Dr. Lucy Zang, a noted local podiatrist, plans to open a retail shoe store specializing in hard-to-find footwear for people with feet problems such as bunions, flat feet, mallet toes, diabetic feet, and so forth. Because of the wide variety of foot ailments and shoe sizes needed, Dr. Zang estimates that she would have to stock a large inventory of shoes, perhaps as much as $1.5 million (at her cost). She found a 4,000 square foot store in a popular mall that provides adequate retail space and storage for her inventory. Store improvements including carpeting, lighting, shelving, computer terminals, and so forth, require an additional $0.2 million investment. Initial advertising, hiring expenses, legal fees, and working capital are projected to add another $0.1 million of initial investment. To finance this $1.8 million investment, Dr. Zang and her family will invest $0.4 million and the balance of the $1.4 million will be borrowed from a bank. The mall charges rent of $40 per square foot per year, payable in equal monthly installments, plus 3 percent of her retail sales. So, to rent the 4,000 foot store, the annual rent is $160,000, or $13,333 per month PLUS 3 percent of her sales. Besides the rent, Dr. Zang estimates other monthly expenses for labor, utilities, and so on to be $38,000. These expenses will not vary with the amount of shoe sales. She plans to markup the shoes 100 percent, so a pair of shoes she buys wholesale for $110 will be sold at retail for $220. Based on her research, she expects monthly retail sales to be $150,000, but in any given month total sales can be $80,000 or $220,000 with equal probability. Dr. Zang talks to her local banker and lays out her business plan; the banker tells her the bank would make a three-year interest-only loan at 10 percent interest, with the principal of $1.4 million due in three years (or it could be refinanced). The high interest rate of 10 percent was caused by the rather large risk of default due to the substantial fixed costs in the business plan. The banker explains that the monthly rent ($13,333), other expenses ($38,000), and interest ($11,667), or $63,000, require the shoe store to generate a fairly large minimum level of sales to pay these expenses. Required: a. Calculate the amount of sales the Happy Feet store must do each month to breakeven. b. After calculating the breakeven point in part (a), Dr. Zang still believes that her Happy Feet store can be commercially successful and provide a valuable service to her patients. She goes back to the mall leasing agent and asks if the mall would take a lower fixed monthly rental amount and a larger percentage fee of her sales. The mall leasing agent (who happens to have sore feet and believes the Happy Feet store will drive new customers to his mall) says the mall would accept a rental fee of $1,000 per month plus 12.5 percent of her monthly sales. While Dr. Zang likes the idea of dropping her monthly rent from $13,333 to $1,000, she feels that raising the percentage of sales from 3 percent to 12.5 percent is a bit steep. But she goes back to the bank and presents the revised rental agreement. The banker says the bank would lower the annual interest rate from 10 percent to 9 percent if Dr. Zang accepts the new lease agreement. Both the original lease and the new lease are for three years, and can be renegotiated at the end of the three years. Should Dr. Zang accept the new lease agreement ($1,000 per month plus 12.5 percent) or the original lease terms ($13,333 per month plus 3 percent)? Support your recommendation with both a written analysis and a quantitative analysis backing up your recommendation. (Hint: First, conduct an analysis comparing the two options, using the expected monthly sales of $150,000. Second, conduct an analysis comparing the two options, using the two extreme sales of $80,000 and $220,000.)
> How do the life-cycle and permanent-income hypotheses resolve the seemingly contradictory pieces of evidence regarding consumption behavior?
> The chapter analyzes Fisher’s model for the case in which the consumer can save or borrow at an interest rate of r and for the case in which the\ consumer can save at this rate but cannot borrow at all. Consider now the intermediate case in which the con
> A central bank has a new head, who decides to raise the target inflation rate from 2 to 3 percent. Using a graph of the dynamic AD–AS model, show the effect of this change. What happens to the nominal interest rate immediately upon the change in policy a
> Use the model of the small open economy to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to each of the following events. a. A fall in consumer confidence about the future induces consum
> “If a central bank wants to achieve lower nominal interest rates, it has to raise the nominal interest rate.”
> Why might inflation be inertial?
> An economy has the following equation for the Phillips curve: π = Eπ - .5(u - 6) People form expectations of inflation by taking a weighted average of the previous two years of inflation: Eπ= 0.7 π-1 + 0.3 π-2 Okun’s law for this economy is: (Y 2 Y21)/Y2
> In the Mundell–Fleming model with floating exchange rates, explain what happens to aggregate income, the exchange rate, and the trade balance when a quota on imported cars is removed. What would happen if exchange rates were fixed rather than floating?
