Jinny Buffett recently retired as a flight attendant and is interested in opening a fitness center and health spa exclusively for women in Grand Cayman, where she resides. After careful study, she is somewhat puzzled as to how to proceed. In her words, “I see my business going in one of two directions: Either I open the fitness center and health spa all at once, or I start with the health spa and hold off on the fitness center for a while. Either way, it should be a success because women on this island love to be pampered. My only concern about the fitness center is the initial cost, but if the projections look good enough, I know some investors in Phoenix who can help me get started. In any event, I plan to retire permanently in 10 years.” The following information is available: • Jinny has identified a suitable location for her business in a new shopping center in George Town, capital of the Cayman Islands. The developer has units of 1,000 square feet and 2,500 square feet available and is willing to sell either unit for CI$150 per square foot (CI$1.00 US$1.25). Alternatively, the space can be leased at a cost of CI$1.80 per square foot per month, on an annual basis. • Commercial real estate values have more than doubled in Grand Cayman during the past 10 years, with no slowdown in sight. As a result, Jinny is more attracted to the purchase option because she expects the price per square foot to be CI$300 by the time she is ready to sell her unit in 10 years. • Exercise machines and other equipment necessary to open the fitness center would cost US$50,000. In addition, US$35,000 would need to be invested in equipment related to the health spa. The useful life for all such equipment is 10 years, and the expected salvage value is not large enough to be concerned about. • In addition, US$8,000 would need to be invested in an inventory of cosmetics and skin care products necessary to operate the health spa. This level of inventory would need to be maintained throughout the 10-year period and will be given away to loyal customers when Jinny retires permanently. • The health spa can be operated in the 1,000 square foot unit. Variable operating costs would include CI$0.10 per square foot per month for cleaning and CI$0.40 per square foot per month for utilities. The 2,500 square foot unit is large enough to operate both the fitness center and health spa, and the CI$0.10 rate per square foot for cleaning would not change. However, if the 2,500 square foot unit were used, the health spa would be located in an open loft that would need to be air-conditioned at all times. As a result, utility costs are expected to be CI$0.60 per square foot per month under this option. • Jinny is a certified aesthetician and expects to do most of the makeovers, facials, and peels herself, but she needs a qualified assistant for the health spa. She estimates that hiring an appropriate person will cost US$25,000 per year. Likewise, for the fitness center, two full-time aerobics instructors would be hired for US$20,000 each per year, and a physical trainer would be hired for US$30,000 per year. • Additional fixed costs include US$3,000 per year for advertising and US$4,500 per year for maintenance, insurance, and other items. These costs will be incurred without respect to the size of operations. • Annual membership fees to the fitness center will be CI$300, and a preliminary market survey shows a demand of approximately 500 initial members. Although members tend to come and go, the net change in membership from year to year is not expected to be significant. No additional fees will be charged to fitness center members. • Health spa fees are assessed on a user basis, although the steam room facilities are available at no charge to fitness center members. The net cash inflow from cosmetics and skin care products (after deducting the cost of inventory used and sold) is expected to be CI$8,000 per month. • Jinny’s cost of capital is 12%, and there are no taxes in the Cayman Islands. Required: a. Calculate the net present value in US$ of an investment in the health spa only, assuming that the 1,000 square foot unit is purchased and then resold at the end of 10 years. (Hint: Before making your present value calculations, multiply all amounts expressed in CI$ by $1.25 to convert into US$.) b. Calculate the net present value in US$ of an investment in the fitness center and health spa, assuming that the 2,500 square foot unit is purchased and then resold at the end of 10 years. c. Jinny is quite concerned about possible forecasting errors and has asked you to prepare a more conservative estimate. Repeat part b, assuming that the fitness center attracts only 300 members per year (rather than 500); that the net cash inflow per month from cosmetics and skin care products is only CI$6,000 per month (rather than CI$8,000 per month); and that commercial real estate values in Grand Cayman at the end of 10 years are only CI$200 per square foot (rather than CI$300 per square foot). d. Explain why it might be in Jinny’s best interest to lease (rather than purchase) the 1,000 square foot unit if she initially decides to open the health spa only. Although no calculations are required, you should consider both quantitative and qualitative factors in your response. e. What is your overall recommendation? Include an explanation of any additional factors that you would consider in making your recommendation. Keep in mind that Jinny has not given herself a salary in her projections. Assume that a reasonable salary would be CI$4,000 per month.
