Fixed Accounting

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Assignment 1: Client Letter

Due Week 2 and worth 150 points

Imagine that you are a Certified Public Accountant (CPA) with a new client who needs an opinion on the most advantageous capital structure of a new corporation. Your client formed the corporation in question to provide technology to the medical profession to facilitate compliance with the Health Insurance Portability and Accountability Act (HIPAA). Your client is very excited because of the ability to secure several significant contracts with sufficient capital.

Use the Internet and Strayer databases to research the advantages and disadvantages of debt for capital formation versus equity for capital formation of a corporation. Prepare a formal letter to the client using the six (6) step tax research process in Chapter 1 and demonstrated in Appendix A of your textbook as a guide.

Write a one to two (1-2) page letter in which you:

1.    Compare the tax advantages of debt versus equity capital formation of the corporation for the client.

2.    Recommend to the client whether he / she should use debt or equity for capital formation of the new corporation, based on your research. Provide a rationale for the response.

3.    Use the six (6) step tax research process, located in Chapter 1 and demonstrated in Appendix A of the textbook, to record your research for communications to the client.

Your assignment must follow these formatting requirements:

·         Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

·         Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length

Running head: CLIENT LETTER 1

CLIENT LETTER 4

 

 

 

 

 

Client Letter

Karen

ACC 565

Organizational Tax Research and Planning

November 28, 2013

Dr. Michael Anyanwu

Professor

 

 

 

Richardson Accounting

143 Karen Ct

North Charleston, SC 29405

 

October 29, 2013

Keon Brown, Chief Financial Officer

Brown Industries

9876 State St.

Charleston, SC 29425

 

Dear Mr. Brown:

 

It is a pleasure to be able to address you today in reference to your new company, Brown Industries. As there is a drastic need for ways to ensure compliance with the Health Insurance Portability and Accountability Act (HIPAA) in the medical profession, I am excited to see the technology that you incorporate.

 

You contacted me on October 1, 2013 inquiring if it would be more advantageous to use debt or equity for capital formation of the new corporation. While both equity and debt capital have their own advantaged and disadvantages, debt capital holds the biggest tax advantages for you company.

 

In reaching this conclusion, research was performed on both debt and equity capital. Specific attention was paid to the tax advantages and disadvantages of each. Also taken into consideration was any information disclosed to us about your company and its operations.

 

The interest paid on debt capital is tax exempt; hence, the company’s loan costs are lowered. Creditors have no say in the conduct of the business, so by issuing debt capital, the company does not dilute the ownership rights of the shareholders. Also, as the interest rates are predetermined, the management is able to budget for the payments. During the initial years of the company’s formation, it is able to raise equity capital more easily than debt capital. The company is not, at any time, obligated to repay the money as long as it operates, and the company pays dividends only if it makes profits. However, tax payments are required on dividends.

 

Another consideration is that both instruments, debt and equity, are viewed and evaluated by credit rating agencies. Once all of the volatility and safety features related to each capital type have been dissected, the credit rating agency will make recommendations of where to invest. In this case, they agree that debt capital is currently the best option.

 

Conclusion

 

To re-iterate what has previously been said, according to the research conducted by Richardson Accounting and a credit rating agency on behalf of Brown Industries, it has been determined that currently debt capital is the best financing option due to tax advantages. Since this may not be the case in the future, it is suggested that research be conducted each time that additional capital is needed in order to verify which type of capital would best suit the company’s needs at that time.

 

 

If you have any questions concerning this recommendation, please call me via phone @ 843-987-6543 or email at [email protected].

 

 

 

 

Sincerely,

 

 

Karen Richardson

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

References

 

Raghavendra, P. (2010, December 3). Comparison of Issue Debt vs. Equity | eHow. eHow. Retrieved from http://www.ehow.com/about_7593181_comparison-issue-debt-vs-equity.html

Running head:

 

CLIENT LETTER

 

 

 

 

1

 

 

 

 

 

 

 

 

Client Letter

 

Karen

 

ACC 565

 

Organizational Tax Research and Planning

 

November 28, 2013

 

Dr. Michael Anyanwu

 

Professor

 
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Financial Statements Assignment

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Hello,

Please read the assignment before bidding.

Thanks.