> A small open economy with a floating exchange rate is in recession with balanced trade. If policymakers want to reach full employment while maintaining balanced trade, what combination of monetary and fiscal policy should they choose? Use a graph, and be
> Suppose that policymakers in a large open economy want to raise the level of investment without changing aggregate income or the exchange rate. a. Is there any combination of domestic monetary and fiscal policies that would achieve this goal? b. Is there
> What is the impact of a decrease in the money supply on the interest rate, income, consumption, and investment?
> Consider the economy of Hicksonia. a. The consumption function is given by C = 300 + 0.6(Y - T).The investment function is I = 700 - 80r. Government purchases and taxes are both 500. For this economy, graph the IS curve for r ranging from 0 to 8. b. The
> Why does the IS curve slope downward?
> Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with national income. (Examples in the United States include the income tax and the payroll tax.
> If a war broke out abroad, it would affect the U.S. economy in many ways. Use the model of the large open economy to examine each of the following effects of such a war. What happens in the United States to saving, investment, the trade balance, the inte
> Why does the aggregate demand curve sloped downward?
> Let’s examine how the goals of the Fed influence its response to shocks. Suppose that in scenario A the Fed cares only about keeping the price level stable and in scenario B the Fed cares only about keeping output and employment at their natural levels.
> What data would you need to determine whether an economy has more or less capital than in the Golden Rule steady state?
> In the United States, the capital share of GDP is about 30 percent, the average growth in output is about 3 percent per year, the depreciation rate is about 4 percent per year, and the capital–output ratio is about 2.5. Suppose that the production functi
> Suppose an economy described by the Solow model is in a steady state with population growth n of 1.8 percent per year and technological progress g of 1.8 percent per year. Total output and total capital grow at 3.6 percent per year. Suppose further that
> Might a policymaker choose a steady state with more capital than in the Golden Rule steady state? With less capital than in the Golden Rule steady state? Explain your answers.
> Consider an economy described by the production function: Y = F(K, L) = K 0.4L0.6. a. What is the per-worker production function? b. Assuming no population growth or technological progress, find the steady-state capital stock per worker, output per worke
> Give three explanations of why the real wage may remain above the level that equilibrates labor supply and labor demand.
> In this chapter we saw that the steady-state rate of unemployment is U/L= s/(s + f ). Suppose that the unemployment rate does not begin at this level. Show that unemployment will evolve over time and reach this steady state. (Hint: Express the change in
> If a small open economy cuts defense spending, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?
> Write the quantity equation and explain it.
> Explain the difference between macroeconomics and microeconomics. How are these two fields related?
> The frame-welding department of a large automotive company welds car frames as they pass down the assembly line. Four computer-controlled robots make the welds on each frame simultaneously. When installed last year, each robot was expected to have a five
> Auden Manufacturing produces a single product with the following standards: Standard direct labor cost per unit…………………………………….. $2.00 Standard direct materials per unit ……………………………………… $3.00 Flexible overhead budget ………………………………………………… $60,000 Normal p
> An investment opportunity that will involve an investment of $1,000 will generate $300 per year for five years and then earn $140 per year forever. What is the net present value of this investment, assuming the interest rate is 14 percent?