> From the following data, calculate the retained earnings balance as of December 31, 2009: Retained earnings, December 31, 2010 . . . . . . . . . . . . . ………... . . . . . . . $841,200 Decrease in total liabilities during 2010 . . . . . . . . . . . . . .
> From the following data, calculate the retained earnings balance as of December 31, 2010: Retained earnings, December 31, 2009 . . . . . . . . …………... . . . . . . . . . . …. $311,800 Cost of equipment purchased during 2010 . . . . . . . ………………….. . . .
> From the following data, calculate the Retained Earnings balance as of December 31, 2011: Retained earnings, December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $346,400 Cost of buildings purchased during 2011 .
> Prepare a bank reconciliation as of October 31 from the following information: a. The October 31 cash balance in the general ledger is $844. b. The October 31 balance shown on the bank statement is $373. c. Checks issued but not returned with the bank s
> Prepare a bank reconciliation as of August 31 from the following information: a. The August 31 balance shown on the bank statement is $9,810. b. There is a deposit in transit of $1,260 at August 31. c. Outstanding checks at August 31 totaled $1,890. d.
> Assume that you own 600 shares of common stock of a company, that you have been receiving cash dividends of $6 per share per year, and that the company has a 4-for-3 stock split. Required: a. How many shares of common stock will you own after the stock
> A firm issues long-term debt with an effective interest rate of 10% and the proceeds of this debt issue can be invested to earn an ROI of 12%. What effect will this financial leverage have on the firm’s ROE relative to having the same amount of funds inv
> A bookkeeper prepared the year-end financial statements of Giftwrap, Inc. The income statement showed net income of $47,400, and the balance sheet showed ending retained earnings of $182,000. The firm’s accountant reviewed the bookkeeper’s work and deter
> Maliha, Inc., did not pay dividends on its $6.50, $50 par value, cumulative preferred stock during 2009 or 2010. Since 2005, 22,000 shares of this stock have been outstanding. Maliha, Inc., has been profitable in 2011 and is considering a cash dividend o
> The balance sheet caption for common stock is the following: Common stock, $5 par value, 2,000,000 shares authorized, 1,400,000 shares issued, 1,250,000 shares outstanding . . . . . . . . . . . . . . . . . . . . . . . $ ? Required: a. Calculate the dol
> Kohl Co. provides warranties for many of its products. The January 1, 2010, balance of the Estimated Warranty Liability account was $70,400. Based on an analysis of warranty claims during the past several years, this year’s warranty provision was establi
> Two acquaintances have approached you about investing in business activities in which each is involved. Julie is seeking $560 and Sam needs $620. One year from now your original investment will be returned, along with $50 income from Julie or $53 income
> Prepare an answer sheet with the column headings shown here. For each of the following transactions or adjustments, indicate the effect of the transaction or adjustment on the appropriate balance sheet category and on net income by entering for each acco
> Crichton Publications uses the accounting rate of return method to evaluate proposed capital investments. The company’s desired rate of return (its cost of capital) is 18%. The project being evaluated involves a new product that will have a three-year li
> The following capital expenditure projects have been proposed for management’s consideration at Heard, Inc., for the upcoming budget year: Required: a. Calculate the net present value of projects B, C, and D, using 14% as the cost of
> Information about four investment proposals is summarized here: Required: Calculate the present value ratio of each proposal and indicate which proposal is the most desirable investment. Proposal Investment Required Net Present Value $60,000 24,000
> Duncan Company is considering the investment of $140,000 in a new machine. It is estimated that the new machine will generate additional cash flow of $21,000 per year for each year of its 12-year life and will have a salvage value of $15,000 at the end o
> The segmented income statement for XYZ Company for the year ended December 31, 2010, follows: The company is concerned about the performance of product A, and you have been asked to analyze the situation and recommend to the president whether to contin
> MMV Inc. opened a chain of businesses several years ago that provide quick oil changes and other minor services in conjunction with a convenience operation consisting of a soup, sandwich, and snack bar. The strategy was that as customers brought autos in
> Following are the current asset and current liability sections of the balance sheets for Freedom, Inc., at January 31, 2011 and 2010 (in millions): Required: a. Calculate the working capital and current ratio at each balance sheet date. Round your curr
> Hull Motors, Inc. (HMI), produces small gasoline-powered motors for use in lawn mowers. The company has been growing steadily over the past five years and is operating at full capacity. HMI recently completed the addition of new plant and equipment at a
