Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $1.6 million per unit, and the credit price is $1.87 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 200 such orders is never collected. The required return is 2.9 percent per period.
a. Assuming that this is a one-time order, should it be filled? The customer will not buy if credit is not extended.
b. What is the break-even probability of default in part (a)?
c. Suppose that customers who don’t default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. Should the order be filled? What is the break-even probability of default?
d. Describe in general terms why credit terms will be more liberal when repeat orders are a possibility
> An insurance company has an online help service for its customers. Customer queries that take more than 5 minutes to resolve are categorized as “unsatisfactory” experiences. To evaluate the quality of its service, the
> (*) A production line has five workstations and a 60-second cycle time. The total amount of actual task time across all four workstations is 120 seconds. What is the idle time? The percent idle time? The efficiency delay?
> All Frute Company bottles and distributes Frute Ade, a fruit drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 70 cents per bottle. For the year 2014, management estimates the following revenues and costs.Ins
> Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16-ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2014, management estimates the following revenues and costs.(a) Pr
> Schultz Electronics manufactures two large-screen television models: the Royale which sells for $1,600, and a new model, the Majestic, which sells for $1,300. The production cost computed per unit under traditional costing for each model in 2014 was as f
> FireOut, Inc. manufactures steel cylinders and nozzles for two models of fire extinguishers: (1) a home fire extinguisher and (2) a commercial fire extinguisher. The home model is a high-volume (54,000 units), half-gallon cylinder that holds 2 1/2 pounds
> Altex Inc. manufactures two products: car wheels and truck wheels. To determine the amount of overhead to assign to each product line, the controller, Robert Hermann, has developed the following information.Instructions:(a) Compute the overhead cost assi
> Innova uses 1,000 units of the component IMC2 every month to manufacture one of its products. The unit costs incurred to manufacture the component are as follows.Direct materials ………………….65Direct labor ………………45Overhead ……………….126.5Total……………..236.5Overhe
> DeWitt Company uses flexible budgets to control its selling expenses. Monthly sales are expected to range from $170,000 to $200,000. Variable costs and their percentage relationship to sales are sales commissions 6%, advertising 4%, traveling 3%, and del
> Norton Company reports the following operating results for the month of August: sales $310,000 (units 5,000); variable costs $210,000; and fixed costs $75,000. Management is considering the following independent courses of action to increase net income.1
> Using the information in E22-3, assume that in July 2014, Thome Company incurs the following manufacturing overhead costs.Instructions:(a) Prepare a flexible budget performance report, assuming that the company worked 9,000 direct labor hours during the
> Schopp Inc. has been manufacturing its own shades for its table lamps. The company is currently operating at 100% of capacity, and variable manufacturing overhead is charged to production at the rate of 70% of direct labor cost. The direct materials and
> Turney Company produces and sells automobile batteries, the heavy-duty HD-240. The 2014 sales forecast is as follows.Quarter HD-240……………….HD-2401……………….50002…………………….70003…………………80004…………………..10000The January 1, 2014, inventory of HD-240 is 2,000 units.
> Thome Company uses a flexible budget for manufacturing overhead based on direct labor hours. Variable manufacturing overhead costs per direct labor hour are as follows.Indirect labor …………………1Indirect materials ……………….0.6Utilities ……………….0.4Fixed overhead
> Edington Electronics Inc. produces and sells two models of pocket calculators, XQ-103 and XQ-104. The calculators sell for $15 and $25, respectively. Because of the intense competition Edington faces, management budgets sales semiannually. Its projection
> BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below.Ins
> Atlanta Company is preparing its manufacturing overhead budget for 2014. Relevant data consist of the following.Units to be produced (by quarters): 10,000, 12,000, 14,000, 16,000.Direct labor: time is 1.5 hours per unit.Variable overhead costs per direct
> Chen Minerals processes materials extracted from mines. The most common raw material that it processes results in three joint products: Larco, Marco, and Narco. Each of these products can be sold as is, or each can be processed further and sold for a hig
> Cook Company estimates that 300,000 direct labor hours will be worked during the coming year, 2014, in the Packaging Department. On this basis, the budgeted manufacturing overhead cost data, shown below, are computed for the year.During October, 27,000 d
> Frio Company uses standard costs with its job order cost accounting system. In January, an order (Job No. 84) was received for 5,500 units of Product D. The standard cost of 1 unit of Product D is as follows.Direct materials—1.5 pounds at $4.00 per pound