 

Assignment Content

Purpose of Assignment

This activity helps students recognize the significant role accounting plays in providing financial information to management for decision making through the evaluation of financial statements. This experiential assignment requires students to use ratios to evaluate and analyze a company’s liquidity, solvency, and profitability.

Two-Rivers Inc. (TRI) manufactures a variety of consumer products. The company’s founders have run the company for thirty years and are now interested in retiring. Consequently, they are seeking a purchaser, and a group of investors is looking into the acquisition of TRI. To evaluate its financial stability, TRI was requested to provide its latest financial statements and selected financial ratios. Summary information provided by TRI Document presented below.

TRI Documents

Required:

a. Calculate the select financial ratios for the fiscal year Year 2. (use MS word or excel but excel is more recommended)

b. Interpret what each of these financial ratios means in terms of TRI’s financial stability and operating efficiency.

Purpose of Assignment

 

This activity helps students recognize the significant role accounting plays in providing financial information to management for decision making through the evaluation of financial statements. This experiential assignment requires students to use ratios to evaluate and analyze a company’s liquidity, solvency, and profitability.

 

 

Two-Rivers Inc. (TRI) manufactures a variety of consumer products. The company’s founders have run the company for thirty years and are now interested in retiring. Consequently, they are seeking a purchaser, and a group of investors is looking into the acquisition of TRI. To evaluate its financial stability, TRI was requested to provide its latest financial statements and selected financial ratios. Summary information provided by TRI is presented below.  cid:image004.png@01D4F6AB.1688EDA0   cid:image005.png@01D4F6AB.1688EDA0   cid:image006.png@01D4F6AB.1688EDA0  Required: a. Calculate the select financial ratios for the fiscal year Year 2. (use MS word or excel but excel is more recommended)

b. Interpret what each of these financial ratios means in terms of TRI’s financial stability and operating efficiency.

 

Click the Assignment Files tab to submit your assignment.

 
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financial ratios for Chase

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Resource:  Financial Statements for (JP Morgan Chase

Review chases financial statements from the past three years.

Calculate the financial ratios for Chase

and then interpret those results against  3 banking industry companies historical data as well as industry benchmarks:

  • Compare the financial ratios with each of the preceding three (3) years (e.g. 2014 with 2013; 2013 with 2012; and 2012 with 2011).
  • Compare the calculated financial ratios against the industry benchmarks for the industry of your assigned company.

Write an apa with references 750 word summary of your analysis.

Show financial calculations where appropriate

The attached the professor sent so just in case it may be useful

#4.2

4.2. Liquidity ratios: Flying Penguins Corp. has total current assets of $11,845,175,
current liabilities of $5,311,020, and a quick ratio of 0.89.
What is its level of inventory?
Total current assets $ 11,845,175.00
Total current liabilities $ 5,311,020.00
Quick ratio 0.89
Quick ratio = (Total Current assets – Inventory)
Current Liabilities
Inventory = Total Current assets -(Quick ratio * Current Liabilities)
Inventory = $ 7,118,367.20
Check:
Quick ratio= 0.89

#4.3

4.3. Efficiency ratio: If Newton Manufacturers have an accounts receivable
turnover of 4.8 times and net sales of $7,812,379, what is its level of receivables?
Accounts receivable turnover 4.8 times
Net sales $ 7,812,379
A/R Turnover = Net sales
A/R
A/R = Net sales
A/R Turnover
A/R = 1,627,578.96

#4.5

4.5. Efficiency ratio: Sorenson Inc. has sales of $3,112,489,
a gross profit margin of 23.1 percent, and inventory of $833,145.
What are the company’s inventory turnover ratio and days’ sales in inventory?
Sales $ 3,112,489
Gross profit margin 23.10%
Inventory $ 833,145
Inventory turnover ratio = Cost of Goods Sold/Inventory
Day’s sales in inventory = 365 days/Inventory turnover ratio
Cost of goods sold = $ 2,393,504
Inventory turnover ratio 2.87
Day’s sales in inventory 127.05 days

