Software Solutions, Inc., was started by two young software engineers to market SpamBlocker

Problem A-6 The Economists’ Approach to Pricing; Absorption Costing Approach to Cost-Plus Pricing

Software Solutions, Inc., was started by two young software engineers to market SpamBlocker, a software application they had written that screens incoming e-mail messages and eliminates unsolicited mass mailings. Sales of the software have been good at 50,000 units a month, but the company has been losing money as shown below:

Sales (50,000 units _ $25 per unit) . . . . . . . . . $1,250,000
Variable cost (50,000 units _ $6 per unit) . . . . 300,000
Contribution margin . . . . . . . . . . . . . . . . . . . . . 950,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . . . . 960,000
Net operating income (loss) . . . . . . . . . . . . . . . $ (10,000)

The company’s only variable cost is the $6 fee it pays to another company to reproduce the software on floppy diskettes, print manuals, and package the result in an attractive box for sale to consumers. Monthly fixed selling and administrative expenses are $960,000. The company’s marketing manager has been arguing for some time that the software is priced too high. She estimates that every 5% decrease in price will yield an 8% increase in unit sales. The marketing manager would like your help in preparing a presentation to the company’s owners concerning the pricing issue.

Required:
1. To help the marketing manager prepare for her presentation, she has asked you to fill in the blanks in the following table. The selling prices in the table were computed by successively decreasing the selling price by 5%. The estimated unit sales were computed by successively increasing the unit sales by 8%. For example, $23.75 is 5% less than $25.00 and 54,000 units is 8% more than 50,000 units

Selling Price, Estimated Unit Sales, Sales, Variable Cost, Fixed Expenses, Net Operating Income
$25.00 50,000 $1,250,000 $300,000 $960,000 $(10,000)
$23.75 54,000 $1,282,500 $324,000 $960,000 $ (1,500)
$22.56 58,320 ? ? ? ?
$21.43 62,986 ? ? ? ?
$20.36 68,025 ? ? ? ?
$19.34 73,467 ? ? ? ?
$18.37 79,344 ? ? ? ?
$17.45 85,692 ? ? ? ?
$16.58 92,547 ? ? ? ?
$15.75 99,951 ? ? ? ?

2. Using the data from the table, construct a chart that shows the net operating income as a function of the selling price. Put the selling price on the X-axis and the net operating income on the Y-axis. Using the chart, determine the approximate selling price at which net operating income is maximized.

3. Compute the price elasticity of demand for the SpamBlocker software. Based on this calculation, what is the profit-maximizing price?

4. The owners have invested $2,000,000 in the company and feel that they should be earning at least 2% per month on these funds. If the absorption costing approach to pricing were used, what would be the target selling price based on the current sales of 50,000 units? What do you think would happen to the net operating income of the company if this price were charged?

5. If the owners of the company are dissatisfied with the net operating income and return on investment at the selling price you computed in (3) above, should they increase the selling price? Explain.

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Olsson Video Center accumulates the following cost and market data at December 31

ACC 290 Week 5 Assignment

BE6-7 Olsson Video Center accumulates the following cost and market data at December 31.

Inventory Cost Market
Categories Data Data
Cameras $12,500 $13,400
Camcorders 9,000 9,500
DVDs 13,000 12,200

Compute the lower-of-cost-or-market valuation for Olsson inventory.

Click here for the solution: Olsson Video Center accumulates the following cost and market data at December 31

Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union

Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union. Sewell intended to sell individual franchises for the major language groups of Western Europe—German, French, English, Spanish, and Italian. Naturally, investors considering buying a franchise from Sewell asked to see the financial statements of his business.

Believing the value of the franchise to be $500,000, Sewell sought to capitalize his own franchise at $500,000. The law firm of St. Charles & LaDue helped Sewell form a corporation chartered to issue 500,000 shares of common stock with par value of $1 per share. Attorneys suggested the following chain of transactions:

a. Sewell's cousin, Bob, borrows $500,000 from a bank and purchases the franchise from Sewell.
b. Sewell pays the corporation $500,000 to acquire all its stock.
c. The corporation buys the franchise from Cousin Bob.
d. Cousin Bob repays the $500,000 loan to the bank.