> The Bonita Inn is trying to determine its break-even point. The inn has 75 rooms that are rented at $60 a night. Operating costs are as follows.Salaries………………………………………………….8800Utilities………………………………………………..2400Depreciation………………………………………... 1500Maintenanc
> Isaac’s Auto Repair is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $65,000 price tag for a new truck would represent a major expenditure for the garage. Isaac Mayer, owner of the garage, has compile
> The Borders and Noble partnership is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.Depreciation is computed by the straight-line method with no salvage
> Huang Company uses a standard cost accounting system to account for the manufacture of exhaust fans. In July 2014, it accumulates the following data relative to 1,800 units started and finished.Manufacturing overhead was applied on the basis of direct la
> Mercer Farm Supply Company manufactures and sells a fertilizer called Basic II. The following data are available for preparing budgets for Basic II for the first 2 quarters of 2014.1. Sales: quarter 1, 40,000 bags; quarter 2, 50,000 bags. Selling price i
> Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the estimates sh
> Henkel Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.Depreciation is computed by the straight-line method with no salvage value. The company
> Jorgensen Corporation uses standard costs with its job order cost accounting system. In January, an order (Job No. 12) for 1,900 units of Product B was received. The standard cost of one unit of Product B is as follows.Normal capacity for the month was 4
> Gutierrez Company has four operating divisions. During the first quarter of 2014, the company reported aggregate income from operations of $213,000 and the following divisional results.Discontinuance of any division would save 50% of the fixed costs and
> Hill Company uses budgets in controlling costs. The August 2014 budget report for the company’s Assembling Department is as follows.The monthly budget amounts in the report were based on an expected production of 60,000units per month o
> Sutton Industrial Products Inc. (SIPI) is a diversified industrial-cleaner processing company. The company’s Verde plant produces two products: a table cleaner and a floor cleaner from a common set of chemical inputs (CDG). Each week 90
> Wilkins Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this
> Ayala Corporation accumulates the following data relative to jobs started and finished during the month of June 2014.Overhead is applied on the basis of standard machine hours. Three hours of machine time are required for each direct labor hour. The jobs
> Felde Company builds custom fishing lures for sporting goods stores. In its first year of operations, 2014, the company incurred the following costs.Variable Costs per UnitDirect materials ………………………7.5Direct labor………………………..2.45Variable manufacturing ove
> Doug’s Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows.The equipment’s salvage value is zero, and Doug us
> Judy Jean, a recent graduate of Rolling’s accounting program, evaluated the operating performance of Artie Company’s six divisions. Judy made the following presentation to Artie’s board of directors a
> Nona Inc., which produces a single product, has prepared the following standard cost sheet for one unit of the product.Direct materials (8 pounds at $2.50 per pound) ……………………..20Direct labor (3 hours at $12.00 per hour) ………………..36During the month of Apri
> The standard cost of Product B manufactured by MIT Company includes three units of direct materials at $5.00 per unit. During June, 29,000 units of direct materials are purchased at a cost of $4.70 per unit, and 29,000 units of direct materials are used
> Major Instrument, Inc. manufactures two products: missile range instruments and space pressure gauges. During April, 50 range instruments and 300 pressure gauges were produced, and overhead costs of $94,500 were estimated. An analysis of estimated overhe
> The Polishing Department of Harbin Company has the following production and manufacturing cost data for September. Materials are entered at the beginning of the process.Production: Beginning inventory 1,600 units that are 100% complete as to materials an
> Stahl Inc. produces three separate products from a common process costing $100,000. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown below are cost and selling price data for a re
> The Green Acres Inn is trying to determine its break-even point. The inn has 50 rooms that it rents at $60 a night. Operating costs are as follows.Salaries ……………………………….6200 per monthUtilities …………………………………1100 per monthDepreciation………………………………..1000 per
> Hank Itzek manufactures and sells homemade wine, and he wants to develop a standard cost per gallon. The following are required for production of a 50-gallon batch.3,000 ounces of grape concentrate at $0.06 per ounce54 pounds of granulated sugar at $0.30
> Refer to Table 12.1 in the text and look at the period from 1973 through 1980:Table 12.1:a. Calculate the average return for Treasury bills and the average annual inflation rate (consumer price index) for this period.b. Calculate the standard deviation o
> Suppose the spot and three-month forward rates for the yen are ¥114.32 and ¥116.03, respectively.a. Is the yen expected to get stronger or weaker?b. What would you estimate is the difference between the inflation rates of the United States and Japan?