#4.7

4.7. Leverage ratios: Norton Company has a debt-to-equity ratio of 1.65,
ROA of 11.3 percent, and total equity of $1,322,796. What are the
company’s equity multiplier, debt ratio, and ROE?
Debt-to-equity ratio 1.65
ROA 11.30%
Total equity $ 1,322,796
Equity multiplier = Total Assets/Total Equity
Debt ratio= Total Debt/Total Assets
ROE = ROA * Equity multiplier
Debt-to-equity ratio = Total Debt/Total equity –>Total Debt = Debt-to-equity ratio*Total equity
Total Debt= 2,182,613.40
Total Assets = Total Debt + Total Equity = 3,505,409.40
Equity multiplier= $ 2.65
Debt ratio = 62.26%
ROE 29.95%

#4.8

4.8. DuPont equation: The Rangoon Timber Company has the following relationships:
Sales/Total assets = 2.23; ROA = 9.69%; ROE = 16.4%
What are Rangoon’s profit margin and debt ratio?
Sales/Total Assets= 2.23
ROA= 9.69%
ROE= 16.40%
Profit margin = Net Income/Sales
Debt ratio = Total Debt/Total Assets
ROA = Net Income/Total Assets
ROE = Net Income/ Total equity
Based on the Du Pont Breakdown:
ROA = (Net Income/Sales)*(Sales/Total Assets)
and
ROE = (Net Income/Sales)*(Sales/Total Assets)*(Total Assets/Equity)
ROA Breakdown:
9.69% =(Net Income/Sales)* 2.23
==>(Net Income/Sales) = 4.35%
Profit Margin = 4.35%
ROE= 9.69% *TA/Equity
16.40% =(TA/Equity) X 9.69%
==>(TA/Equity)= 1.692
==>Equity/Total Assets= 1/(TA/Equity)
==>Equity/Total Assets= 59.09%
Debt/Total Assets = 1-(Equity/Total Assets)= 40.91%
Alternative way:
TA/Equity = (ROE/ROA)= 1.692
Equity/TA=1/(TA/EQ) 59.09%
Debt /TA= 1- (E/TA) 40.91%

#4.12

4.12 Market value ratios: Rockwell Jewelers has announced net earnings of
$6,481,778 for this year. The company has 2,543,800 shares outstanding,
and the year-end stock price is $54.21. What are the company’s earnings
per share and P/E ratio?
Net earnings 6,481,778
# of shares outstanding 2,543,800
Year-end stock price $54.21
Earnings per share 2.55
P/E ratio $21.27

#4.11

4.11 Benchmark analysis: Trademark Corp.’s financial manager collected
the following information for its peer group so it can compare
its own performance against the peers.
Ratios Trademark Peer Group
DSO 33.5 days 27.9 days
Total assets turnover 2.3 X 3.7 X
Inventory turnover 1.8 X 2.8 X
Quick ratio 0.6 X 1.3 X
a .Explain how Trademark is doing relative to its peers.
b. How do the industry ratios help Trademark’s management?
a. Trademark is lagging behind its peer group in all four areas. It takes, on
average, about 6 more days to collect its receivables, has a slower inventory and total assets turnover, and
lower liquidity than its peers.
b. The industry ratios help Trademark’s management by giving them a benchmark
representing the average performance in the industry, against which they can compare
the firm’s performance. Accordingly, corrective action can be taken by determining how much
the firm’s assets and liabilities need to be changed to match the peer group.

#4.14

4.14 Liquidity ratios: Laurel Electronics has a quick ratio of 1.15,
current liabilities of $5,311,020, and inventories of $7,121,599.
What is the firm’s current ratio?
Quick ratio 1.15
Current liabilities $ 5,311,020
Inventories $ 7,121,599
Current ratio = Current assets/Current Liabilities
Quick ratio =( Total Current Assets – Inventories)/ Current Liabilities
==> Total Current Assets = (Quick ratio * Current Liabilities)+Inventories
==> Total Current Assets = $ 13,229,272
Current ratio= 2.49

#4.16

4.16 Efficiency ratio: Norwood Corp. currently has accounts receivable of
$1,223,675 on net sales of $6,216,900. What are its accounts
receivable turnover ratio and days’ sales outstanding?
Accounts receivable $ 1,223,675
Net sales $ 6,216,900
Days’ sales outstanding = 365/Accounts receivable turnover
Accounts receivable turnover = Net sales/Accounts receivable
Accounts receivable turnover= 5.081
Days’ sales outstanding= 72 days