> The purchasing department of Bradley Inc. is responsible for companywide purchasing. Its total costs are assigned to each division based on the number of purchase orders the purchasing department processes for each division. The purchasing department’s f
> Ultrasonic manufactures three ultrasound imaging systems: Avex, AvexII, and Mel. Overhead is allocated to each system based on standard direct material dollars in each system. The firm uses a flexible overhead budget to calculate the overhead rate for th
> Your firm uses return on assets (ROA) to evaluate investment centers and is considering changing the valuation basis of assets from historical cost to current value. When the historical cost of the asset is updated, a price index is used to approximate r
> Digital Convert (DC) is a three-year-old start-up company with most of its capital coming from banks and personal investments by the founders. DC manufactures a high-resolution scanner (MXP35) for professional photographers that scans 35-mm negative film
> An October 25, 1999, article in BusinessWeek by D. Brady, “Why Xerox Is Struggling,” reported: President and Chief Executive G. Richard Thoman is a big-picture guy. For the past two years, he has preached a digital revolution at the copier giant. Get dow
> Joon manufactures and sells to retailers a variety of home care and personal care products. Joon has a single plant that produces all four of its product lines: Stick Goods (brooms and mops), Floor Care(strippers, soaps, and waxes), Brushes (hair brushes
> The owner of a small software company felt his accounting system was useless. He stated, “Accounting systems only generate historical costs. Historical costs are useless in my business because everything changes so rapidly.” Required: a. Are historical c
> IPX is a specialized packaging company that packages other manufacturers’ products. Other manufacturers ship their products to IPX in bulk. IPX then packages the products using high-speed, stateof-the-art packaging machines and ships the packaged product
> Discretionary costs are defined as “costs that (1) arise from periodic (usually yearly) appropriation decisions regarding the maximum amounts to be incurred and (2) have no well-specified function relating inputs (as measured by the costs) and outputs (a
> Old Town Roasters (OTR) owns and operates a chain of 12 coffee shops around town. OTR’s strategy is to provide the highest-quality coffee and baked goods in a warm, friendly environment. Each OTR provides its customers Internet access and current newspap
> You are a new consultant with the Boston Group and have been sent to advise the executives of Penury Company. The company recently acquired product line L from an out-of-state concern and now plans to produce it, along with its old standby K, under one r
> Zeflax manufactures insulated plastic bottles for bikes that the company sells for $4.00 per bottle. Last year the company produced 230,000 bottles and sold 200,000 bottles. This year Zeflax produced 200,000 bottles and sold 230,000 bottles. In both year
> Outback Opals mines and processes opals from its Australian opal mines. The process consists of removing large chunks of stones, carefully splitting the stones and removing the opals, and then cutting and polishing the stones. Finally, the opals are sort
> Slawson is a publicly traded Argentine company with three operating companies located in Argentina, the United States, and Germany. Slawson’s corporate headquarters in Buenos Aires oversees the three operating companies. The annual cost
> Rogers Petersen and Cabots are two of the five largest investment banks in the United States. Last year there was a major scandal at Cabots involving manipulation of some auctions for government bonds. A number of senior partners at Cabots were charged w
> Critically discuss the following quotation: ABC (activity-based cost) information, by itself, does not invoke actions and decisions leading to improved profits and operating performance. . . . For ABC systems to be effective, everyone in the company—from
> Phipps manufactures circuit boards in Division Low in a country with a 30 percent income tax rate and transfers them to Division High in a country with a 40 percent income tax. An import duty of 15 percent of the transfer price is paid on all imported pr
> Black Feather Indian Nation is a 900 square-mile territory in North Dakota that has the legal right to sell gasoline without having to collect or pay state and federal taxes on it. Gasoline in North Dakota sells for $1.20 per gallon, which includes $0.50
> Guest Watches is a division of Guest Fashions, a large, international fashion designer. Guest Watches manufactures highly stylish watches for young adults (age 18 to 30) who are fashion conscious. It is a profit center and its senior managementâ
> International Computer Company (ICC) has annual revenues of $2 billion primarily from selling and leasing large networked workstation systems to businesses and universities. The manufacturing division produces the hardware that is sold or leased by the m
> The National Direct Student Loan (NDSL) program allows college students to borrow funds from the federal government. The contract stipulates that the annual percentage rate of interest is 0 percent until 12 months after the student ceases his or her form
> Magee Inc. pays its sales manager a bonus of $10,000 if the manager meets the sales quota. The sales manager can exert either high effort or low effort. The additional disutility of the manager in exerting high effort relative to low effort to meet the s
> Panarude Airfreight is an international air freight hauler with more than 45 jet aircraft operating in the United States and the Pacific Rim. The firm is headquartered in Melbourne, Australia, and is organized into five geographic areas: Australia, Japan
