Answer: True
Explanation:
According to Peter Senge, he described team learning as a team skill which is required to be practiced by the team members that are involved so that they will all be able to develop their learning skills collectively.
Organizational learning works best when there is integrated thinking and acting at all levels of the organization.
fremont which uses the high-low method reported total cost of $10 per unit its lowest production level, 5000 units. when production tripled to its highest level, the total cost per unit dropped to $5 variable cost per unit
Answer:
$2.50
Explanation:
Calculation for the estimation of variable cost per unit
Units Total cost
High method 15,000×$5 per units =$75,000
(5,000*3)=15,000
Low method 5,000*$10 per units=$50,000
Difference 10,000 $25,000
Variable cost per unit =$25,000/10,000
Variable cost per unit=$2.50
Note: Based on the information given we were told that production tripled to its highest level which means the high method units will be 15,000 units (5,000 units*3)
Therefore Fremont would estimate its variable cost per unit as: $2.50
Assuming a 360 -day year the maturity value of a 15000, 9%,60-day note receivable dated February 10th is:
Answer:
the maturity value of the note receivable is $15,225, and includes both principal plus interest revenue.
Explanation:
when the note is collected on April 11, the journal entry should be:
April 11, collection of notes receivable
Dr Cash 15,225
Cr Notes receivable 15,000
Cr Interest revenue 225
interest revenue = $15,000 x 9% x 2/12 = $225
During the month of March, Blossom Company’s employees earned wages of $60,000. Withholdings related to these wages were $4,590 for Social Security (FICA), $7,031 for federal income tax, $2,906 for state income tax, and $375 for union dues. The company incurred no cost related to these earnings for federal unemployment tax but incurred $656 for state unemployment tax.
1. Prepare the necessary March 31 journal entry to record salaries and wages expense and salaries and wages payable. Assume that wages earned during March will be paid during April.
2. Prepare the entry to record the company’s payroll tax expense.
Answer:
1.
March 31,
DR Salaries and Wages Expense ....................$60,000
CR FICA taxes payable ........................................................$4,590
CR Federal income tax payable .........................................$7,031
CR State income tax payable ..............................................$2,906
CR Union dues payable .......................................................$375
CR Salaries and Wages payable ..........................................$45,098
Working
Salaries and Wages payable = 60,000 - 4,590 - 7,031 - 2,906 - 375
= $45,098
2.
DR Payroll taxes payable ...................................$5,246
FICA taxes payable .................................................................$4,590
State unemployment taxes payable ....................................$656
Working
Payroll taxes payable = 4,590 + 656
= $5,246
(Table) If Jake and Sue are the only buyers of the local pizzeria's pizza, what is the market demand for pizzas at each of the prices listed, starting at the market price of $5? QJ is the quantity demanded at each price by Jake, and QS is the quantity demanded at each price by Sue.
Answer:
This is the table that the question is referring to:
Price QJ QS
5 4 2
10 3 1
15 2 0
20 1 0
Total market demand is the sum of the individual market demands. In this market, it is the sum of the market demand of Jake and Sue.
Market demand at the price of $5 is 7 pizzas.
Market demand at the price of $10 is 4 pizzas.
Market demand at the price of $15 is 2 pizzas.
Market demand at the price of $20 is 1 pizza.
Net sales for the year were $1,050,000 and cost of goods sold was $735,000 for the company’s existing products. A new product is presently under development and will have an expected selling price of not more than $68 per unit in order to remain competitive with similar products in the marketplace. Required: a. Calculate gross profit and the gross profit ratio for the year.
Answer:
The answer is:
Gross profit is $315,000
Gross profit ratio is 30 percent
Explanation:
Gross profit equals net sales minus cost of sales
Net sales - $1,050,000
Cost of sales - ($735,000)
Gross profit -. $315,000
Gross profit ratio is:
(Gross profit / net sales) x 100 percent
($315,000 / $1,050,000) x 100 percent
0.3 x 100 percent
30 percent.
So we have:
Gross profit is $315,000
Gross profit ratio is 30 percent
What is the beta for a company with a 12% expected return, while treasury bills are yielding 5% and the market risk premium is 7%
Answer:
The beta for the company is 1.