> You observe that the inflation rate in the United States is 3.9 percent per year and that T-bills currently yield 5.8 percent annually. What do you estimate the inflation rate to be in:a. Australia, if short-term Australian government securities yield 4
> Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.15 and Kr 5.22, respectively. The annual risk-free rate in the United States is 3.8 percent, and the annual risk-free rate in Norway is 5.7 percent.a. Is there an arbitrage oppo
> Take a look back at Figure 21.1 to answer the following questions:Figure 21.1:a. If you have $100, how many euros can you get?b. How much is one euro worth?c. If you have 5 million euros, how many dollars do you have?d. Which is worth more, a New Zealand
> The Arizona Bay Corporation sells on credit terms of net 30. Its accounts are, on average, 8 days past due. If annual credit sales are $8.4 million, what is the company’s balance sheet amount in accounts receivable?
> Essence of Skunk Fragrances, Ltd., sells 5,600 units of its perfume collection each year at a price per unit of $425. All sales are on credit with terms of 1/10, net 40. The discount is taken by 60 percent of the customers. What is the amount of the comp
> Rise Above This, Inc., has an average collection period of 39 days. Its average daily investment in receivables is $47,500. What are annual credit sales? What is the receivables turnover?
> Skye Flyer, Inc., has weekly credit sales of $19,400, and the average collection period is 34 days. The cost of production is 75 percent of the selling price. What is the average accounts receivable figure?
> Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 210, net 30. Based on experience, 65 percent of all customers will take the discount.a. What is the average collection period for Kyoto Joe?b. If Kyoto Joe sells 1,30
> Consider the following information:a. What is the expected return on an equally weighted portfolio of these three stocks?b. What is the variance of a portfolio invested 20 percent each in A and B and 60 percent in C?
> The Sand Surfer Corporation has annual sales of $47 million. The average collection period is 36 days. What is the average investment in accounts receivable as shown on the balance sheet?
> The Techtronic’s store begins each week with 300 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $41 per year and the fixed order cost is $95, what is the total carrying cost? What is the restocking co
> Redan Manufacturing uses 2,500 switch assemblies per week and then reorders another 2,500. If the relevant carrying cost per switch assembly is $9, and the fixed order cost is $1,700, is Redan’s inventory policy optimal? Why or why not?
> Devour, Inc., is considering a change in its cash only sales policy. The new terms of sale would be net one month. Based on the following information, determine if Devour should proceed or not. Describe the buildup of receivables in this case. The requir
> You place an order for 400 units of inventory at a unit price of $125. The supplier offers terms of 1/10, net 30.a. How long do you have to pay before the account is overdue? If you take the full period, how much should you remit?b. What is the discount
> No More Pencils, Inc., disburses checks every two weeks that average $93,000 and take seven days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays .015 percent per day for
> It takes Cookie Cutter Modular Homes, Inc., about six days to receive and deposit checks from customers. Cookie Cutter’s management is considering a lockbox system to reduce the firm’s collection times. It is expected that the lockbox system will reduce
> Paper Submarine Manufacturing is investigating a lockbox system to reduce its collection time. It has determined the following:The total collection time will be reduced by three days if the lockbox system is adopted.a. What is the PV of adopting the syst
> Your firm has an average receipt size of $108. A bank has approached you concerning a lockbox service that will decrease your total collection time by two days. You typically receive 8,500 checks per day. The daily interest rate is .016 percent. If the b
> Your neighbor goes to the post office once a month and picks up two checks, one for $17,000 and one for $6,000. The larger check takes four days to clear after it is deposited; the smaller one takes five days.a. What is the total float for the month?b. W
> A portfolio is invested 25 percent in Stock G, 55 percent in Stock J, and 20 percent in Stock K. The expected returns on these stocks are 8 percent, 15 percent, and 24 percent, respectively. What is the portfolio’s expected return? How do you interpret y
> Each business day, on average, a company writes checks totaling $14,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $
> No More Books Corporation has an agreement with Floyd Bank whereby the bank handles $4 million in collections a day and requires a $400,000 compensating balance. No More Books is contemplating canceling the agreement and dividing its eastern region so th
> In a typical month, the Jeremy Corporation receives 80 checks totaling $156,000. These are delayed four days on average. What is the average daily float?
> The Torrey Pine Corporation’s purchases from suppliers in a quarter are equal to 75 percent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes, and other expenses are 20 percent of sales
> Iron Man Products has projected the following sales for the coming year:Sales in the year following this one are projected to be 15 percent greater in each quarter.a. Calculate payments to suppliers assuming that Iron Man places orders during each quarte
> Your firm has an average collection period of 32 days. Current practice is to factor all receivables immediately at a 1.5 percent discount. What is the effective cost of borrowing in this case? Assume that default is extremely unlikely
> Consider the following financial statement information for the Mediate Corporation:Calculate the operating and cash cycles. How do you interpret your answer?
