Part 1: Market Timing

This question explores uncertainty in investing. Assume you plan to invest in a broad-based equity index. You start with a zero balance account. Each year, you plan to contribute an extra $10,000 at year-end. (Assume annual compounding and uncorrelated market returns from year to year.)

a. If you invest (and contribute) for 30 years and the equity index return each year is normally distributed with expected return of 10% and standard deviation 20% (i.e., a different realized return each year), what is the expected value of your investment account in 30 years (just after your last payment)?

b. What is the likelihood that you end up with less than $600,000 in 30 years (i.e., twice what you contributed)?

c. How does the expected balance and likelihood change if you move your money to cash in years where the realized index return in the previous year was negative? (Note: You still make a contribution to your account every year, but your allocation to the market is zero in years where the prior year realized market return was negative.)

d. Lets explore the assumption of uncorrelated market returns. The accompanying spreadsheet provides annual realized market excess returns. Run the following regression of current year returns on last-year returns (youll need to lag the returns one year to form the x-variable): ???????????????????? = ???? +????????????1 ???????????? +????

What is the estimate and t-statistic for the coefficient ????? What is the estimate and tstatistic for the intercept ????? Please interpret both economically and statistically.

MGMT502 Managerial Accounting Spring 2017 Mid-term homework set Note: This is also a group assignment. The assignment will be due on Monday, February 13th, by 8PM. Submissions will be electronic to Owlspace in either word or pdf format. Late submissions will not be accepted. Problem 1 Baber, Inc., manufactures custom scaffolding used in construction projects. The following data pertain to its operations for the most recent year: Direct materials beginning inventory Direct materials ending inventory WIP beginning inventory WIP ending inventory Finished goods beginning inventory Finished goods ending inventory Raw materials purchased Direct labor cost Selling and administration expenses Revenues $23,000 $42,000 $98,500 $76,400 $124,350 $138,750 $190,000 $145,000 $87,600 $694,740 You also know that Baber, Inc., uses two allocation bases to charge overhead to products. It calculates a rate of 20% of materials cost for materials-related overhead. The rate for all other manufacturing overhead is 150% of direct labor cost. Required: a. Calculate the cost of direct materials issued to WIP during the year. b. Calculate the cost of manufacturing overhead charged to production. c. Calculate the cost of goods manufactured during the year. d. Calculate the cost of goods sold during the year. e. Prepare a GAAP income statement. f. For a particular custom truss, Baber informs you that it incurred $7,800 for direct materials costs and $12,300 for direct labor costs. What is the inventoriable cost of this truss? g. Comment on whether the value of the units as reported in the ending inventory account is a good estimate of the products' costs for decisions such as setting pricing. Problem 2 Mowerson Division The Mowerson Division of Brown Instruments manufactures testing equipment for the automobile industry. Mowerson's equipment is installed in several places along the automobile assembly line for component testing and is also used for recoding and measurement purposes during track and road tests. Mowerson's sales have grown steadily, and revenue will exceed $200 million for the first time in 2011. Mowerson designs and manufactures its own printed circuit boards (PCBs) for use in the test equipment. The PCBs are manually assembled in the Assembly Department, which employs 45 technicians. Because of a lack of plant capacity and a shortage of skilled labor, Mowerson is considering having the PCBs manufactured by Tri-star, a specialist in this field. Quality control restrictions and vendor requirements dictate that all PCBs be either manufactured by Mowerson or contracted to one outside vendor. The per-board cost of outside manufacture is higher than the in-house cost; however, management thinks that savings could also be realized from this change. Jim Wright, a recently hired cost analyst, has been entrusted with performing a financial analysis of the outside manufacturing proposal. Wright's report in Exhibit 1 includes the assumptions he used in his analysis, along with his recommendation. His financial analysis appears below, and his notes and assumptions follow the analysis. Required: 1. Discuss whether Jim Wright should have analyzed only the cost and savings that Mowerson will realize in 2012. 2. For each of the ten items listed in Wright's financial analysis, indicate whether i. The item is appropriate or inappropriate for inclusion in the report. If the item is inappropriate, explain why it should not be included in the report. ii. The amount is correct or incorrect. If the amount is incorrect, state what the correct amount is. 3. What additional information about Tri-star would be helpful in evaluating the decision? Exhibit 1 Annual Cost Savings Analysis For Tri-star Contract Savings Reductions in Assembly Technicians 1 ($28,500 40) $ 2 Assembly supervisor transferred 3 35,000 Floor space savings [(1,000 $9.5)+(8,000 $6.00)] 57,500 4 Purchasing clerk, 1/2 time on special project 5 6,000 Purchase order reduction (2,000 orders @ $1.25 each) 2,500 6 Reduced feright expense Costs Increased production cost 7 [($60,00-52.00) 100,000 units] 1,140,000 7,500 $ 20,000 9 Hire quality control inspector 22,000 Increased storage cost for safety stock (expectd value of 4,200 units @ $2,00/unit Net annual savings 1,248,500 $ $ 850,400 398,100 800,000 8 Hire junior engineer 10 $ 8,400 NOTES AND ASSUMPTIONS Personnel 1. Assembly department technicians will be reduced by 40 at an annual savings (salary plus benefits) of $28,500 each. Five technicians will remain to assist the field service department with repair work on the printed circuit boards. The supervisor of the assembly department will remain with Mowerson because he has only two years until retirement; a position will be created for him in the machining department, where he will serve as a \"special\" consultant. 