Explanation:
A beta is the measure of systematic risk associated to a stock or the portfolio. Systematic risk is the market risk that affects all the stocks in the market due to factors that are uncontrollable. Such a risk is what the companies compensate the investors for. Using the CAPM equation, we calculate the expected rate of return of a stock. The equation is,
r = rRF + Beta * rpM
Where,
rRF is the risk free raterpM is the risk premium on marketWe already have the values for r, rRF and rpM. Plugging them in the formula, we calculate the beta to be,
0.12 = 0.05 + Beta * 0.07
0.12 - 0.05 = Beta * 0.07
0.07/ 0.07 = Beta
Beta = 1
A stock has had the following year-end prices and dividends: Year Price Dividend 1 $ 43.37 - 2 48.35 $ .60 3 57.27 .63 4 45.35 .80 5 52.27 .85 6 61.35 .93 What are the arithmetic and geometric average returns for the stock? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
Answer:
geometric mean return = 1.2%
arithmetic mean return = 1.21%
Explanation:
Year Price Dividend Yearly return
1 $43.37 - 0
2 $48.35 $0.60 1.24%
3 $57.27 $0.63 1.1%
4 $45.35 $0.80 1.76%
5 $52.27 $0.85 1.63%
6 $61.35 $0.93 1.52%
geometric mean return = [(1 + 0) x (1 + 0.0124) x (1 + 0.011) x (1 + 0.0176) x (1 + 0.0163) x (1 + 0.0152)]¹/⁶ - 1 = 1.012 - 1 = 0.012 = 1.2%
arithmetic mean return = (0% + 1.24% + 1.1% + 1.76% + 1.63% + 1.52%) / 6 = 7.25% / 6 = 1.21%
"One of the ten IG principles is a Continuous improvement. What is the importance of this principle to the organization program"
Answer:
the importance is to provide periodic program review and necessary adjustments against gaps and it short comings
Explanation:
Information governance is a full way of managing information in a corporation by the implementation of a series of processes, controls and roles. It can be simply said to be a process of managing information assets as this will cause a balance between security and usage.
continuous improvement is one of its 10 principles. And it simply means that programs in information governance have to go through continuous reviews and updates as doing such will help to reduce shortcomings.
Kansas Enterprises purchased equipment for $73,500 on January 1, 2021. The equipment is expected to have a five-year service life, with a residual value of $6,450 at the end of five years. Using the double-declining balance method, depreciation expense for 2022 would be
Answer:
The answer is $17,640
Explanation:
Equipment was bought on Jan. 1, 2022 for $73,500. This is the historical cost of the asset.
Residual value is $6,450. This is the amount the equipment is being expected to sell for at the end of its useful life.
Useful life is 5 years.
To know the percentage to be used for the depreciation, we have:
100percent / 5 years
= 20 percent
Double-declining is 40 percent(20 percent x 2)
Depreciation for 2021 is
$73,500 x 40 percent
= $29,400.
Carrying amount at the end of 2021 which will also be for the beginning of 2022 is $44,100 ($73,500 - $29,400)
Depreciation for 2022:
$44,100 x 40 percent
$17,640.
Therefore, the depreciation for 2022 is $17,640.
Regulations that permit a regulated firm to cover its costs and to make a normal level of profit are commonly referred to as
Answer:
cost plus regulation
Explanation:
Cost plus regulation is generally used by the government to regulate monopolies (mainly natural monopolies like utilities, and others). The price that the monopoly can charge for its goods or services is set by the government and it should generally cover all of the company's costs plus allow it to make a "normal" profit.
Finding operating and free cash flows Consider the following balance sheets and selected data from the income statement of Keith Corporation.
Keith Corporation Balance Sheets December 31
Assets 2015 2014
Cash $ 1,500 $ 1,000
Marketable securities 1,800 1,200
Accounts receivable 2,000 1,800
Inventories 2,900 2,800
Total current assets $ 8,200 $ 6,800
Gross fixed assets $ 29,500 $ 28,100
Less: Accumulated depreciation 14,700 13,100
Net fixed assets $ 14,800 $ 15,000
Total assets $ 23,000 $ 21,800
Liabilities and stockholders' equity
Accounts payable $ 1,600 $ 1,500
Notes payable 2,800 2,200
Accruals 200 300
Total current liabilities $ 4,600 $ 4,000
Long-term debt 5,000 5,000
Total liabilities $ 9,600 $ 9,000
Common stock $ 10,000 $ 10,000
Retained earnings 3,400 2,800
Total stockholders' equity $ 13,400 $ 12,800
Total liabilities and stockholders' equity $ 23,000 $ 21,800
Keith Corporation Income Statement Data (2015)
Depreciation expense $1,600
Earnings before interest and taxes (EBIT) 2,700
Interest expense 367
Net profits after taxes 1,400
Tax rate | 40%
Required
a. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2015
b. Calculate the firm?s operating cash flow (OCF) for the year ended December 31, 2015
c. Calculate the firm?s free cash flow (FCF) for the year ended December 31, 2015
d. Interpret, compare, and contrast your cash flow estimates in parts b and c.