#4.6

4.6. Leverage ratios: Breckenridge Ski Company has total assets of
$422,235,811 and a debt ratio of 29.5 percent. Calculate the company’s
debt-to-equity ratio and the equity multiplier.
Total assets $ 422,235,811
Debt ratio 29.50%
Debt ratio = Total Debt / Total Assets –> Total Debt = Debt ratio * Total assets
Debt-to-equity ratio = Total debt/Shareholder’s equity
Equity Multiplier = Total Assets/Shareholder’s equity
Shareholder’s equity = Total Assets – Total Debt
Total Debt = 124,559,564.24
Shareholders’ equity = 297,676,246.76
Debt-to-equity ratio = 41.84%
Equity Multiplier 1.42

#4.30

4.30 Blackwell Automotive’s balance sheet at the end of its most recent fiscal year shows the following information:
Assets As of 3/31/2011 Liabilities and Equity
Cash and marketable sec. $23,015 Accounts payable and accruals $163,257
Accounts receivable $141,258 Notes payable $21,115
Inventories $212,444
Total current assets $387,940 Total current liabilities $184,372
Long-term debt $168,022
Net plant and equipment $711,256 Total liabilities $352,394
Goodwill and other assets $78,656 Common stock $313,299
Retained earnings $512,159
Total assets $1,177,852 Total liabilities and equity $1,177,852
In addition on, it was reported that the firm had a net income of $156,042
on sales of $4,063,589.
a. What are the firm’s current ratio and quick ratio?
b. Calculate the firm’s days’ sales outstanding (DSO), total asset
turnover ratio, and fixed asset turnover ratio.
Current ratio = Total current assets/Total current liabilities 2.10 times
Quick ratio = (Total current assets – Inventory)/Total current liabilities 0.95 times
Sales = 4,063,589 Net income = 156,042
Days’ sales outstanding = 365/Accounts receivables turnover 12.69 days
Accounts receivables turnover = Sales/Accounts receivables 28.77
Total asset turnover = Sales/Total assets 3.45 times
Fixed asset turnover = Sales/Fixed assets 5.71 times

#4.32

4.32 Ratio analysis: Refer to the information above for Nederland Consumer
Products Company. Compute the firm’s ratios for the following categories and
briefly evaluate the company’s performance from these numbers.
a. Efficiency ratios
b. Asset turnover ratios
c. Leverage ratios
d. Coverage ratios
As Reported on Annual Income Statement 9/30/08
Net sales $51,407
Cost of products sold $25,076
Gross margin $26,331
Marketing, research, administrative exp. $15,746
Depreciation $758
Operating income (loss) $9,827
Interest expense $629
Other nonoperating income (expense), net $152
Earnings (loss) before income taxes $9,350
Income taxes $2,869
Net earnings (loss) $6,481
As Reported on Annual Balance Sheet 9/30/08
Assets Liabilities and Equity
Cash and cash equivalents 5,469 Accounts payable 3,617
Investment securities 423 Accrued and other liabilities 7,689
Accounts receivable 4,062 Taxes payable 2,554
Total inventories 4,400 Debt due within one year 8,287
Deferred income taxes 958
Prepaid expenses and other receivables 1,803
Total current assets 17,115 Total current liabilities 22,147
Property, plant, and equipment, at cost 25,304 Long-term debt 12,554
Less: Accumulated depreciation 11,196 Deferred income taxes 2,261
Net property, plant, and equipment 14,108 Other noncurrent liabilities 2,808
Net goodwill and other intangible assets 23,900 Total liabilities 39,770
Other noncurrent assets 1,925 Convertible class A preferred stock 1,526
Common stock 2,141
Retained earnings 13,611
Total shareholders’ equity (deficit) 17,278
Total assets 57,048 Total liabilites and shareholders’ equity 57,048
Efficiency ratios 2008
Inventory Turnover = Cost of goods sold/Inventory = 5.70 times
Day’s Sales in Inventory = 365 days/Inventory turnover = 64.05 days
Accounts Receivable Turnover = Net sales/Account receivable = 12.66 times
Days’ Sales Outstanding = 365 Days/Account receivable turnover 28.84 days
Asset turnover ratios
Total Asset Turnover = Net sales/Total assets 0.90 times
Fixed Asset Turnover = Net sales/Net fixed assets 3.64 times
Leverage ratios
Total Debt Ratio = Total debt/Total assets 0.70
Debt-Equity Ratio = Total debt/Total equity 2.30
Equity Multiplier = Total assets/ Total equity 3.30 times
Coverage ratios
Interest Coverage =Times Interest Earned = EBIT/Interest expense 15.62 times
Cash Coverage = (EBIT + Depreciation)/Interest expense 16.83 times