> The Xerox DocuColor iGen3 digital production press is a high volume, on-demand, full-color printer capable of producing up to 6,000 impressions (pages) per hour. It weighs nearly 3 tons, stretches 30 feet long, and holds more than 40 pounds of dry ink. I
> Shady Tree produces two products: M1 and M2. There are no beginning inventories or ending working-process inventories of either M1 or M2. A single plant wide overhead rate is used to allocate overhead to products using standard direct labor hours. This o
> Anpax, Inc., manufactures two products: L7 and Q2. Overhead is allocated to products based on machine hours. Management uses a flexible budget to forecast overhead. For the current year, fixed factory overhead is projected to be $2.75 million and variabl
> Darien Industries operates a cafeteria for its employees. The operation of the cafeteria requires fixe costs of $4,700 per month and variable costs of 40 percent of sales. Cafeteria sales are currently averaging $12,000 per month. Darien has an opportuni
> A finance professor and a marketing professor were recently comparing notes on their perceptions of corporations. The finance professor claimed that the goal of a corporation should be to maximize the value to the shareholders. The marketing professor cl
> Oaks Auto Supply just acquired a patent on an antifreeze recycler that flushes used antifreeze from a car, filters it, removes dissolved chemicals, and then returns it to the automobile without having to dispose of the old antifreeze or use new antifreez
> You have just purchased a house and have obtained a 30-year, $200,000 mortgage with an interest rate of 10 percent. Required: a. What is your annual payment? b. Assuming you bought the house on January 1, what is the principal balance after one year? Aft
> Montana Pen Company manufactures a full line of premium writing instruments. It has 12 different styles and within each style, it offers ball point pens, fountain pens, mechanical pencils, and a roller ball pen. Most models also come in three finishes—go
> The current year’s income statement for Sants Brakes Co. on a variable costing basis appears in the accompanying table. Inventories of finished stock were increased during the year in anticipation of increases in sales volume in the cur
> After the Iraqi invasion of Kuwait in August 1990, the world price of crude oil doubled to more than $30 per barrel in anticipation of reduced supply. Immediately, the oil companies raised the retail price on refined oil products even though these produc
> Swan Systems developed and manufactures residential water filtration units that are installed under sinks. The filtration unit removes chlorine and other chemicals from drinking water. This Dutch company has successfully expanded sales of its units in th
> Starling Coatings produces weatherproofing coatings that protect metal from oxidation. One of Starling’s patented coatings, zurtan, is composed of two inputs, magna45 and zelon. While both inputs are required, they can be substituted fo
> Sunstar sells a full line of small home kitchen appliances, including toasters, coffee makers, blenders, and bread machines. It is organized into a marketing division and a manufacturing division. The manufacturing division is composed of several plants,
> Watson’s Bay Co. is considering a contract to manufacture didgeridoos. Producing didgeridoos will require an investment in equipment of $100,000 and operating costs of $15 per didgeridoo produced. The contract calls for the company to deliver 3,000 didge
> The Bartolotta Company had an overabsorbed overhead balance at year-end. The firm wrote off one-third of it to Cost of Goods Sold, thereby raising net income by $100,000, and the remainder was charged to inventory accounts. Overhead is allocated to produ
> News.com is a Web site that offers users access to current national and international news stories. News.com does not charge users a fee for accessing the site, but rather charges advertisers $0.05 per hit to the Web site. A “hit” is a user that logs on
> The coating department of a parts manufacturing department coats various parts with an antirust, zinc based material. The parts to be processed are loaded into baskets; the baskets are passed through a coating machine that dips the parts into the zinc so
> A new pharmaceutical drug calls for 4.5 ounces of compound AN7-X1 per batch of 250 tablets. AN7- X1 has a standard price of $2 per ounce. An initial inventory of 8,000 ounces of AN7-X1 is purchased for $17,200. The firm produces 1,000 batches of the new
> The MRI department at Community Hospital, a large urban health center, performs magnetic resonance imaging for heart disease, brain disorders, and total body scans for the various patient care units (neurology, cardiovascular, OB/GYN, oncology, and so fo
> Prior to the Securities Acts of 1933 and 1934, corporations with publicly traded stock were not required to issue financial statements, yet many voluntarily issued income statements and balance sheets. Discuss the advantages and disadvantages of such vol
> Mickles Ltd. uses a standard cost system. In June, Mickles’ direct labor efficiency variance was $1,470 U and its direct labor rate variance was $825 F. Mickles manufactured 460 batches of product in June. Actual direct labor hours in June were 980 hours
> Zipp Cards buys baseball cards in bulk from the companies that produce them. Zipp buys sheets of 48 cards, then cuts the sheets into individual cards, and sorts and packages them, usually by team. Zipp then sells the packages to large discount stores. Th
> Diagnostic Imaging & Medical (DIM) has introduced a revolutionary new magnetic resonance imaging (MRI) device that it sells to hospital radiology departments. Their new device has a much larger chamber that reduces patients’ claustr