Answer:
a. NOPAT = EBIT * (1-t)
NOPAT = $2,700 * (1-0.40)
NOPAT = $1,620
b. OCF = NOPAT + Depreciation
OCF = $1,620 + $1,600
OCF = $3,220
c. FCF = Net fixed asset investment - Net current asset investment
FCF = $3,320 - $1,400 - $1,400
FCF = $420
Note:
Net fixed asset investment = Change in net fixed assets + depreciation
= ($14,800- $ 15,000) + $1,600
= $1,400
Net current asset investment = Change in current assets - Change in accounts payable and accurals
= ($8,200 - $6,800) - {($1,600 + $200) - ($1,500 - $300)}
= $1,400
d. FCF is meaningful as it shows that OCF is able to cover Operating expenses as well as Investment in Fixed and Current Assets
At Jacobson Company, indirect labor is a variable cost that varies with direct labor-hours. Last month’s performance report showed that actual indirect labor cost totaled $5,780 for the month and that the associated spending variance was $245 Favorable. If 24,100 direct labor-hours were actually worked last month, then the flexible budget cost formula for indirect labor must be (per direct labor-hour):
Answer:
Flexible budget cost formula for indirect labor is $0.25 per DL hours
Explanation:
Flexible budget cost for indirect labor = Actual indirect labor cost + Associated spending variance
= $5,780 + $245
= $6,025
Flexible budget cost formula for indirect labor= Flexible budget cost for indirect labor / Direct labor-hours
= $6,025 / 24,100 DL hours
= $0.25 per DL hours
True or False: The more that the labor supply decreases in response to a decrease in wages, the larger are the supply-side effects of an increase in tax rates (that is, the decrease in output is largerdue to a tax increase).
Answer:
Correct Answer:
1. True
Explanation:
Taxes affect work activity directly through labor supply-and-demand channels and indirectly through government spending responses to available tax revenues. It has been determined that higher tax rates on labor lead to less work time in the legal market sector.
Which of the following statements is CORRECT? a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. b. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. c. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. d. Trade credit is provided only to relatively large, strong firms. e. Commercial paper is typically offered at a long-term maturity of at least five years.
Answer: Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
Explanation:
Commercial papers a promissory notes which are issued by companies on a short term basis that are unsecured. It should be noted that that they are used by the strong, large, and financially stable companies.
Commercial paper are issued in order to finance payroll, and also meet a company's short-term liabilities.
JG Asset Services is recommending that you invest $1,275 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures
Answer:
The amount that will be received when CD matures is $1514.30
Explanation:
To calculate the amount that will be received at the maturity of the CD, we simply need to calculate the future value of the invested amount using annual compounding. The formula for the future value that we will use is,
Future value = Present value * (1+r)^t
Where,
r is the rate of interestt is the time in yearsFuture value = 1275 * (1+0.035)^5
Future value = $1514.30
In which of the following scenarios would enforcement of specific performance be appropriate? Multiple Choice Your bookstore agrees to order a textbook for you but breaches its contract with you by canceling the order the next day. You order 3 gallons of white ceiling paint from a local store, and the store breaches by not delivering or making available to you the 3 gallons. You own the pistol used by Hamilton and contract to buy the pistol used by Burr in the Hamilton-Burr duel to complete your set, but despite the contract the Burr pistol owner refuses to sell at the last minute. You order a current-model, name-brand television from a department store, and a few days later the store breaches by not ordering it from the manufacturer.
Answer:
Correct Answer:
2. You order 3 gallons of white ceiling paint from a local store, and the store breaches by not delivering or making available to you the 3 gallons.
3. You own the pistol used by Hamilton and contract to buy the pistol used by Burr in the Hamilton-Burr duel to complete your set, but despite the contract the Burr pistol owner refuses to sell at the last minute.
1. Your bookstore agrees to order a textbook for you but breaches its contract with you by canceling the order the next day.
