Case study on decision making

RI, decision making. The following data refer to Clear Panes, a division of Global Corporation. Clear Panes makes and sells residential windows that sell for $150 each. Clear Panes expects sales of 150,000 units in 2017. Clear Panes’ annual fixed costs are $2,750,000 and their variable cost is $90 per window.

Global evaluates Clear Panes based on residual income. The total investment attributed to Clear Panes is $12 million and the required rate of return on investment is 16%. Ignore taxes and depreciation expense. Answer each of the following parts independently, unless otherwise stated.

1. What is the expected residual income in 2017?

2. Clear Panes receives an external special order for 10,000 units at $120 each. If the order is accepted, Clear Panes will have to incur incremental fixed costs of $250,000 and invest an additional $450,000 in various assets. What is the effect on Clear Panes’s residual income of accepting the order?

3. The window latch Clear Panes manufactures for its windows has a variable cost of $20. An outside vendor has offered to supply the 150,000 units required at a cost of $21 per unit. If the component is purchased outside, fixed costs will decline by $100,000 and assets with a book value of $150,000 will be sold at book value. Will Clear Panes decide to make or buy the component? Explain your answer.

4. One of Clear Panes’s regular customers asks for a special window with stained glass inserts. The customer requires 2,500 of these windows. Clear Panes estimates its variable cost for these special units at $105 each. Clear Panes will also have to undertake new investment of $300,000 to produce these windows. What is the minimum selling price that will make the deal acceptable to Clear Panes?

5. Assume the same facts as in requirement 4. Also suppose that the customer has offered $130 for each stained glass window. In addition, the customer has indicated that its purchases of the existing product will drop by 1,500 units. a. What is the net change in Clear Panes’s residual income from taking the offer, relative to its planned 2017 situation? b. At what drop in unit sales of the regular window would Clear Panes be indifferent to the offer?

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RI, EVA, measurement alternatives, goal congruence. Refresh Resorts, Inc., operates health spas in Key West, Florida; Phoenix, Arizona; and Carmel, California. The Key West spa was the company’s first and opened in 1991. The Phoenix spa opened in 2004, and the Carmel spa opened in 2013. Refresh Resorts has previously evaluated divisions based on RI, but the company is considering changing to an EVA approach. All spas are assumed to face similar risks. Data for 2017 are:

1. Calculate RI for each of the spas based on operating income and using total assets as the measure of investment. Suppose that the Key West spa is considering adding a new group of saunas from Finland that will cost $225,000. The saunas are expected to bring in operating income of $22,000. What effect would this project have on the RI of the Key West spa? Based on RI, would the Key West manager accept or reject this project? Without resorting to calculations, would the other managers accept or reject the project? Why?

2. Why might Refresh Resorts want to use EVA instead of RI for evaluating the performance of the three spas?

3. Refer back to the original data. Calculate the WACC for Refresh Resorts.

4. Refer back to the original data. Calculate EVA for each of the spas, using net book value of long-term assets. Calculate EVA again, this time using gross book value of long-term assets. Comment on the differences between the two methods.

5. How does the selection of asset measurement method affect goal congruence?

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major concern for tax authorities

Transfer pricing is a major concern for tax authorities who are worried that multi-national entities may set transfer prices on cross-border transactions to reduce taxable profits in their jurisdiction. This has led to the rise of transfer pricing regulations and enforcement, making transfer pricing a major tax compliance issue. Explain what transfer pricing is in greater detail and address how the Australian Taxation Office is trying to remediate this issue?

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Complete Tax return Forms for 2015:

George Large (SSN 000-11-1111) and his wife Marge Large (000-22-2222) live at 2000 Lakeview Drive, Cleveland, OH 49001 and want to prepare their 2015 income tax return based on the information below:
George Large worked as a salesman for Toyboat, Inc. He received a salary of $80,000 ($8,500 of federal income taxes withheld and $1,800 of state income taxes withheld) plus and expense reimbursement from Toyboat of $5,000 to cover his employee business expenses. George must make an adequate accounting to his employer and return excess reimbursement; none of the reimbursement was related to meals and entertainment.
Additionally, Toyboat provides George with medical insurance worth $7,200 per year. George drove his car a total of $24,000 miles during the year and placed car in service on June 1, 2013. His log indicates that $18,000 miles were for sale calls to customers at the customers’ offices and the remainder was personal mileage. George uses the standard rate method. Assume his business miles were driven evenly during the year
George is a college basketball fan. He purchased two season tickets for a total of $4,000. He takes a customer to every game, and they discuss business before, during and after the games. George also takes clients to business lunches. His log indicates that he spent $1,500 on these business meals. George also took a five day trip to the Toyboat headquarters in Musty, OH.
He was so well prepared that he finished his business in three days, so he spent the other two days sightseeing. He had the following expenses during each of the five days of his trip:
Airfare $200
Lodging $85/day
Meals $50/day
Taxicabs $20/day
Marge Large is self-employed. She repair’s rubber toy boats in the basement of their home, which is 25% of the house’s square footage. The business code is 811490. She had the following income and expenses.
Income from rubber toy boat repairs $15,000
Cost of supplies $ 5,000
Contract labor $ 3,500
Long-distance phone calls – business $ 500
The Large’s home cost a total of $150,000 of which the cost of land was $20,000. The FMV of the house is $225,000. The house is depreciable over a 39 year recovery period. The Larges incurred the following total other expenses:
Utility bills for the house $2,000
Real estate taxes $2,500
Mortgage interest $4,500
Cash charitable contributions $3,500
Required:
Prepare Federal Form 1040, Schedule A , Schedule C and Schedule SE for form 1040 , and Federal Form 2106 and Federal Form 8829 for the income tax year 2015 . (Assume that no estimated taxes were paid by the Larges.)