In the final analysis, Cousin Bob is debt-free and out of the picture. Sewell owns all the corporation's stock, and the corporation owns the franchise. The corporation's balance sheet lists a franchise acquired at a cost of $500,000. This balance sheet is Sewell's most valuable marketing tool.

1. What is unethical about this situation?
2. Who can be harmed? How can they be harmed? What role does accounting play?


Click here for the solution: Stan Sewell paid $50,000 for a franchise that entitled him to market software programs in the countries of the European Union

Interest is said to drive the stock market

Interest is said to drive the stock market. But interest is paid on bonds and loans, while stocks pay dividends, never interest. It would seem that interest has nothing to do with the stock market. Explain this apparent contradiction.


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An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price

15-37 (Accounting Estimates) An Alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently 5% above the existing market price. In addition, the co-op has agreed to pay the farmers interest at 2% for each month delivery is delayed beyond December 31, 2009. Management expects that at least 14,500 tons will be delivered sometime after the balance sheet date.

Required
A. What factors should be considered in making an estimate of the loss accrual?
B. Assuming the amount of the purchase commitment is material, what information should management disclose in the footnotes to the financial statements concerning this purchase commitment?


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Suppose the realized rate of return on the market portfolio is one percentage point greater than its expected return

Suppose the realized rate of return on the market portfolio is one percentage point greater than its expected return. How would the realized rate of return compare with the expected return of a security with a beta of +2?


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Challenge Problem: Consider a market with only the following three risky assets

Challenge Problem: Consider a market with only the following three risky assets:

Expected Return % per month Risk % Covariance with market
Asset 1 2.03 2 1.12
Asset 2 1.79 1 0.90
Asset 3 1.49 1 0.62
Market Portfolio 0.92

a) Consider the market portfolio comprised of 4% invested in Asset 1, 76% invested in Asset 2, and 20% invested in Asset 3. What is the expected return of this portfolio?
b) What are the betas of the three risky assets?
c) Suppose the riskless rate of interest is 0.8% (8/10ths of one percent per month). Are these three securities priced correctly?
d) What is the beta of the market portfolio calculated as a weighted average of the betas of its components?


Click here for the solution: Challenge Problem: Consider a market with only the following three risky assets

Dover Company began operations in 2012 and determined its ending inventory at cost and at the lower of cost or market at December 31, 2012 and December 31, 2013

E9-4 Dover Company began operations in 2012 and determined its ending inventory at cost and at the lower of cost or market at December 31, 2012 and December 31, 2013 . This information is presented below.

Cost lower of cost or market
12/31/12 $346,000 $322,000
12/31/12 410,000 390,000

a) Prepare the journal entries required at December 31,2012 and December 31,2013 assuming that the inventory is recorded at lower of cost or market and a perpetual inventory system. Assume the cost of goods sold method with no allowance used.
b) Prepare journal entries required at December 31, 2012 and December 31,2013 assuming that the inventory is recorded at lower of cost or market and a perpetual inventory system. Assume the loss method with an allowance used.
c) Which of the 2 methods above provides the higher net income in each year?


Click here for the solution: Dover Company began operations in 2012 and determined its ending inventory at cost and at the lower of cost or market at December 31, 2012 and December 31, 2013

LaGreca Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items

E9-6 (Lower-of-Cost-or-Market—Error Effect) LaGreca Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items. The inventory at December 31, 2010, included product X. Relevant per-unit data for product X appear below.

Estimated selling price $50
Cost 40
Replacement cost 38
Estimated selling expense 14
Normal profit 9

There were 1,000 units of product X on hand at December 31, 2010. Product X was incorrectly valued at $38 per unit for reporting purposes. All 1,000 units were sold in 2011.