Explanation:
In enforcement of specific performance is applied in situations where there there is an established contract that has was not honored. This bridge of contract would then trigger performance enforcement.
Knowing she has sold 5,000 pairs, assume the company wants to launch a Black Friday promotion, where she would discount her shoes by 10%. How many more shoes would she have to sell to justify this promotion
Revenue: $500,000
Shoes: $250,000
Shoe boxes: $1,000
Advertising: $500
Rent: $1,000
Depreciation: $25
Knowing she has sold 5,000 pairs, assume the company wants to launch a Black Friday promotion, where she would discount her shoes by 10%. How many more shoes would she have to sell to justify this promotion?
A. 25.13% more shoes
B. 20.08% more shoes
C. None of the above, but I could calculate this with the information I am given.
D. None of the above, I cannot calculate this with the information I am given.
Answer:
Option A. 25.13% more shoes
Explanation:
Cost Benefit analysis would be useful here to acknowledge what percentage of shoe sales is required to justify the promotion.
The Benefit drawn before 10% promotion proposal:
Revenue: $500,000
Shoes: ($250,000)
Shoe boxes: ($1,000)
Advertising: ($500)
Rent: ($1,000)
Depreciation: ($25)
Profit $247,475
The Benefit drawn before 10% promotion proposal:
Revenue: $450,000
Shoes: ($250,000)
Shoe boxes: ($1,000)
Advertising: ($500)
Rent: ($1,000)
Depreciation: ($25)
Profit $197,475
Now we can calculate how much additional sales must be required to justify the promotion.
Sales Increase Required = (Initial Profit - Before Promotion) / Profit After Promotion
Sales Increase Required = ($247,475 - $197,475) / $197,475
Sales Increase Required = 25.31% which is close to option 1, hence Option 1 is correct here.
Promotion is termed as the activity that involves the spreading or publicizing of information regarding the products and services. It is a part of marketing that involves publicity and public relations between the customers.
The correct option is A. 25.13% more shoes
Cost Benefit analysis would be useful here to acknowledge what percentage of shoe sales is required to justify the promotion.
The Benefit drew before 10% promotion proposal:
Revenue: $500,000
Shoes: ($250,000)
Shoe boxes: ($1,000)
Advertising: ($500)
Rent: ($1,000)
Depreciation: ($25)
Profit $247,475
The Benefit drew before 10% promotion proposal:
Revenue: $450,000
Shoes: ($250,000)
Shoe boxes: ($1,000)
Advertising: ($500)
Rent: ($1,000)
Depreciation: ($25)
Profit $197,475
Now we can calculate how much additional sales must be required to justify the promotion.
Sales Increase Required = [tex]\frac{\text{Initial Profit - Before Promotion}}{\text{Profit After Promotion}}[/tex]
Sales Increase Required = [tex]\frac{\$247,475-\$197,475}{\$197,475}[/tex]
Sales Increase Required = 25.31% which is close to option 1, hence Option 1 is correct here.
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dazzle, inc. produces beads for jewelry making use the journal entry to record production activities for direct labor usage is
Answer:
Debit Work in Process Inventory $180,000; credit Factory Wages Payable $180,000.
Explanation:
The journal entry to record the direct labor usage is shown belwo:
Work in process inventory Dr
To factory wages payable
(Being the direct labor usage is recorded)
For recording this we debited the work in process as it increased the assets and credited the factory wages payable as it also increased the liabilities
Moreover, when the wages is applied in the production level so the respective account is debited and credited
Which of the following perspectives from the balanced scorecard approach helps managers answer the question, "How do we look to shareholders?
a. Learning and growth perspective
b. Internal business perspective
c. Customer perspective
d. Financial perspective
Answer:
d. Financial perspective
Explanation:
-Learning and growth perspective focuses on the measures that the company can take to improve its performance.
-Internal business perspective indicates if the internal performance is allowing to meet the customers' needs.
-Customer perspective shows if the company is focused on the customers and on delivering value to them.
-Financial perspective indicates if the company's strategy is providing benefits and value to the shareholders.
According to this, the answer is that the perspective from the balanced scorecard approach that helps managers answer the question, "How do we look to shareholders?" is the financial perspective because it indicates the shareholders if the company is getting the economic results that are expected.
