, 2nd, CLR WORK.

Calculator displays CF0, enter 11,000 +|- key, press Enter key

Press down arrow, enter 8,000 and press Enter.

Press down arrow, enter 1 and press Enter.

Press down arrow, enter 5,000 and press Enter.

Press down arrow, enter 1 and press Enter.

Press down arrow, enter 10,000 and press Enter.

Press down arrow, enter 1 and press Enter.

Press NPV; calculator shows I = 0; enter 8 and press Enter.

Press down arrow; calculator shows NPV = 0.

Press CPT; calculator shows NPV = 8,632.42.

Under the net present value method, you should select Project A because of the higher net present value.

Appendix Solutions:

Project A
Year	Cash Flow				PVIF			Present Value
1		$	15,000			.926			$	13,890
2			6,000			.857				5,142
3			5,000			.794				3,970
		Present value of inflows							$	23,002
		Present value of outflows								11,000
		Net present value							$	12,002

 

Project B
Year	Cash Flow				PVIF			Present Value
1		$	8,000			.926			$	7,408
2			5,000			.857				4,285
3			10,000			.794				7,940
		Present value of inflows							$	19,633
		Present value of outflows								11,000
		Net present value							$	8,633

 

The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $180,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years:

May 22, 2015, 10:03 am

≫ Next: The Dorton University president has asked the OM department to assign eight biology professors (A, B, C, D, E, F, G, and H) to eight offices (numbered 1 to 8 in the diagram) in the new biology building.

≪ Previous: X-treme Vitamin Company is considering two investments, both of which cost $11,000. The cash flows are as follows:

$

0

0

The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $180,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years: Use Table 12-12.

 

Year 1	$	96,000
Year 2		110,000
Year 3		48,000
Year 4		46,000

 

The firm is in a 35 percent tax bracket and has a cost of capital of 12 percent. Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods.

 

a.	Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places.)

 

Net present value

$

 

b.	Under the net present value method, should Summitt Petroleum Corporation purchase the asset?
	Yes

 
Explanation:

a.

First, determine annual depreciation.

Year	Depreciation Base		Percentage Depreciation (Table 12-12)			Annual Depreciation
1	$	180,000		.333		$	59,940
2		180,000		.445			80,100
3		180,000		.148			26,640
4		180,000		.074			13,320
						$	180,000

Then, determine the annual cash flow.

	Year 1			Year 2			Year 3			Year 4
EBDT	$	96,000		$	110,000		$	48,000		$	46,000
Depreciation		59,940			80,100			26,640			13,320
EBT	$	36,060		$	29,900		$	21,360		$	32,680
Taxes		12,621			10,465			7,476			11,438
EAT	$	23,439		$	19,435		$	13,884		$	21,242
Depreciation		59,940			80,100			26,640			13,320
Cash flow	$	83,379		$	99,535		$	40,524		$	34,562

Then, determine the net present value.

NPV	=	−$180,000 + ($83,379 / 1.12) + ($99,535 / 1.122) + ($40,524 / 1.123) + ($34,562 / 1.124)
	=	$24,603.19

b.

The asset should be purchased as the NPV is positive at the 12 percent cost of capital.

Calculator Solution:

Press the following keys: CF, 2nd, CLR WORK.

Calculator displays CF0, enter 180,000 +|−, press the Enter key.

Press down arrow, enter 83,379, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 99,535, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 40,524, and press Enter.

Press down arrow, enter 1, and press Enter.

Press down arrow, enter 34,562, and press Enter.

Press down arrow, enter 1, and press Enter.

Press NPV; calculator shows I = 0; enter 12 and press Enter.

Press down arrow; calculator shows NPV = 0.00.

Press CPT; calculator shows NPV = 24,603.19

Appendix Solution:

Year	Cash Flow (Inflows)	PVIF at 12%			Present Value
1	$ 83,379		.893		$	74,457.45
2	99,535		.797			79,329.40
3	40,524		.712			28,853.09
4	34,562		.636			21,981.43
	Present value of inflows				$	204,621.36
	Present value of outflows					180,000.00
	Net present value				$	24,621.36

---

The Dorton University president has asked the OM department to assign eight biology professors (A, B, C, D, E, F, G, and H) to eight offices (numbered 1 to 8 in the diagram) in the new biology building.

June 23, 2015, 8:14 am

≫ Next: Mr. Meyers wishes to know how many shares are necessary to elect 3 directors out of 11 directors up for election in the Austin Power Company. There are 71,000 shares outstanding.

≪ Previous: The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS depreciation. The cost is $180,000 and the asset will provide the following stream of earnings before depreciation and taxes for the next four years:

$

0

0

The Dorton University president has asked the OM department to assign eight biology professors (A, B, C, D, E, F, G, and H) to eight offices (numbered 1 to 8 in the diagram) in the new biology building.