> The Delmar Beverage Co. produces a premium root beer that is sold throughout its chain of restaurants in the Midwest. The company is currently producing 4,000 gallons of root beer per day, which represents 80% of its manufacturing capacity. The root beer
> Eddie Lander Tie Co. manufactures neckties and scarves. Two overhead application bases are used; some overhead is applied on the basis of raw material cost at a rate of 120% of material cost, and the balance of the overhead is applied at the rate of $8.0
> Busy Beaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50,000 investment in a machine that had an estimated useful life of five years a
> Lake Regional Hospital is considering the acquisition of a new diagnostic scanning machine. The investment required to get the machine operational will be $2,082,560. The machine will be capable of performing 6,000 scanning procedures per year, but based
> The Good wrench Garage is considering an investment in a new tune-up computer. The cost of the computer is $48,000. A cost analyst has calculated the discounted present value of the expected cash flows from the computer to be $52,650, based on the firm’s
> A task force of capital budgeting analysts at Seger Ltd. collected the following data concerning the drilling and production of known petroleum reserves at an offshore location: Investment in rigging equipment and related personnel costs requir
> South Bay Manufacturing Ltd. is considering the investment of $230,000 in a new machine. The machine will generate cash flow of $40,000 per year for each year of its eight-year life and will have a salvage value of $26,000 at the end of its life. The com
> National Leasing is evaluating the cost of capital to use in its capital budgeting process. Over the recent past, the company has averaged a return on equity of 12% and a return on investment of 9%. The company can currently borrow short-term money for 6
> Capital budgeting analysis involves the use of many estimates. Required: For each of the following estimation errors, state whether the net present value of the project will be too high or too low: a. The investment is too high. b. The cost of capital i
> Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions. Table 6-4: Required: a. Staley Co.’s common stock is expected to have a dividend of $6 per share for each of the next 12 years, and it is esti
> Using data from the financial statements of Intel Corporation in the appendix, calculate a. ROI for 2008. Round your percentage answer to one decimal place. b. ROE for 2008. Round your percentage answer to one decimal place. c. Working capital at Decemb
> An investor has asked for your help with the following time value of money applications. Use the appropriate factors from Table 6-4 or Table 6-5 to answer the following questions. Table 6-4: Required: a. What is the present value of $50,000 to be rece
> Lamp Art Co. makes specialty table lamps. Manufacturing overhead is applied to production on a direct labor hour’s basis. During November, the first month of the company’s fiscal year, $173,250 of manufacturing overhead was applied to Work in Process Inv
> ABC Company produces Product X, Product Y, and Product Z. All three products require processing on specialized finishing machines. The capacity of these machines is 3,600 hours per month. ABC Company wishes to determine the product mix that should be ach
> Product S has a contribution margin of $150 per unit and requires three hours of machine time. Product T requires four hours of machine time and provides $200 of contribution margin per unit. Required: If the capacity of machine time is limited to 600 h
> Sycamore Company uses a certain part in its manufacturing process that it buys from an outside supplier for $29 per part plus another $4 for shipping and other purchasing-related costs. The company will need 14,400 of these parts in the next year and is
> Eldon Engine, Inc., produces engines for the watercraft industry. An outside manufacturer has offered to supply several component parts used in the engine assemblies, which are currently being produced by Eldon. The supplier will charge Eldon $620 per en
> Rainbow Cruises operates a week-long cruise tour through the Hawaiian Islands. Passengers currently pay $1,800 for a two-person cabin, which is an all-inclusive price that includes food, beverages, and entertainment. The current cost to Rainbow per two-p
> Canton Company, a manufacturer of digital cameras, is considering entry into the digital binocular market. Canton Company currently does not produce binoculars of any style, so this venture would require a careful analysis of relevant manufacturing costs
> AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock show that manufacturing costs total $29.00 per lock. An analysis of this amount indicates that $16.75 of the total cost has a variable cost behavior
> Circuit Masters, Inc. (CMI), is presently operating at 80% of capacity and manufacturing 120,000 units of a patented electronic component. The cost structure of the component is as follows: Raw materials . . . . . . . . . . . . . . . . . . . . . . . . .