Cameroon Corp. manufactures and sells electric staplers for $15.30 each. If 10,000 units were sold in December, and management forecasts 3.3% growth in sales each month, the number of electric stapler sales budgeted for March should be:
Answer:
Electric stapler sales budgeted for March should be: 11,023 units.
Explanation:
Apply the growth of 3.30% to each month starting December as follows :
December Sales = 10,000 units
January Sales = 10,000 × (1.033)^1 = 10,330 units
February Sales = 10,000 × (1.033)^2 = 10,671 units
March Sales = 10,000 × (1.033)^3 = 11,023 units
Endor Company begins the year with $110,000 of goods in inventory. At year-end, the amount in inventory has increased to $118,000. Cost of goods sold for the year is $1,300,000. Compute Endor’s inventory turnover and days’ sales in inventory. Assume that there are 365 days in the year
Answer:
11.40
32 days
Explanation:
Inventory turnover and days of sales of inventory are examples of activity ratios.
They are used to measure the efficiency of performing daily tasks
inventory turnover = Cost of goods sold/ average inventory
Average inventory = ($118,000 + $110,000) / 2 = $114,000
Inventory turnover = $1,300,000 / $114,000 = 11.40
days of sales of inventory = 365 / inventory turnover = 365 / 11.40 = 32 days
The firm receives an average of $20,000 in checks per day. The weighted average delay in clearing the checks received is 3 days. Meanwhile, the firm writes an average of $17,000 in checks to pay its suppliers per day. The usual clearing time for the checks the firm wrote is 2 days. The current interest rate is 0.015 percent per day. What is the most the firm should be willing to pay today (in a lump sum today) to eliminate its float entirely? A) 3000 B) 26000 C) 34000 D) 37000 E) 60000
Answer:
$26000
Explanation:
from the question;
check per day; 20000
delay: 3 days
checks to pay suppliers; 17000
clearing time 2 days
we first calculate collection flaot:
collection flaot = average amount of check x outstanding days
= 20000 x 3
= 60000
now we have to calculate disbursements float:
average amount of check x days to clear
= 17000 x 2
= 34000
with these two values we can get the net float
= collection flaot - disbursements float
= 60000 - 34000
= $26000
A NASDAQ security is bid at $30.25 and offered at $30.75. An over-the-counter trader effects a trade at $30.75 and charges a commission of $.50 to the customer. The price that will show on the tape is:
Answer:
$30.75
Explanation:
Given that
Security bidding = $30.25
Offered price = $30.75
over the counter trading = $30.75
Commission charged = $0.50
based on the above information, the price that shows on the tape is equivalent to the over the counter trading price i.e $30.75 also it does not include the commission charged i.e $0.50
Hence, the price is $30.75
Charger Company's most recent balance sheet reports total assets of $28,413,000, total liabilities of $16,113,000 and total equity of $12,300,000. The debt to equity ratio for the period is (rounded to two decimals):
Answer:
Debt to equity ratio is 1.31
Explanation:
Given the above inflation, the formula for debt to equity ratio is
= Total debt / Total equity
= $16,113,000 / $12,300,000
= 1.31
Therefore, debt to equity ratio is 1.31
What is the yield to maturity on a bond that pays annual coupon rate of 14%, has a par value of $1,000, matures in 10 years, and is selling for $911?
Answer:
Yield to Maturity =15.6%
Explanation:
The Yield to maturity is the discount rate that equates then price of the bonds to the present of cash inflows expected from the bond
The yield on the bond can be determined as follows using the formula below:
YM = C + F-P/n) ÷ 1/2 (F+P)
YM-Yield to maturity-
C- annual coupon
F- Face Value
P- Current Price
n- number of years
DATA
Coupon = coupon rate × Nominal value = 1,000 × 14%=140
Face Value = 1000
YM-?, C- 140, Face Value - 1,000, P-911 , n- 10
YM = (140 + (1000-911)/10) ÷ ( 1/2× (1000 + 911) )
YM = 0.156 × 100 = 15.6%
Yield to Maturity =15.6%
Tyler Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $127.20 per unit. Sales volume (units) 5,000 6,000 Cost of Sales $419,000 $502,800 Selling and Administrative costs $186,000 $202,200 The best estimate of the total contribution margin when 5,300 units are sold is: Group of answer choices $230,020 $51,410 $146,810 $32,330
Answer:
The correct answer is A.
Explanation:
Giving the following information:
The company sells the product for $127.20 per unit.