Instructions
Compute the effect of this error on net income for 2010 and the effect on net income for 2011, and indicate the direction of the misstatement for each year.

Click here for the solution: LaGreca Company uses the lower-of-cost-or-market method, on an individual-item basis, in pricing its inventory items

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits. In 2011, the partnership distributes this property to Isabel, also a 25% partner, in a no liquidating distribution. The fair market value has increased to $30,000 at the time the property is distributed. Isabel’s and Adrianna’s bases in their partnership interests are each $40,000 at the time of the distribution.

a. How much gain or loss, if any, does Adrianna recognize on the distribution to Isabel? What is Adrianna’s basis in her partnership interest following the distribution?
b. What is Isabel’s basis in the land she received in the distribution?
c. How much gain or loss, if any, does Isabel recognize on the distribution? What is Isabel’s basis in her partnership interest following the distribution?
d. How much gain or loss would Isabel recognize if she later sells the land for its $30,000 fair market value? Is this result equitable?
e. Would your answers to (a) and (b) change if Adrianna originally contributed the property to the partnership in 2000?

Click here for the solution: In 2008, Adrianna contributed land with a basis of $16,000 and a fair market value of $25,000 to the A&I Partnership in exchange for a 25% interest in capital and profits

H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market

Exercise 13-35 Target Costing

H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market. The toaster will have four slots that adjust in thickness to accommodate both slim slices of bread and oversized bagels. The target price is $75. Banks requires that new products be priced such that 20 percent of the price is profit.

Instructions
1. Calculate the amount of desired profit per unit of the new toaster.
2. Calculate the target cost per unit of the new toaster.

Click here for the solution: H. Banks Company would like to design, produce, and sell versatile toasters for the home kitchen market

The efficient market hypothesis requires

1) The efficient market hypothesis requires

2) If financial markets are efficient, that suggests that

3) Which of the following is included in an individual's cash budget?

4) The tendency for securities prices to overreact may create an anomaly that can lead to superior returns.

a. True

b. False

5) Contributions to a Roth IRA are not tax-deductible.

a. True

b. False

6) Pension plans permit investors to defer income tax.

a. True

b. False

7) With a Roth IRA, the individual

8) Possible investment objectives may include

9) The amount of an outstanding mortgage appears on the individual's balance sheet.

a. True

b. False

10) One anomaly to the efficient market hypothesis is that investments in debt of large firms will earn higher returns than investments in their stock.

a. True

b. False

11) The process of financial planning requires the individual to

12) Examples of tax shelters for individuals include

13) Short-term capital gains are subject to higher tax rates than long-term capital gains.

a. True

b. False

14) Which of the following currently reduces taxes?

15) Net short-term capital losses are used to offset

16) An active portfolio strategy is premised on

17) The traditional IRA is

18) Contributions to an IRA appear on the individual's estimate of cash receipts and disbursements.

a. True

b. False

19) One of the first steps an investor should take is to establish the goals of the portfolio.

a. True

b. False

20) An implication of the efficient market hypothesis is

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ACC 225 Week Six (Week 6) Solution

ACC 225 Week Six (Week 6) Solution

CheckPoint: Computing Inventory Balances and Lower of Cost or Market
• Resource: Fundamental Accounting Principles, pp. 247-249
• Due Date: Day 4 [Individual] forum
• Complete Quick Study question QS 6-1 on p. 247 and Exercises 6-1 and 6-5 on pp. 248 and 249.

Assignment: Estimating Inventory and Preparing Multiple-Step and Single-Step Income Statements
• Resource: Fundamental Accounting Principles, pp. 251 and 256
• Due Date: Day 7 [Individual] forum
• Complete Problems 5-4A on p. 212, 6-1A on p. 251, and 6-6B and 6-7B on p. 256.
• Post your answers as an attachment.
 Click here for the solution: ACC 225 Week Six (Week 6) Solution