The following distances and two-way flows are given:

	DISTANCES BETWEEN OFFICES (FEET)
	1	2	3	4	5	6	7	8
1	—	10	20	30	15	18	25	34
2		—	10	20	18	15	18	25
3			—	10	25	18	15	18
4				—	34	25	18	15
5					—	10	20	30
6						—	10	20
7							—	10
8								—

	TWO-WAY FLOWS (UNITS PER PERIOD)
	A	B	C	D	E	F	G	H
A	—	4	0	0	6	0	0	0
B		—	0	0	0	5	0	5
C			—	0	0	0	0	6
D				—	1	0	0	0
E					—	3	0	0
F						—	2	0
G							—	1
H								—

a.	If there are no restrictions (constraints) on the assignment of professors to offices, how many alternative assignments are there to evaluate?
	40,320

The biology department has sent the following information and requests to the OSCM department:

Offices 1, 4, 5, and 8 are the only offices with windows.

A must be assigned Office 1.

D and E, the biology department co-chairpeople, must have windows.

H must be directly across the courtyard from D.

A, G, and H must be in the same wing.

F must not be next to D or G or directly across from G.

b.	How many possible solutions (assignments of faculty to offices) satisfy all of the stated constraints?

Number to possible solutions

Assume the solution is as follows:

A-1	B-2	G-3	H-4
COURTYARD
E-5	F-6	C-7	D-8

c.	What is the total flow-distance cost measure of this solution?

Total flow-distance cost

Explanation:

a.

For any problem with an equal number of assignees and slots (call this “n”), the number of possible assignments is n! = n × n − 1 × n − 2 × n − 3 × … × 1.Therefore, in this problem, the number of possible assignments is 8! = 40,320.

b.

There are two solutions that satisfy the constraints:

A-1	C-2	G-3	H-4
COURTYARD
E-5	F-6	B-7	D-8

A-1	B-2	G-3	H-4
COURTYARD
E-5	F-6	C-7	D-8

c.

Generally speaking, for all 28 pairs of offices, multiply the distance between the offices times the two-way flows between the faculty that occupy those offices. Then sum up the results to get the total flow-distance measure. Here you only need to worry about those office pairs where there is travel between the assigned faculty members (non-zero flow), significantly reducing your computational work.

Mr. Meyers wishes to know how many shares are necessary to elect 3 directors out of 11 directors up for election in the Austin Power Company. There are 71,000 shares outstanding.

May 21, 2015, 3:48 pm

≫ Next: Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value of the stock is $74. The Andersons also have $54 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $54 for each four shares currently owned (based on four rights).

≪ Previous: The Dorton University president has asked the OM department to assign eight biology professors (A, B, C, D, E, F, G, and H) to eight offices (numbered 1 to 8 in the diagram) in the new biology building.

$

0

0

Mr. Meyers wishes to know how many shares are necessary to elect 3 directors out of 11 directors up for election in the Austin Power Company. There are 71,000 shares outstanding. (Do not round intermediate calculations.)

  
 

Number of shares

 
Explanation:

Shares required	=	(Number of directors desired) × (Total number of shares outstanding)			+ 1
		Total number of directors to be elected + 1
	=	3 × 71,000	+ 1
		11 + 1
	=	17,751 shares

Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value of the stock is $74. The Andersons also have $54 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $54 for each four shares currently owned (based on four rights).

May 22, 2015, 12:52 am

≫ Next: Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 13 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 30,001 shares. Ms. Ramsey and her friends on the board control 50,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 20,998 shares. The company uses cumulative voting.

≪ Previous: Mr. Meyers wishes to know how many shares are necessary to elect 3 directors out of 11 directors up for election in the Austin Power Company. There are 71,000 shares outstanding.

$

0

0

Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value of the stock is $74. The Andersons also have $54 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $54 for each four shares currently owned (based on four rights).

(Do not round intermediate calculations and round your answers to the nearest whole dollar.)

a.	What is the value of a right?

Value per right

$

b.	What is the value of the Andersons’ portfolio before the rights offering? (Portfolio in this question represents stock plus cash.)

Portfolio value

$

c-1.	Compute the diluted value (ex-rights) per share.

Diluted value

$

c-2.	If the Andersons participate in the rights offering, what will be the value of their portfolio, based on the diluted value (ex-rights) of the stock?

Portfolio value

$

d.	If they sell their two rights but keep their stock at its diluted value and hold on to their cash, what will be the value of their portfolio?

Portfolio value

$

 
Explanation:

a.

R	= (M0 − S) / (N + 1)
	= ($74 − 54) / (4 + 1)
	= $4

b.