> Mizzou Mining Company mines an iron ore called Alpha. During the month of December, 400,000 tons of Alpha were mined and processed at a cost of $742,500. As the Alpha ore is mined, it is processed into Delta and Pi, where 60% of the Alpha output becomes
> Management of Rivers Co. anticipates that its year-end balance sheet will show current assets of $12,639 and current liabilities of $7,480. Management is considering paying $3,850 of accounts payable before year-end even though payment isn’t due until la
> Checker, Inc., produces automobile bumpers. Overhead is applied on the basis of machine hours required for cutting and fabricating. A predetermined overhead application rate of $18.50 per machine hour was established for 2010. Required: a. If 12,000 mac
> Write a paragraph describing your perceptions of what accounting is all about and the work that accountants do.
> National Chemical Company manufactures a chemical compound that is sold for $58 per gallon. A new variant of the chemical has been discovered, and if the basic compound were processed into the new variant, the selling price would be $72 per gallon. Natio
> Attending college involves incurring many costs. Give an example of a college cost that could be assigned to each of the following classifications. Explain your reason for assigning each cost to the classification. a. Sunk cost. b. Discretionary cost. c
> Assume that you have decided to drive your car to Florida for the spring break. A classmate learns about your plans and asks about riding along with you. Explain how you would apply each of the following cost concepts to the task of determining how much,
> Pioneer State Bank developed a standard for teller staffing that provided for one teller to handle 12 customers per hour. During April, the bank averaged 57 customers per hour and had six tellers on duty at all times. (Relief tellers filled in during lun
> The Foster Insurance Company developed standard times for processing claims. When a claim was received at the processing center, it was first reviewed and classified as simple or complex. The standard time for processing was: Simple claim . . . . . . .
> The standards for one case of Spring fever Tonic are: Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 lbs. @ $5.00/lb. =$30 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 hrs
> Silverstone’s production budget for March called for making 200,000 units of a single product. The firm’s production standards allow one-quarter of a machine hour per unit produced. The fixed overhead budget for March was $108,000. Silverstone uses an ab
> Milano Corporation has three operating divisions and requires a 12% return on all investments. Selected information is presented here: Required: a. Calculate the missing amounts for each division. b. Comment on the relative performance of each division
> Deckhand Accessories, Inc., manufactures women’s boating shoes. Manufacturing overhead is assigned to production on a machine-hour basis. For 2010, it was estimated that manufacturing overhead would total $974,400 and that 67,200 machine hours would be u
> The Central Division of American, Inc., has operating income of $19,200 on sales revenue of $160,000. Divisional operating assets are $100,000, and management of American has determined that a minimum return of 16% should be expected from all investments
> a. Firm D has net income of $83,700, sales of $2,790,000, and average total assets of $1,395,000. Calculate the firm’s margin, turnover, and ROI. b. Firm E has net income of $150,000, sales of $2,500,000, and ROI of 15%. Calculate the firm’s turnover and
> Vogel Co. produces three models of heating and air conditioning thermostat components. The following table summarizes data about each model: Required: a. Criticize the preceding presentation. On what basis does the $30,000 of company fixed expenses app
> The president of Truman, Inc., attended a seminar about the contribution margin model and returned to her company full of enthusiasm about it. She requested that last year’s traditional model income statement be revised, and she receive
> Fiber works Company is a manufacturer of fiberglass toy boats. The company has recently implemented a standard cost system and has designed the system to isolate variances as soon as possible. During the month of August, the following results were report
> Birchwood, Inc., manufactures end tables, armchairs, and other wood furniture products from high-quality materials. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlli
> Coastal Industries has established direct labor performance standards for its maintenance and repair shop. However, some of the labor records were destroyed during a recent fire. The actual hours worked during March were 4,000, and the total direct labor
> Ackerman’s Garage uses standards to plan and control labor time and expense. The standard time for an engine tune-up is 3 hours, and the standard labor rate is $25 per hour. Last week, 42 tune-ups were completed. The labor efficiency variance was 14 hour