#4.31

4.31 The following are the financial statements of Nederland
Consumer Products Company reported for the fiscal year ended September 30, 2011.
As Reported on Annual Income Statement 9/30/11
Net sales $51,407
Cost of products sold $25,076
Gross margin $26,331
Marketing, research, administrative exp. $15,746
Depreciation $758
Operating income (loss) $9,827
Interest expense $629
Other nonoperating income (expense), net $152
Earnings (loss) before income taxes $9,350
Income taxes $2,869
Net earnings (loss) $6,481
As Reported on Annual Balance Sheet 9/30/11
Assets Liabilities and Equity
Cash and cash equivalents 5,469 Accounts payable 3,617
Investment securities 423 Accrued and other liabilities 7,689
Accounts receivable 4,062 Taxes payable 2,554
Total inventories 4,400 Debt due within one year 8,287
Deferred income taxes 958
Prepaid expenses and other receivables 1,803
Total current assets 17,115 Total current liabilities 22,147
Property, plant, and equipment, at cost 25,304 Long-term debt 12,554
Less: Accumulated depreciation 11,196 Deferred income taxes 2,261
Net property, plant, and equipment 14,108 Other noncurrent liabilities 2,808
Net goodwill and other intangible assets 23,900 Total liabilities 39,770
Other noncurrent assets 1,925 Convertible class A preferred stock 1,526
Common stock 2,141
Retained earnings 13,611
Total shareholders’ equity (deficit) 17,278
Total assets 57,048 Total liabilites and shareholders’ equity 57,048
Calculate all the ratios (for which industry figures are available) for
Nederland and compare the firm’s ratios with the industry ratios.
Industry Ratios Nederland Consumer Products Co. Ratios Comment
Current ratio 2.05 0.77 Weak
Quick ratio 0.78 0.57 Weak
Gross margin 23.90% 51.22% Much stronger
Profit margin 12.30% 12.61% Slightly better
Debt ratio 0.23 0.70 Highly leveraged with more short term debt
Long-term debt to equity 0.98 0.73 Relatively less LTD
Interest coverage 5.62 14.86 Much higher
ROA 5.30% 11.36% Much higher
ROE 18.80% 37.51% Much higher

#4.34

4.34 Nugent, Inc., has a gross profit margin of 31.7 percent on
sales of $9,865,214 and total assets of $7,125,852. The company has a current
ratio of 2.7 times, accounts receivable of $1,715,363, cash and marketable
securities of $315,488, and current liabilities of $870,938.
a. What is Nugent’s level of current assets?
b. How much inventory does the firm have? What is the inventory turnover ratio?
c. What is Nugent’s days’ sales outstanding?
d. If management wants to set a target DSO of 30 days, what should
Nugent’s accounts receivable be?
Sales $ 9,865,214
Total assets $ 7,125,852
Accounts receivable $ 1,715,363
Cash and marketable securities $ 315,488
Current liabilities $ 870,938
Target DSO 30 days
Gross profit margin 31.70%
Current ratio 2.7 times
a) Current ratio = Current assets/Current liabilities
==> Current assets = Current ratio * Current liabilities
==> Current assets = $ 2,351,532.60
b) Total current assets = Cash and marketable securities + A/R + Inventory
==> Inventory = Total current assets -Cash and M/S – A/R
Inventory = $ 320,681.60
c) Days’ sales outstanding = 365/Accounts receivable turnover
Accounts receivable turnover = Sales/Accounts receivable
Accounts receivable turnover = $ 5.75
DSO = 63.47 days
d) Target DSO = 30 days
Since, Days’ sales outstanding = 365/Accounts receivable turnover
==> Accounts receivable turnover = 365/DSO
Accounts receivable turnover would have to be 12.1666666667
and since, Accounts receivable = Sales/Accounts receivabel turnover
Accounts receivable would have to be 810,839.51
i.e. A/R would have to decline by $ 904,523.49