CHECK ANSWERS WITH CHECK FIGURES:

1040 Individual Tax Return Check Figures:

1040

Page 1 Line 37 – AGI – $82,711

Page 2 Line 43 – Taxable Income – $57,125

Schedule A

Line 29 – Total Itemized Deductions – $ 17,586

Schedule SE

Line 5 – Self Employment Tax – $412

Form 2106

Line 6 – Total Expenses – Column A – $10,865

Column B – $5,650

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Bo Vonderweidt, the production manager for Sportway Corporation, had requested to have lunch with the company president. Vonderweidt wanted to put forward his suggestion to add a new product line. As they finished lunch, Meg Thomas, the company president, said, “I’ll give your proposal some serious thought, Bo. I think you’re right about the increasing demand for skateboards. What I’m not sure about is whether the skateboard line will be better for us than our tackle boxes. Those have been our bread and butter the past few years.” Vonderweidt responded with, “Let me get together with one of the controller’s people. We’ll run a few numbers on this skateboard idea that I think will demonstrate the line’s potential.” Sportway is a wholesale distributor supplying a wide range of moderately priced sports equipment to large chain stores. About 60 percent of Sportway’s products are purchased from other companies while the remainder of the products are manufactured by Sportway. The company has a Plastics Depart-ment that is currently manufacturing molded fishing tackle boxes. Sportway is able to manufacture and sell 8,000 tackle boxes annually, making full use of its direct-labor capacity at available work stations. The selling price and costs associated with Sportway’s tackle boxes are as follows: Selling price per box ………………………………………………………………………………………………………$86.00Costs per box: Molded plastic …………………………………………………………………………………………………………$ 8.00 Hinges, latches, handle ……………………………………………………………………………………………..9.00 Direct labor ($15.00 per hour) …………………………………………………………………………………….18.75 Manufacturing overhead …………………………………………………………………………………………….12.50 Selling and administrative cost ……………………………………………………………………………………. 17.00 65.25Profit per box ……………………………………………………………………………………………………………….$20.75 Because Sportway’s sales manager believes the firm could sell 12,000 tackle boxes if it had suffi-cient manufacturing capacity, the company has looked into the possibility of purchasing the tackle boxes for distribution. Maple Products, a steady supplier of quality products, would be able to provide up to 9,000 tackle boxes per year at a price of $68.00 per box delivered to Sportway’s facility. Bo Vonderweidt, Sportway’s production manager, has come to the conclusion that the company could make better use of its Plastics Department by manufacturing skateboards. Vonderweidt has a market study that indicates an expanding market for skateboards and a need for additional suppliers. Vonderweidt believes that Sportway could expect to sell 17,500 skateboards annually at a price of $45.00 per skateboard. After his lunch with the company president, Vonderweidt worked out the following estimates with the assistant controller. Selling price per skateboard ……………………………………………………………………………………………….$45.00Costs per skateboard: Molded plastic ……………………………………………………………………………………………………………$5.50 Wheels, hardware ……………………………………………………………………………………………………….7.00 Direct labor ($15.00 per hour) ……………………………………………………………………………………….7.50 Manufacturing overhead ……………………………………………………………………………………………….5.00 Selling and administrative cost ………………………………………………………………………………………. 9.00 34.00Profit per skateboard …………………………………………………………………………………………………………$11.00 In the Plastics Department, Sportway uses direct-labor hours as the application base for manufac-turing overhead. Included in the manufacturing overhead for the current year is $50,000 of factorywide, fixed manufacturing overhead that has been allocated to the Plastics Department. For each unit of prod-uct that Sportway sells, regardless of whether the product has been purchased or is manufactured by Sportway, there is an allocated $6.00 fixed overhead cost per unit for distribution that is included in the selling and administrative cost for all products. Total selling and administrative costs for the purchased tackle boxes would be $10.00 per unit. 640 Chapter 14 Decision Making: Relevant Costs and Benefits Required: In order to maximize the company’s profitability, prepare an analysis that will show which product or products Sportway Corporation should manufacture or purchase. 1. First determine which of Sportway’s options makes the best use of its scarce resources. How many skateboards and tackle boxes should be manufactured? How many tackle boxes should be purchased? 2. Calculate the improvement in Sportway’s total contribution margin if it adopts the optimal strategy rather than continuing with the status quo. (CMA, adapted)

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Case study on work

Tim is the vice president of western operations for Maroon Oil Company and is stationed in San Francisco. He is required to live in an employer-owned home, which is three blocks from his company office. The company-provided home is equipped with high-speed internet access and several telephone lines. Tim receives telephone calls and e-mails that require immediate attention any time of day or night, the company’s business is spread all over the world. A full-time administrative assistant resides in the house to assist Tim with the urgent business matters. Tim often uses the home for entertaining customers, suppliers, and employees. The fair market value of comparable housing is $9,000 per month. Tim is also provided with free parking at his company’s office. The value of the parking is $350 per month.

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