Once the predicted demand is frozen, L.L. Bean uses its historical demand and forecast data to analyze the forecasting errors. The forecast errors are calculated for each individual item and a frequency distribution of these is made, which is further used as a probability distribution for future errors. Thus, if 50% of the errors were within 0.7 and 1.6, the forecast for this year would be adjusted accordingly. Next, each item commitment quantity was calculated using its contribution margin and its total contribution in dollar to the revenue of the company.
Finding the initial investment Answer: $20,000 Purchase price of new machinery $3,000 Installation costs $4,500 After-tax proceeds from sale of old machinery $18,500 Initial investment E11-4. Book value and recaptured depreciation $175,000 $124, 250 $110,000 $50,750 $50, 750 $59,250 Recaptured depreciation E11-5. Initial investment purchase price installation costs – after-tax proceeds from sale of old asset change in net working capital $55,000 $7,500 – $23,750 $2,000 $40,750 Answer: Book value Answer: Initial investment CAPITAL BUDGETING PROBLEMS: CHAPTER 11 Solutions to Problems Note: The MACRS depreciation percentages used in the following problems appear in Chapter 4, Table 4.2. The percentages are rounded to the nearest integer for ease in calculation. For simplification, 5-year-lived projects with 5 years of cash inflows are typically used throughout this chapter.
Margin of safety (MOS) is the excess of budgeted or actual sales over the break even volume of sales. It states the amount by which sales can drop before losses begin to be incurred. The higher the margin of safety, the lower the risk of not breaking even. The formula or equation for the calculation of margin of safety is as follows: [Margin of Safety = Total budgeted or actual sales − Break even sales] The margin of safety can also be expressed in percentage form. This percentage is obtained by dividing the margin of safety in dollar terms by total sales.
Following graph depicts the effect of inflation on cost One of the method firms use for adjusting for inflation is by deflating nominal cost data using an implicit price deflator. Usually the deflator value is obtained from Survey of current business for a period question. Nominal cost is divided by deflator to arrive at the real cost. Using real cost will help up the firm to come up with good a short run cost estimate. Since short run involves a smaller period the effect of inflation on input prices is ignored.
Another method is first-in first out (FIFO). This method for valuing inventory is based on the order that merchandise comes in. The first goods in are the first is out for sale first and everything else afterwards must wait until product one is out of stock. Finally, last-in first out (LIFO) refers to the merchandise that is produced most recently/last is recorded as sold first. Last-in first out is usually known as inventory profit, and when prices are decreasing in the market the situation is reversed.
Analysis approach: In this report, five years (2007-2011) financial statements data and various financial ratios of these two companies are compared and analyzed. In order to evaluate the relative financial strength compared to the rest of the industry, financial ratios of these two companies are compared with the benchmark data of the Semiconductor Industry. Based on the above analysis, an investment recommendation is made. There are two ways common stock investors can benefit from investing in a specific company stock, i.e. dividend paid by the stock and the appreciation of stock price since the investment was made.
Question: (TCO4) When the LIFO method is used, cost of goods sold is assumed to consist of: Your Answer: Instructor Explanation: LIFO means last in, first out, so the last units purchased are sold and the remaining units are assumed to consist of the first units. Points Received: 0 of 5 Comments: 4. Question: (TCO4) Given the following data, calculate the gross profit using the average-cost method, if the selling price was $20 per unit. Date, Item, Unit 1/1, Beginning inventory, 40 units at $12 per unit 3/5, Purchase of inventory, 18 units at $14 per unit 5/30, Purchase of inventory, 24 units at $18 per unit 12/31, Ending inventory, 20 unites Your Answer: Instructor Explanation: Units available for sale (40+18+24) =82, less ending inventory of 20 units tells us that 62 units were sold. To determine the average cost per unit, we need the value of the total units available for sale, (40*$12) +(18$14) +(24$18) =$1,164.
For example, if 50% of the errors for a specific item category, i.e. the A/F ratios, fell between 0.8 and 1.2 in the past years, then the company assumes that with a probability of 0.5, the error for an item belonging to this specific category will fall between 0.8 and 1.2 this coming year. For a new item that has not any past data, there is a part of judgement from the people in charge of forecast. They will look at the demand generated by this new item: if the demand is incremental then they have to approximate new figures, but if it is not then they have to take in account of much demand it will steal from other items. 2.
It will be depreciated under MACRS using a 5-year recovery period. At the end of 5 years, the machine can be sold to net $400,000 before taxes. If this machine is acquired, it is anticipated that the following current account changes would result. Cash + $25,000 Accounts Receivable + 120,000 Inventories - 20,000 Accounts Payable + 35,000 Press B – This press is not as sophisticated as press A. It costs $640,000 and requires $20,000 in
Cost, Volume, and Profit Formulas There are five components of CVP (cost-volume-profit) analysis; 1. volume or level of activity 2. unit selling prices 3. variable cost per unit 4. total fixed costs 5. sales mix Each component are import to the CVP, volume or level of activity can be explain as sales of a product or the number of units sold. Unit selling prices is the amount the product is sold. An example of this is a department store is selling two ties for $20 dollars, then the unit price of each tie is $10 dollars. The variable cost per unit is how much does it really take to make a product. Such as the tie is selling for ten dollars per unit but it only cost two dollars in materials to make.