#4.35

4.35 Recreational Supplies Co. has net sales of $11,655,000,
an ROE of 17.64 percent, and a total asset turnover of 2.89 times. If the firm
has a debt-to-equity ratio of 1.43, what is the company’s net income?
Net sales $ 11,655,000
ROE 17.64%
Total asset turnover 2.89 times
Debt-equity ratio 1.43
What is the company’s net income?
Equity multiplier = 1 + Debt-to-equity ratio 2.43
Return on equity = Net profit margin * Total Asset turnover * Equity multiplier
==> Net profit margin = Return on equity/(Total asset turnover * Equity multiplier)
==> Net profit margin = 2.51%
Net income = Net sales * Net profit margin = $ 292,756.63

STP #4.1

STP #4.1. Morgan Sports Equipment Company has accounts payable of $1,221,669,
cash of $ 677,423, inventory of $ 2,312,478, accounts receivable of $845,113,
and net working capital of $2,297,945. What are the company’s current ratio
and quick ratio?
Accounts payable $ 1,221,669
Cash $ 677,423
Accounts receivable $ 845,113
Inventory $ 2,312,478
Net working capital $ 2,297,945
Current ratio = Current assets / Current liabilities 2.50
Current assets = Cash + A/R + Inventory = $ 3,835,014
Net working capital = Current assets – Current liabilities
==> Current liabilities = Current assets – Net working capital $ 1,537,069
Quick ratio = (Current assets – iInventories)/Current liabilities= 0.99

STP #4.2

STP #4.2. Southwest Airlines, Inc., has total operating revenues of $6.53 million
on total assets of $11.337 million. Their property, plant, and equipment,
including their ground equipment and other assets, are listed at a historical cost
of $11.921 million, while the accumulated depreciation and amortization
amount to $3.198 million. What are the airline’s total asset turnover
and fixed asset turnover ratios?
Operating revenues $ 6.53 million
Total assets $ 11.337 million
Property, Plant, & Equipment (historical cost) $ 11.92 million
Accumulated depreciation and amortization $ 3.198 million
Total asset turnover = Operating revenues/Total assets = $ 0.58
Fixed asset turnover = Operating revenues/Net fixed assets = 0.749
 
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Managerial Accounting

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Disk City, Inc. is a retailer for digital video disks. The projected net income for the current year is  $1,840,000 based on a sales volume of 230,000 video disks. Disk City has been selling the disks for $23 each. The variable costs consist of the $11 unit purchase price of the disks and a handling cost of $2 per disk. Disk City’s annual fixed costs are $460,000.
     Management is planning for the coming year, when it expects that the unit purchase price of the video disks will increase 30 percent. (Ignore income taxes.)

 

Required:

 

1. Calculate Disk city’s break-even point for the current year in number of video disks. (Round your answer to the nearest whole number.)

 

 

  Break-even point 46,000  units

 

2. What will be the company’s net income for the current year if there is a 15 percent increase in projected unit sales volume? (Omit the “$” sign in your response.)

 

  Net income 2,185,000 $

 

3. What volume of sales (in dollars) must Disk City achieve in the coming year to maintain the same net income as projected for the current year if the unit selling price remains at $23? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Volume of sales 7,895,522 $

 

4. In order to cover a 30 percent increase in the disk’s purchase price for the coming year and still maintain the current contribution-margin ratio, what selling price per disk must Disk City establish for the coming year? (Do not round intermediate calculations and round your final answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Selling price 28.84 $

rev: 02_27_2014_QC_45987, 03_22_2014_QC_45987

references

[The following information applies to the questions displayed below.]

 

Corrigan Enterprises is studying the acquisition of two electrical component insertion systems for producing its sole product, the universal gismo. Data relevant to the systems follow.

 

Model no. 6754:
     Variable costs, $20.00 per unit
     Annual fixed costs, $985,900

 

Model no. 4399:
     Variable costs, $11.80 per unit
     Annual fixed costs, $1,114,200

 

Corrigan’s selling price is $64 per unit for the universal gismo, which is subject to a 10 percent sales commission. (In the following requirements, ignore income taxes.)

