SOLVE QUESTION ABOVE

1. All of the revenues and costs of producing Murfreesboro Sour Mash are variable, but they vary with different aspects of the production process. Carefully identify how revenue and each cost varies. Which costs are product costs and which costs are period costs under Braggs accounting method?

2. Extend the income statements under the current accounting method through year 9, at which point Bragg will distill and sell 16,000 barrels per year, and age 128,000 barrels per year.

3. Determine the book value of warehouse inventory for the base year. If inventory is the firms only asset, what is its ROA (accounting income divided by book value of assets) in the base year? How does the ROA compare to Braggs cost of capital, if you assume that it is 10%?

4. Repeat your answer to question 2 above assuming all costs had been capitalized as product costs throughout the life of the business instead of being expensed as period costs.

5. Which method of accounting do you believe better reflects the economics of the business?

6. Evaluate the decision to increase production of Murfreesboro Sour Mash.

7. What problems, if any, do you see this business having, and what are your recommendations for the business?