2. Because of the elimination of purchasing and stocking of component parts required for the PCB assembly, one purchasing clerk will be assigned half-time to a special project until his time can be more fully utilized. 3. A junior engineer will be hired to act as liaison between the Mowerson and Tri-star. In addition, a third quality control inspector will be needed to monitor the vendor's adherence to quality standards. Floor space 4. For the past two years, Mowerson has rented, on a month-to-month basis, 1,000 square feet of space for $9.50 per square foot in a neighboring building to accommodate the overflow of assembly work. The 8,000 square currently being used in Mowerson's main plant by the assembly department could be potentially used for temporary stockroom storage, if at all necessary. Further, there are no immediate plans for other ways of utilizing this space although it can be reclaimed for manufacturing use at some future point in time. This floor space is \"valued\" at $6.00 per square foot. Production costs and volume 5. Mowerson's cost of manufacturing PCBS is as follows: Direct material Direct labor Variable overhead Fixed overhead Total cost $24.00 $12.50 $6.25 $9.25 $52.00 The direct material cost includes normal scrap and other such material-related costs as incoming freight and issuing costs. Mowerson's annual cost for incoming freight attributed to PCBs is $7,500. Tri-star will charge $60 per board, including the cost of delivery. 6. Mowerson's production volume of PCBs for the past two years has been 80,000 and 90,000 boards, respectively. Projected production volumes for the next three years are: 2012 2013 2014 100,000 120,000 130,000 Storage costs 7. Because Mowerson will not have direct control over the manufacture of the PCBs, the level of safety stock will be increased over the current level of 1,800 boards. The supervisor of the assembly department has provided the accompanying probabilities associated with reduction in Tri-star's ability to produce and/or deliver PCBs. Percentage of Time Tri-star Deliveries Will be Late 4% 6 8 10 Probability (1) 0.30 0.40 0.25 0.05 Safety Stock of PCBs (2) 2,500 4,000 6,000 7,000 Expected Value (1)(2) 750 1,600 1,500 350 4,200 The variable cost to store the PCBs is $2 per board per year. Other 8. The variable cost of executing a purchase order at Mowerson is $1.25 for items such as postage, forms, and telephone. Since Mowerson will no longer have to purchase all the component parts required for the PCBs, there will be a reduction of 2,000 purchase orders prepared manually. Recommendation Based on annual savings of $398,100 projected above, Mowerson should enter into an agreement with Tri-star to manufacture the PCBs. Problem 3 Hannah Turnbull manages Elegant Suites, a hotel in a small town 10 miles inland from Florida's beautiful gulf coast. Elegant Suites has a capacity of 320 suites and offers a small, but well managed, conference center. Since opening, Elegant Suites has established a good reputation among small and medium-sized business clients as a nice place to hold annual meetings and retreats. Hannah currently is in a quandary regarding hotel bookings for the last weekend in February. One of Elegant's long-standing clients, Piedmont Publishing, recently called Hannah about the possibility of holding its annual three-day sales conference at the end of February. Piedmont wants to reserve 75 rooms each day (= 225 total room days). Per its usual arrangement, Piedmont would pay $120 per day per room and $5,000 per day for use of the convention center. Because this is a bulk booking, the room rate is lower than the normal rate of $150 per day. Like all clients, however, the Piedmont attendees would spend additional money at the hotel. Hannah expects this miscellaneous expenditure to be $25 per person per day. Shortly after receiving the call from Piedmont, Hannah received a call from Capelli Fashion Designers. Capelli, a prospective first-time client, wants to hold its annual three-day fashion event at Elegant Suites at the end of February. Capelli would book 225 suites per day (for a total of 675 room days) and is willing to pay $120 per suite per day. Also, Capelli would be willing to pay the normal daily rate of $5,000 for use of the convention center, although it wants Hannah to construct a runway at a cost of $3,000. Hannah was ecstatic to receive the Capelli call until she realized that the dates Capelli wants coincide with Piedmont's annual sales meeting. Trying to figure a way out, Hannah calls both Capelli and Piedmont to see if either party would be willing to move its event to different dates. However, both Capelli and Piedmont are committed to holding their respective events at the end of February. Next, Hannah looks at her reservations chart to see if she can hold both events. She realizes that 60 suites already are committed to other individual clients during that time. Hannah believes strongly that she must honor these reservations. Hannah provides you with the following summary financial data for a typical month of operations. Summary Financial Data for a Typical Month of Operations Number of occupied suite-days (approx. 