Sales volume (units) 5,000 6,000
Cost of Sales $419,000 $502,800
First, we need to determine the unitary variable cost:
unitary variable cost= 419,000/5,000= $83.8
unitary variable cost= 502,800/6,000= $83.8
Now, the unitary contribution margin:
Unitary contribution margin= 127.2 - 83.8= $43.4
Finally, the total contribution margin:
total contribution margin= 5,300*43.4= $230,020
The best estimate of the total contribution margin when 5,300 units are sold is option A $230,020.
Total Contribution Margin
To Calculate the Contribution Margin, we need to find the value of the unitary variable cost, and their margin. We are provided with these information:
Selling price $127.20 per unit.
Sales volume 5,000, & 6,000
Cost of Sales $419,000 & $502,800
To find the value of Total Contribution margin:
Step 1: Unitary Variable Cost= 419,000/5,000= $83.8
Step 2: Unitary Variable Cost= 502,800/6,000= $83.8
Step 3: Unitary Contribution Margin= 127.2 - 83.8= $43.4
Step 4: Total contribution margin when 5300 units are sold= 5,300×43.4= $230,020.
Hence, option A is correct.
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Wing CompanyCash- $234,000 Accounts payable- $97,000Inventories- $121,000 Notes payable (due 2020)- $211,000Land- $453,000 Accounts receivable- $46,000Refer to the information provided for Wing Company. Calculate current assets.a. $498,000b. $401,000c. $854,000d. $709,000
Answer:
b. $401,000
Explanation:
Currents assets refer to assets that are possible to be employed, exhausted, consumed, or sold withing a one year during the normal business activities of a company.
Current assets therefore include cash, cash equivalent and other assets that are expected to be changed to cash within one year.
From the question, we have;
Cash- $234,000
Accounts payable- $97,000
Inventories- $121,000
Notes payable (due 2020)- $211,000
Land- $453,000
Accounts receivable- $46,000
Therefore, current assets of Wing Company can be computed as follows:
Current assets = Cash + Inventories + Accounts receivable = $234,000 + $121,000 + $46,000 = $401,000
Therefore, the correct option is b. $401,000.
A publisher is deciding whether or not to invest in a new printer. The printer would cost $900, and would increase the cash flows in year 1 by $500 and in year 3 by $800. Cash flows do not change in year 2.If the interest rate is 12% Is the investment in the new printer feasible?
Answer:
Yes, since NPV>0
Explanation:
The computation of the net present value is shown below:
= Present value of cash inflows - initial investment
where,
Present value of cash inflows is
= $500 ÷ (1 + 0.12)^1 + $800 ÷ (1 + 0.12)^3
= $446.43 + $569.42
= $1,015.85
And the intial investment is $900
So, the net present value is
= $1,015.85 - $900
= $115.85
Since the net present value comes in positive so the investment in new printer is feasible
Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called:
Answer:
Avoidable costs
Explanation:
An avoidable cost is defined as one that an entity will not incur if a particular activity is not undertaken.
In business operations avoidable costs are usually variable costs. These are costs that vary or change in the cost of production. For example wages, cost of raw materials, and labour. These can be avoided depending on business needs.
Costs that are not avoidable are fixed cost. For example rent, insurance, and utilities.
These costs are paid wether production occurs or not.
You manufacture wine goblets. In mid- June you receive an order for 10,000 goblets from Japan. Payment of ¥400,000 is due in mid- December. You expect the yen to rise from its present rate of $1=¥107 to $1 to ¥120 by December 2020. You can borrow yen at 6% a year. What should you do?
Answer:
I will borrow yen at 6% a year.
Explanation:
a) Data and Calculations:
Payment for 10,000 = ¥400,000
Spot rate = $1 = ¥107
Forward rate = $1 to ¥120
Borrow ¥400,000, the interest cost = ¥24,000 = $224.30/2 (¥24,000/107) = $112.15 for six months
Value of ¥400,000 borrowed in dollars = $3,738.32 (¥400,000/107)
Loan Repayment of ¥400,000 in dollars = $3,333,33 (¥400,000/120)
Gain from forward contract = $404.99
Interest cost for borrowing = 112.15
Overall debt hedging gain = $292.84
By borrowing yen at 6% per annum, you will make an overall gain of $292.84. This is not comparable to the foreign exchange loss of $404.99 that you will incur without borrowing yen. Taking advantage of the the debt hedging, the supplier is able to save foreign exchange loss.