Portfolio value = (Number of shares owned × Price per share) + Cash

= (4 × $74) + $54

= $350

c-1.

Me = Mo − R

= $74 − 4

= $70

c-2.

Portfolio value = (Number of shares owned × Ex-rights price) + Cash

= (5 × $70) + $0

= $350

d.

Portfolio value = (Number of shares owned × Ex-rights price) + Cash from sale of rights + Original cash

= (4 × $70) + (4 × $4) + $54

= $350

Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 13 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 30,001 shares. Ms. Ramsey and her friends on the board control 50,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 20,998 shares. The company uses cumulative voting.

May 22, 2015, 4:17 am

≫ Next: Rust Pipe Co. was established in 1994. Four years later, the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders' stock and is entitled to seven votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.

≪ Previous: Mr. and Mrs. Anderson own four shares of Magic Tricks Corporation's common stock. The market value of the stock is $74. The Andersons also have $54 in cash. They have just received word of a rights offering. One new share of stock can be purchased at $54 for each four shares currently owned (based on four rights).

$

0

0

Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 13 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 30,001 shares. Ms. Ramsey and her friends on the board control 50,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 20,998 shares. The company uses cumulative voting.

 

a.	How many directors can Mr. Clark be sure of electing? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

 

Number of directors

b.	How many directors can Ms. Ramsey and her friends be sure of electing? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

 

Number of directors

c-1.	How many directors could Mr. Clark elect if he obtains all the proxies for the uncommitted votes? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

 

Number of directors

c-2.	Will he control the board?
	Yes

d.	If nine directors were to be elected, and Ms. Ramsey and her friends had 51,001 shares and Mr. Clark had 31,001 shares plus half the uncommitted votes, how many directors could Mr. Clark elect? (Do not round intermediate calculations. Round down your answer to the nearest whole number.)

  

Number of directors

 
Explanation:

a.

Number of directors that can be elected	=	(Shares owned − 1) × (Total number of directors to be elected + 1)
		Total number of shares outstanding
	=	(30,001 − 1) × (13 + 1)
		101,000
	=	4.16, or 4 directors when rounded down

Mr. Clark can be assured of electing four directors.

b.

Number of directors that can be elected	=	(Shares owned − 1) × (Total number of directors to be elected + 1)
		Total number of shares outstanding
	=	(50,001 − 1) × (13 + 1)
		101,000
	=	6.93, or 6 directors, when rounded down

Ms. Ramsey and her friends can be assured of electing six directors.

c-1.

Number of directors that can be elected	=	(Shares owned − 1) × (Total number of directors to be elected + 1)
		Total number of shares outstanding
	=	(30,001 + 20,998 − 1) × (13 + 1)
		101,000
	=	7.07, or 7 directors when rounded down

  

In this case, the shares owned used in the formula is equal to the dissident's shares plus the uncommitted shares.

c-2.

He can elect seven directors. Yes, Mr. Clark will control the board.

d.

Number of directors that can be elected	=	(Shares owned − 1) × (Total number of directors to be elected + 1)
		Total number of shares outstanding
	=	(31,001 + 9,499 − 1) × (10 + 1)
		101,000
	=	4.41, or 4 directors when rounded down

Rust Pipe Co. was established in 1994. Four years later, the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders' stock and is entitled to seven votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.

May 22, 2015, 4:20 am

≫ Next: Betsy Ross owns 978 shares in the Hanson Fabrics Company. There are 16 directors to be elected. There are 42,000 shares outstanding. The firm has adopted cumulative voting.

≪ Previous: Midland Petroleum is holding a stockholders’ meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 13 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 30,001 shares. Ms. Ramsey and her friends on the board control 50,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 20,998 shares. The company uses cumulative voting.

$

0

0

Rust Pipe Co. was established in 1994. Four years later, the company went public. At that time, Robert Rust, the original owner, decided to establish two classes of stock. The first represents Class A founders' stock and is entitled to seven votes per share. The normally traded common stock, designated as Class B, is entitled to one vote per share. In late 2010, Mr. Stone, an investor, was considering purchasing shares in Rust Pipe Co. While he knew the existence of founders’ shares were not often present in other companies, he decided to buy the shares anyway because of a new technology Rust Pipe had developed to improve the flow of liquids through pipes.

Of the 1,350,000 total shares currently outstanding, the original founder's family owns 51,625 shares.

What is the percentage of the founder's family votes to Class B votes? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

Percentage of votes

%

 
Explanation:

Founder's family votes	=	Shares owned × 7
	=	51,625 × 7
	=	361,375

Class B votes	=	Total shares – Founder’s family shares
	=	1,350,000 – 51,625
	=	1,298,375

Percentage of votes	= Founder's family votes / Class B votes
	= 361,375 / 1,298,375
	= .2783, or 27.83%