> Pool Scrubbers manufactures three different models of swimming pool cleaners (710, 720, and 830). These are sophisticated computer-controlled, programmed cleaners that scrub and vacuum the pool’s bottom, walls, and steps and provide supplemental filtrati
> Joanna Wu manages the University Lab Testing department within the University Hospital. Lab Testing, a profit center, performs most of the standard medical tests (such as blood tests) for other university clinical care units as well as for outside health
> Shop and Save (S&S) is a large grocery chain with 350 supermarkets. Twenty-eight S&S stores are located within the Detroit metropolitan region and serviced by the S&S Detroit Bakery, a large central bakery producing all of the fresh-baked goods (breads,
> Spectra Inc. produces color monitors for personal computers. The firm makes 19-inch monitors with the following cost structure: Direct materials ……………&aci
> Two years ago Federal Insurance was charged with making misleading marketing claims about the way it was selling its insurance products. In response to these allegations and subsequent investigations, Federal’s board of directors fired the chief executiv
> Dr. Madison, inventor and owner of Madison Corrosion Treatment, has discovered that ordinary mufflers and pipes, when treated with his patented process, will become permanently impervious to corrosion. To reap the rewards from his ingenuity, he has opene
> Fidelity Bank has five service departments (telecom, information management, building occupancy, training & development, and human resources). The bank uses a step-down method of allocating service department costs to its three lines of business (ret
> Avid, a small, privately held biotech pharmaceutical manufacturing firm, specializes in developing and producing a set of drugs for rare classes of cancers. Avid has two divisions that share the same manufacturing and research facility. The two divisions
> Sarah Adams manages Executive Inn of Toronto, a 200-room facility that rents furnished suites to executives by the month. The market is for people relocating to Toronto and waiting for permanent housing. Adams’s compensation contains a
> The Pottery Store is a chain of retail stores in upscale malls that sells pottery, woodcarvings, and other craft items. The typical customer is shopping for a gift and spends between $50 and $200. Buyers in the corporate office contact artists around the
> Metro Blood Bank, a for-profit firm, collects whole blood from donors, tests it, and then separates it into two components: platelets and plasma. Three pints of whole blood yield two pints of platelets and one pint of plasma. The cost of collecting the t
> Required: a. What differentiates unit-level costs, batch-level costs, product-line costs, and capacity-sustaining costs? Give examples. b. “One advantage of an activity-based cost system is that it prevents unit costs from rising when volumes fall and un
> MacGiver Brass is a brass plating firm with sales of $8 million and profits before taxes of $625,000. MacGiver has a loan outstanding at its local bank for working capital purposes. As the loan officer reviewing MacGiver’s loan application, you are charg
> Telstar Electronics manufactures and imports a wide variety of consumer and industrial electronics, including stereos, televisions, camcorders, telephones, and VCRs. Each line of business (LOB) handles a single product group (e.g., televisions) and is or
> Varilux manufactures a single product and sells it for $10 per unit. At the beginning of the year, there were 1,000 units in inventory. Upon further investigation, you discover that units produced last year had $3 of fixed manufacturing costs and $2 of v
> The Densain Water plant in Naples, Florida, bottles purified and flavored waters in a variety of sizes (20, 36, 48, and 64 ounces) for sale through vending machines and retail stores. Volume is measured as bottled ounces. The plant’s annual budgeted fixe
> Rose Hospital has two service departments (building services and food service), and three patient care units (intensive care, surgery, and general medicine). Building Services provides janitorial, maintenance, and engineering services as well as space (u
> SCX is a $2 billion chemical company with a plastics plant located in Durango, Colorado. The Durango plastics plant of SCX was started 30 years ago to produce a particular plastic film for snack food packages. The Durango plant is a profit center that ma
> A large corporation maintains a fleet of three 30-passenger corporate jets that provide (weather permitting) daily scheduled service between Detroit and several cities that are home to its production facilities. The jets are used for business, not person
> GAMMA produces over a hundred different types of residential water faucets at its Delta, Florida, plant. This plant uses activity-based costing to calculate product costs. The following table summarizes the plant’s overhead for the year
> Jacklin Stampings allocates overhead to products based on machine hours. It uses a flexible overhead budget to calculate a predetermined overhead rate at the beginning of the year. This rate is used during the year to allocate overhead to the various sta
> Parkview Hospital, a regional hospital, serves a population of 400,000 people. The next closest hospital is 50 miles away. Parkview’s accounting system is adequate for patient billing. The system reports revenues generated per department but does not bre
> A large corporation has a manufacturing division with 40 parts departments and 20 assembly departments. The parts departments manufacture most of the parts for the products, and the assembly departments assemble the parts (some of which are purchased out
> Vintage Cellars manufactures a 1,000-bottle wine storage system that maintains optimum temperature (55–57 °F) and humidity (50–80 percent) for aging wines. The system has a backup battery for power failures and can store red and white wines at different