> For the stamping department of a manufacturing firm, the standard cost for direct labor is $12 per hour, and the production standard calls for 1,000 stampings per hour. During June, 168 hours were required for actual production of 148,000 stampings. Actu
> Following is a partially completed performance report for a recent week for direct labor in the binding department of a book publisher: The original budget is based on the expectation that 8,000 books would be bound; the standard is 20 books per hour a
> Clay Co. produces ceramic coffee mugs and pencil holders. Manufacturing overhead is assigned to production using an application rate based on direct labor hours. Required: a. For 2010, the company’s cost accountant estimated that total overhead costs in
> The cost formula for the maintenance department of Rainbow, Ltd., is $12,600 per month plus $4.50 per machine hour used by the production department. Required: a. Calculate the maintenance cost that would be budgeted for a month in which 15,200 machine
> The Consortium for Advanced Manufacturing—International (CAM-I) is an international consortium of companies, consultancies, and academics that have elected to work cooperatively in a precompetitive environment to solve problems common to the group. Its s
> a. Firm A has a margin of 12%, sales of $600,000, and ROI of 18%. Calculate the firm’s average total assets. b. Firm B has net income of $78,000, turnover of 1.3, and average total assets of $950,000. Calculate the firm’s sales, margin, and ROI. Round yo
> York Co. uses a standard cost system. When raw materials are purchased, the standard cost of the raw materials purchased is recorded as an increase in the Raw Materials Inventory account. When raw materials are used, the standard cost of the materials al
> During the year ended May 31, 2009, Teller Register Co. reported favorable raw material usage and direct labor and variable overhead efficiency variances that totaled $114,312. Price and rate variances were negligible. Total standard cost of goods manufa
> Williamson, Inc., manufactures quality replacement parts for the auto industry. The company uses a standard costing system and isolates variances as soon as possible. The purchasing manager is responsible for controlling the direct material price varianc
> Assume that you are the production manager of a small branch plant of a large manufacturing firm. The central accounting control department sends you monthly performance reports showing the flexed budget amount, actual cost and variances for raw material
> If a company uses a standard cost system, should all variances be calculated with the same frequency (e.g., monthly) and should they always be expressed in dollar amounts? Explain your answer and include in it the reason for calculating variances.
> One of the significant costs for a nonpublic college or university is student aid in the form of gifts and grants awarded to students because of academic potential or performance, and/or financial need. Gifts and grants are only a part of a financial aid
> The chair of the Science Department of State University has a budget for laboratory supplies. Supplies have a variable cost behavior pattern that is a function of the number of students enrolled in laboratory courses. For planning purposes, when the budg
> College Carriers manufactures backpacks that are sold to students for use as book bags. Required: Identify a specific item in this company’s manufacturing, selling, or administrative processes for which the cost would be classified as a. raw material. b
> The monthly cash budgets for the second quarter of 2010 follow ($000 omitted) for Morrison Mfg. Co. A minimum cash balance of $30,000 is required to start each month, and a $100,000 line of credit has been arranged with a local bank at a 8% interest rate
> Refer to the Prime Time Sportswear data presented in Problem 14.13. Problem 14.13: Prime Time Sportswear is a custom imprinter that began operations six months ago. Sales have exceeded management’s most optimistic projections. Sales a
> Prime Time Sportswear is a custom imprinter that began operations six months ago. Sales have exceeded management’s most optimistic projections. Sales are made on account and collected as follows: 60% in the month after the sale is made
> You have two investment opportunities. One will have a 10% rate of return on an investment of $500; the other will have an 11% rate of return on principal of $700. You would like to take advantage of the higher-yielding investment but have only $500 avai
> Gemstone, Ltd., is a retail jeweler. Most of the firm’s business is in jewelry and watches. The firm’s average gross profit ratio for jewelry and watches is 80% and 40%, respectively. The sales forecast for the next tw
> Brooklyn Furniture, a retail store, has an average gross profit ratio of 42%. The sales forecast for the next four months follows: May. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 June . . . . . . . . .
