CASE OUTLINE

Jim Foster is the owner of Selwyn Pub in North Carolina. Jim's family was the owner of the pub for over four decades. The distinguishing feature of the Selwyn Pub is the massive oak tree in front of the pub, its branches and leaves cascading over the side walk. The tree became the arbor for outdoor dining and pub services, giving a natural gift of green shade and breeze through the hot summer months and cool sunshine in early Fall and late Spring. The outdoor area was approximately 50 feet by 50 feet. Each table occupies 12 feet by 8 feet, seating 22 tables.

Over the years, Jim noticed that the tree was not as abundant and despite repeatedly service from expert arborists (tree doctors), the tree was in failing health. The past expenses over these years totaled $5,000. The town decided that the tree was danger to property and people and decided on its imminent removal.

Foster was convinced that nothing would replace the tree to his business and to its patron. However, will the removal of the tree offer opportunities for his business? Clearly, each replacement would involve different costs and benefits to his business. These are some of the thoughts Foster considered.

A. Do nothing. This becomes the new baseline for all decisions because the competitive advantage offered by the shade of a beautiful tree is no more. Foster observes that the loss of shade can potentially reduce both indoor and outdoor revenue, compared to past experience.

B. Invest in a non-retractable awning to creating a outdoor space, giving additional protection in clear and rainy days. Foster was concerned that the non-retractable awning would block outdoor sunshine and adversely impact both indoor and outdoor revenue? Could non-retractable awning raise revenue on rainy days and reduce revenue on bright, hot days?

C. Invest in a retractable awning to create outdoor space, giving the option of both sunshine and share. Could this option raise both outdoor and indoor revenue streams?

Foster estimated explicit costs as follows:

1) Do nothing

2) Costs of non-retractable awning: $50,000

3) Costs of retractable awning $100,000

Foster also estimates that financing investment would require additional bank loan. The interest rate on the loan is estimated at 7% annually. Foster intends to apply for a business line, pay interest only for 12 months and the principal back at the end of 12 months. Foster projected marginal costs and marginal revenue for the above alternatives. These projections are shown in Additional Inputs spread sheet.

QUESTIONS

1. Using your knowledge of marginal analysis and present value analysis for the evaluation of extant decisions (potential investment), evaluate the alternatives presented above and recommend to Foster the best rational decision. Use a 7% annual discount rate for calculating Net Present Value. Hint: Use excel function =NPV to calculate the PV of future cash flows over the 12 months. Use the annual cost of bank funds, adjusted to a monthly rate, as the discount rate.

6 Develop the benefits and costs relating to all 3 scenarios (do nothing, install non-retractable awning, install retractable awning) , then perform marginal analysis by comparing alternatives 2 and 3 with 1, and finally compute NPV.

Knowledge Check 01 What is the correct Journal entry for a company that issues $100,000 of raw material, which Includes $10,000 of Indirect material? Debit Work In Process $100,000 and credit Raw Materials Inventory $100,000 Debit Work In Process $90,000, debit Manufacturing Overhead $10,000, and credit Direct Materials $100,000 Debit Work In Process $90,000, debit Manufacturing Overhead $10,000, and credit Raw Materials Inventory $100,000 Debit Manufacturing Overhead $100,000 and credit Raw Materials Inventory Knowledge Check 02 What is the correct journal entry to record actual factory utilities cost as Incurred on account? Debit Work In Process and credit Manufacturing Overhead Debit Utilities Expense and credit Manufacturing Overhead Debit Manufacturing Overhead and credit Accounts Payable Debit Utilities Expense and credit Work In Process Knowledge Check 03 What Is the correct Journal entry to record applied manufacturing cost to Work In Process? Debit to Cost of Goods Sold Debit to Manufacturing Overhead Credit to Work In Process Credit to Manufacturing OverheadWhen materials are requisitioned from the Raw Materials O points Inventory they can be classified as either direct materials (which are traced directly to the job) or indirect materials (which are items so insignificant that they are not traced directly to a job and instead are included in manufacturing overhead). What is the journal entry made when the material is classified as direct material? * * O Debit Work in Process Inventory, Credit Direct Materials O Debit Direct Materials, Credit Raw Materials Inventory O Debit Direct Materials, Credit Raw Materials Inventory O Debit Work in Process Inventory, Credit Raw Materials Inventory Time cards are collected and it is determined that total 0 points labor (both direct and indirect) is $4,890. What journal entry would be made when the weekly payroll is recorded? O Debit Work in Process Inventory, Credit Factory Payroll O Debit Factory Payroll, Credit Cash or Wages Payable O Debit Work in Process Inventory, Credit Wages Payable O Debit Direct Labor, Credit Work in Process InventoryMatch the descriptions with the journal entry that is most closely associated with the data flow Debit Credit 1. Payroll process to GL/BR process: GL Manufacturing Overhead (tax on factory workers) FICA taxes payable employer tax accrual update General and administrative expense SUTA taxes payable 2. B/AR/CR process to GL/BR process: GL Selling expense FUTA taxes payable write-off update Debit Credit 3. B/AR/CR process to GL/BR process: GL invoice update Allowance for doubtful accounts Accounts receivable 4. Payroll process to GL/BR process: GL disbursement voucher update v Debit Credit 5. Payroll process to GL/BR process: GL tax deposit update Bad debt expense Allowance for doubtful accounts 6. B/AR/CR process to GL/BR process: GL V Debit Credit cash receipts update Accounts Receivable Sales 7. AP/CD process to GL/BR process: GL payable update v Debit Credit 8. AP/CD process to GL/BR process: GL Federal income tax withholding cash disbursements update Payroll Clearing State income tax withholding FICA tax withholdings payable 9. Payroll process to GL/BR process: GL labor distribution update Accrued payroll 10. B/AR/CR process to GL/BR process: GL *Debit Credit estimated bad debts updateQUESTION 9 lip-ohm 5:1th The purchase of raw materials on account in a process costing system is recorded with a: 0 Debit to Purchases and credit to Cash. 0 Debit to Purchases and a credit to Accounts Payable. 0 Debit to Ftavv Materials Inventory and a credit to Accounts Payable. 0 Debit to Accounts Payable and a credit to Flaw Materials Inventory. 0 Debit to Work in Process Inventory and a credit to Accounts Payable. QUESTION 10 #90010! album Wilturner Company incurs $74,000 of labor related directly to the product in the Assembly Department, $23,000 of labor not directly related to the product but related to the Assembly Department as a whole, and $10,000 of labor for services that help production in both the Assembly and Finishing departments. The journal entries to record the labor would include: 0 Debit Work in Process Inventory $?4,000; debit Factory Overhead $33,000. 0 Debit Work in Process Inventory $?4,000; debit Wages Expense 5533.000. O Debit Work in Process Inventory $91000; debit Wages Expense 3510.000. 0 Debit Work in Process Inventory $107,000. 0 Debit Work in Process Inventory $91000; debit Factory Dverhead $10.000. In the closing process, expenses and dividends are zeroed out by each account and revenues are zeroed out by EACH account Multiple Choice O debking: crediting O crediting: debiting debiting or crediting (depending on the account crediting O O crediting; crediting