> The Morning Jolt Coffee Company has projected the following quarterly sales amounts for the coming year:a. Accounts receivable at the beginning of the year are $360. Morning Jolt has a 45-day collection period. Calculate cash collections in each of the f
> Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, the letter D for a decrease, and the letter N for no change:a. Average receivables goes up.b. Credit repayment times for customers are incr
> Rocco Corp. has a book net worth of $10,380. Long-term debt is $7,500. Net working capital, other than cash, is $2,105. Fixed assets are $15,190. How much cash does the company have? If current liabilities are $1,450, what are current assets?
> Based on the following information, calculate the expected return and standard deviation for the two stocks:,,,
> Below are the most recent balance sheets for Country Kettles, Inc. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:,,,
> Here are some important fi gures from the budget of Nashville Nougats, Inc., for the second quarter of 2009:The company predicts that 5 percent of its credit sales will never be collected, 35 percent of its sales will be collected in the month of the sal
> The following is the sales budget for Trickle, Inc., for the first quarter of 2009:Credit sales are collected as follows:65 percent in the month of the sale20 percent in the month after the sale15 percent in the second month after the saleThe accounts re
> In the previous problem, suppose the company instead decides on a four-for-one stock split. The firm’s 85-cent per share cash dividend on the new (post-split) shares represents an increase of 10 percent over last year’
> The company with the common equity accounts shown here has declared a 15 percent stock dividend when the market value of its stock is $35 per share. What effects on the equity accounts will the distribution of the stock dividend have?,,,
> The market value balance sheet for Vena Sera Manufacturing is shown here. Vena Sera has declared a 25 percent stock dividend. The stock goes ex dividend tomorrow (the chronology for a stock dividend is similar to that for a cash dividend). There are 12,0
> In the previous problem, suppose Chevelle has announced it is going to repurchase $10,400 worth of stock. What effect will this transaction have on the equity of the firm? How many shares will be outstanding? What will the price per share be after the re
> The balance sheet for Chevelle Corp. is shown here in market value terms. There are 8,000 shares of stock outstanding.The company has declared a dividend of $1.30 per share. The stock goes ex dividend tomorrow. Ignoring any tax effects, what is the stock
> Red Rocks Corporation (RRC) currently has 350,000 shares of stock outstanding that sell for $90 per share. Assuming no market imperfections or tax effects exist, what will the share price be after:a. RRC has a five-for-three stock split?b. RRC has a 15 p
> For the company in Problem 2, show how the equity accounts will change if:Problem 2:The owners’ equity accounts for Quadrangle International are shown here:a. Quadrangle declares a four-for-one stock split. How many shares are outstandi
> Based on the following information, calculate the expected return:,,,
> The owners’ equity accounts for Quadrangle International are shown here:a. If Quadrangle stock currently sells for $30 per share and a 10 percent stock dividend is declared, how many new shares will be distributed? Show how the equity a
> So Much, Inc., has declared a $4.60 per share dividend. Suppose capital gains are not taxed, but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. So Much sells for $80.37 per share, a
> ABC Co. and XYZ Co. are identical firms in all respects except for their capital structure. ABC is all equity financed with $600,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $300,000 and the interest rate on its debt is 8 perc
> Seether, Inc., a prominent consumer products firm, is debating whether to convert its all-equity capital structure to one that is 35 percent debt. Currently, there are 8,000 shares outstanding, and the price per share is $55. EBIT is expected to remain a
> Ignoring taxes in Problem 6, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?Problem 6:Keenan Corp. is comparing two different capital structures. Plan I would result in 7,000 shares of stock and
> Keenan Corp. is comparing two different capital structures. Plan I would result in 7,000 shares of stock and $160,000 in debt. Plan II would result in 5,000 shares of stock and $240,000 in debt. The interest rate on the debt is 10 percent.a. Ignoring tax
> In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Problem 4:James Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a lev
> James Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 160,000 shares of stock outstanding. Under Plan II, there would be 80,000 shares of stock outs
> Suppose the company in Problem 1 has a market to- book ratio of 1.0.Problem 1:Maynard, Inc., has no debt outstanding and a total market value of $250,000. Earnings before interest and taxes, EBIT, are projected to be $28,000 if economic conditions are no
> Repeat parts (a) and (b) in Problem 1 assuming Maynard has a tax rate of 35 percent.Parts (a) and (b) in Problem 1:a. Calculate earnings per share (EPS) under each of the three economic scenarios before any debt is issued. Also calculate the percentage c
> Based on the following information, calculate the expected return:,,,
> In Problem 14, what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm’s capital structure decision?Problem 14:Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9
> Frederick & Co. expects its EBIT to be $92,000 every year forever. The firm can borrow at 9 percent. Frederick currently has no debt, and its cost of equity is 15 percent. If the tax rate is 35 percent, what is the value of the firm? What will the value