 

 

2.

value: 10.00 points

 

 

 

Required:

 

1. How many units must the company sell to break even if Model 6754 is selected? (Do not round intermediate calculations and round your final answer to the nearest whole number.)

 

 

  Break-even point 26, 221  units

 

references

 

3.

value: 10.00 points

 

 

 

2-a. Calculate the net income of the two systems if sales and production are expected to average 42,000 units per year. (Omit the “$” sign in your response.)

 

  Net Income
  Model 6754 683,300 $
  Model 4399 809,400 $
 

 

 

2-b. Which of the two systems would be more profitable?
   
 
  Model 6754
 

 Model 4399 is profitable

 

 

references

 

4.

value: 10.00 points

 

 

 

3. Assume Model 4399 requires the purchase of additional equipment that is not reflected in the preceding figures. The equipment will cost $430,000 and will be depreciated over a five-year life by the straight-line method. How many units must Corrigan sell to earn $958,000 of income if Model 4399 is selected? As in requirement (2), sales and production are expected to average 42,000 units per year. (Do not round intermediate calculations and round your final answer to the nearest whole number.)

 

  Required sales 47,122  units

 

references

 

5.

value: 10.00 points

 

 

 

4. Ignoring the information presented in part (3), at what volume level will the annual total cost of each system be equal? (Round your answer to the nearest whole number.)

 

  Volume level 26,622  units

 

references

 

     

 

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6.

value: 10.00 points

 

 

Houston-based Advanced Electronics manufactures audio speakers for desktop computers. The following data relate to the period just ended when the company produced and sold 41,000 speaker sets:

 

       
  Sales $ 3,280,000  
  Variable costs   820,000  
  Fixed costs   2,310,000  
 

 

Management is considering relocating its manufacturing facilities to northern Mexico to reduce costs. Variable costs are expected to average $16 per set; annual fixed costs are anticipated to be $2,240,000. (In the following requirements, ignore income taxes.)

 

Required:
1. Calculate the company’s current income and determine the level of dollar sales needed to double that figure, assuming that manufacturing operations remain in the United States. (Omit the “$” sign in your response.)

 

   
  Current income 150,000 $
  Required sales 3,480,000 $
 

 

2. Determine the break-even point in speaker sets if operations are shifted to Mexico.

 

  Break-even point 35,000  units

 

3. Assume that management desires to achieve the Mexican break-even point; however, operations will remain in the United States.

 

a. If variable costs remain constant, by how much must fixed costs change? (Input the amount as positive value. Omit the “$” sign in your response.)

 

  Fixed costsby 210,000 $

 

b. If fixed costs remain constant, by how much must unit variable cost change? (Input the amount as positive value. Do not round your intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Variable costsby 6 $

 

4. Determine the impact (increase, decrease, or no effect) of the following operating changes.

 

     
a.  Effect of an increase in direct material costs on the break-even point.  
b.  Effect of an increase in fixed administrative costs on the unit contribution margin.  
c.  Effect of an increase in the unit contribution margin on net income.  
d.  Effect of a decrease in the number of units sold on the break-even point.  
 

rev: 10_30_2013_QC_38310, 02_27_2014_QC_46037

references

7.

value: 10.00 points

 

 

Tim’s Bicycle Shop sells 21-speed bicycles. For purposes of a cost-volume-profit analysis, the shop owner has divided sales into two categories, as follows:

 

  Product Type Sales Price Invoice Cost Sales Commission
  High-quality $ 500   $ 275   $ 25  
  Medium-quality   300     135     15  
 

 

 

Three-quarters of the shop’s sales are medium-quality bikes. The shop’s annual fixed expenses are $65,000. (In the following requirements, ignore income taxes.)

 

Required:

 

 

1. Compute the unit contribution margin for each product type. (Omit the “$” sign in your response.)

 

 

  Bicycle Type Unit Contribution Margin
  High-quality 200 $
  Medium-quality 150 
 

 

2. What is the shop’s sales mix? (Omit the “%” sign in your response.)

 

 

  Sales mix
  High-quality bicycles 25  %
  Medium-quality bicycles 75  %
 

 

3. Compute the weighted-average unit contribution margin, assuming a constant sales mix. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Weighted-average unit contribution margin 162.50 $

 

4. What is the shop’s break-even sales volume in dollars? Assume a constant sales mix. (Round intermediate calculations to 2 decimal places. Omit the “$” sign in your response.)