60% occupancy) 6,000 Average Suite rate $130 Revenues: Suites Convention Center Food, telephone, movies, and other incidentals Total Revenues $780,000 75,000 150,000 $1,005,000 Variable costs: Food, laundry, supplies, telephone, and movies Labor (kitchen help, cleaning staff) Contribution margin $180,000 210,000 $615,000 Fixed costs: Labor (hotel management) Building and Grounds Profit before taxes $125,000 350,000 $140,000 Hannah also informs you that if she stays with Piedmont, she is likely to sell another 57 suites to individual parties for each of the three days at the standard rate of $150 per suite. If she accepts Capelli, she will be able to sell the remaining 35 suites to individual parties for each of the three days at the standard rate of $150 per suite. However, as booking Capelli would cause an abnormally high occupancy rate (100%), Hannah anticipates the need to pay her hourly staff an overtime premium of 50% for the three-day period (i.e., the average hourly wage will be the base wage 1.50). Required a. Identify Hannah's decision options. b. Identify Hanna's best option. c. Suppose 75 and 225 suites per day is the number of suites that Piedmont and Capelli wish to block for their conventions. However, the actual demand might be less than this estimate. While Piedmont is sure to occupy at least 60 suites, Capelli estimates that total demand might range from 150 to 225 suites. Because actual demand would not be known till late, Hannah would not be able to fill unused suites with paying guests. How might this information affect Hannah's decision? d. Considering long-term implications, what should Hannah do? Problem 5: Jessica's Caps Jessica James is considering a business ventureselling custom-embroidered baseball caps from a pushcart kiosk at College Mall. The caps will be available in 12 different colors and one-size fits all. The caps' unique feature is that almost any name, phrase, or logo, can be stitched onto the cap while the customer waits. Thus, a customer can obtain a cap with his or her own name, monogram, special saying, or favorite logo in a wide variety of thread colors, sizes, and fonts. Based on preliminary market research and input from the franchising company, Jessica plans on selling each embroidered cap for $20. Jessica plans to acquire the necessary technology (two industrial strength sewing machines hooked up to PCs with scanners and all of the necessary software) by obtaining a franchise from Made to Order Caps, Inc. Made to Order Caps, Inc., sells all of the necessary equipment and technology and provides the inventory of caps and other supplies. In addition, Made to Order Caps, Inc., trains prospective franchisees such as Jessica in the basics of running the business and operating the machines. Jessica will need to buy the caps from Made to Order Caps, Inc., for $4 per cap and pay a royalty to the franchising company of $2 per cap sold. In addition, Jessica believes that each cap will use about $2.50 worth of supplies (including thread, replacement of sewing needles, machine maintenance, etc.). Finally, Made to Order Caps, Inc., requires that each franchisee invest $250 per month on leaflets and brochures to advertise the product. Jessica discovers that College Mall would supply her with the pushcart and all of the necessary equipment for proper display. The license from the mall also allows Jessica to use several electrical outlets and two telephone outlets. College Mall will pay for Jessica's electricity consumption, but she will have to obtain two business telephone lines at a cost of $50 per line per month. College Mall is willing to license the space and equipment to Jessica on a monthly basis for $1,970 per month. To generate maximum sales, Jessica wants to keep the pushcart open for business from 10 A.M. to 10 P.M. Monday through Friday, and from 10 A.M. to 6 P.M. on Saturday and Sunday. Jessica is willing to put in 50 hours at the kiosk, and she can obtain additional part-time help at $10 per hour (only one individual is required to operate the business). Jessica's only other significant expense is setting up to accept credit cards. Jessica anticipates that 75% of her sales will be credit card sales, and the credit card company charges Jessica a fee of 2% of the selling price. Required: (Assume that there are exactly four weeks per month) 1. Calculate Jessica's monthly breakeven point in baseball caps. What does this translate to in revenue? 2. How much profit would Jessica earn in a month if she sold 1,000 caps? How many caps would Jessica have to sell to earn a target profit of $4,032 per month? 3. Jessica has been toying around with how the quantity of caps she can sell is likely to vary inversely with the selling price. Jessica is keenly aware that the lower the price per cap, the more caps she can sell and vice versa. She is determined to figure this relationship out and find the best price. After conducting extensive market surveys, Jessica believes that the local monthly demand for embroidered baseball caps is as follows: per cap Demand $20 300 $25 250 $28 220 $30 200 $32 180 $34 160 How does this piece of information alter Jessica's profit calculation? What price per cap should Jessica charge to maximize profit? How much profit does she earn at this price? 4. Jessica is almost doneshe realizes that she forgot to include taxes as part of her decision model. Jessica believes that combined local, state, and federal taxes will be 25% of her profit before taxes. Does this piece of information affect Jessica's decision in part (3)? Does this change the profit-maximizing price? Does it change Jessica's profit? 5. What do you think of Jessica's business venture