> Soprano Co. is in the process of preparing the second quarter budget for 2010, and the following data have been assembled: • The company sells a single product at a selling price of $40 per unit. The estimated sales volume for the next
> DMA, Inc., processes corn into corn starch and corn syrup. The company’s productivity and cost standards follow: From every bushel of corn processed, 12 pounds of starch and 6 pounds of syrup should be produced. Standard direct labor and variable overhea
> Ozark Manufacturing Co. manufactures and sells household cleaning products. The company’s research department has developed a new cleaner for which a standard cost must be determined. The new cleaner is made by mixing 18 quarts of triphate solution and 8
> Brass Creations Co. makes decorative candle pedestals. An industrial engineer consultant developed ideal time standards for one unit of the Cambridge model pedestal. The standards follow, along with the cost accountant’s determination of current labor pa
> The following data (amounts in millions) are taken from the January 30, 2009, and February 1, 2008, comparative financial statements of Dell Inc., a direct marketer and distributor of personal computers (PCs) and PC-related products: At February 2,
> Flagstaff Co. has actual sales for July and August and forecast sales for September, October, November, and December as follows: Actual: July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $73,500 August . . . . .
> Osage Inc. has actual sales for June and July and forecast sales for August, September, October, and November as follows: Actual: June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,150 units July . . . . . . . . . . .
> Each gallon of Old Guard, a popular aftershave lotion, requires 6 ounces of ocean scent. Budgeted production of Old Guard for the first three quarters of 2010 is: Management’s policy is to have on hand at the end of every quarter enoug
> Pelican Co. is forecasting sales of 40,300 units of product for October. To make one unit of finished product, 10 pounds of raw materials are required. Actual beginning and desired ending inventories of raw materials and finished goods are: Required: a
> A friend has $4,800 that has been saved from her part-time job. She will need her money, plus any interest earned on it, in six months and has asked for your help in deciding whether to put the money in a bank savings account at 5.5% interest or to lend
> For each of the following costs, check the columns that most likely apply (both variable and fixed might apply for some costs). Product Costs Direct Indirect Period Variable Fixed Wages of assembly-line workers Depreciation of plant equipment Glue a
> Match each of the following cost items with the value chain business function where you would expect the cost to be incurred: Business Function Cost Item Answer 1. Labor time to repair products under warranty 2. TV commercial spots a. Research and d
> Match each of the following cost items with the value chain business function where you would expect the cost to be incurred: Business Function Cost Item Answer a. Research and development b. Design c. Production d. Marketing e. Distribution f. Cust
> SAS® is a world leader in business analytics software, delivering breakthrough technology to transform the way organizations do business. For SAS the mission is to empower organizations around the world with superior software, solutions, and services and
> Intel Corporation provides access to its annual reports online at www.intel.com. The annual reports are found in the “About Intel/Investor Relations/Financials and Filings” area of its Web site. Locate the following information in the annual reports prov
> Olympia Productions, Inc., makes award medallions that are attached to ribbons. Each medallion requires 18 inches of ribbon. The sales forecast for February is 8,000 medallions. Estimated beginning inventories and desired ending inventories for February
> Custom Granite, Inc., uses an absorption cost system for accumulating product cost. The following data are available for the past year: • Raw materials purchases totaled $480,000. • Direct labor costs incurred for the