 

  Break-even sales volume 140,000 $

 

5. How many bicycles of each type must be sold to earn a target net income of $48,750? Assume a constant sales mix. (Round intermediate calculations to 2 decimal places.)

 

  Number of bicycles
  High-quality 175 
  Medium-quality 525 
 

references

8.

value: 10.00 points

 

 

A contribution income statement for the Nantucket Inn is shown below. (Ignore income taxes.)

 

       
  Revenue $ 500,000  
  Less: Variable expenses   300,000  
       
  Contribution margin $ 200,000  
  Less: Fixed expenses   150,000  
       
  Net income $ 50,000  
   

 

  

 

  

 
 

 

Consider each requirement independently.

 

Required:

 

 

1. Show the hotel’s cost structure by indicating the percentage of the hotel’s revenue represented by each item on the income statement. (Input all amounts as positive values. Omit the “$” & “%” signs in your response.)

 

 

  Amount Percent
  Revenue 500,000   
  Variable expenses 300,000   
   

  
  Contribution margin 200,000   
  Fixed expenses 150,000   
   

  
  Net income 50,000   
   

 

  

 
 

 

2. Suppose the hotel’s revenue declines by 15 percent. Use the contribution-margin percentage to calculate the resulting decrease in net income. (Omit the “$” sign in your response.)

 

  Decrease in net income 30,000 $

 

3. What is the hotel’s operating leverage factor when revenue is $500,000?

 

  Operating leverage factor 4 

 

4. Use the operating leverage factor to calculate the increase in net income resulting from a 20 percent increase in sales revenue. (Omit the “%” sign in your response.)

 

  Percentage increase in net income 80  %

references

 

9.

value: 10.00 points

 

 

A contribution income statement for the Nantucket Inn is shown below. (Ignore income taxes.)

 

       
  Revenue $ 500,000  
  Less: Variable expenses   300,000  
       
  Contribution margin $ 200,000  
  Less: Fixed expenses   150,000  
       
  Net income $ 50,000  
   

 

  

 

  

 
 

 

 

Required:

 

 

1. Prepare a contribution income statement if the hotel’s volume of activity increases by 20 percent, and fixed expenses increase by 40 percent. (Input all amounts as positive values. Omit the “$” sign in your response.)

 

 

   
  Revenue 600,000 $   
  Less: Variable expenses 360,000   
   
  Contribution margin 240,000 $   
  Less: Fixed expenses 210,000   
   
  Net income 30,000 $   
   

 
 

 

 

2. Prepare a contribution income statement if the ratio of variable expenses to revenue doubles. There is no change in the hotel’s volume of activity. Fixed expenses decline by $25,000. (Input all amounts as positive values except losses which should be indicated with a minus sign. Omit the “$” sign in your response.)

 

 

   
  Revenue 500,000 $
  Less: Variable expenses 600,000  
   
  Contribution margin (100,000) $
  Less: Fixed expenses 125,000  
   
  Net loss (225,000) $
 

10.

value: 10.00 points

 

 

Hydro Systems Engineering Associates, Inc. provides consulting services to city water authorities. The consulting firm’s contribution-margin ratio is 20 percent, and its annual fixed expenses are $120,000. The firm’s income-tax rate is 40 percent.

 

Consider each requirement independently.

 

 

Required:

 

1. Calculate the firm’s break-even volume of service revenue. (Omit the “$” sign in your response.)

 

 

  Break-even volume 600,000 $

 

2. How much before-tax income must the firm earn to make an after-tax net income of $48,000?. (Omit the “$” sign in your response.)

 

  Before tax income 80,000 $

 

3. What level of revenue for consulting services must the firm generate to earn an after-tax net income of $48,000? (Omit the “$” sign in your response.)

 

  Service revenue 1,000 000 $

 

4. Suppose the firm’s income-tax rate rises to 45 percent. What will happen to the break-even level of consulting service revenue?
   
 
  The break-even level of consulting service revenue will change.
  The break-even level of consulting service revenue will not change.

 

 

  

 

 

 

 

 

 

decrease

 

decrease

 

Increase

 

No effect

 

Increase

 

No effect

 

 

100

 

60

 

40

 

30

 

10

 
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