16 Jun IS IT FAVORABLE OR UNFAVORABLE? WHY?
ituation:
IU Music Camp provides a variety of music lessons and charges each student $350 per month. The Camp purchases music books and supplies for each student which cost the Camp $ 97 per month. The Camp pays a rent, $1,500, per month.
(1) Calculate a contribution margin (CM). (Show how you calculated a CM.)
(2) How many students have to come to the Camp each month for it to break even? (Show how you calculated the number of children.)
Situation 1:
The Camp expect that the Camp should pay an increased cost of music books and supplies per student, $150, monthly, and should pay an increased rent, $1,700, per month from next year.
(1) How many students have to come to the Camp each month for it to break even next year? (Show how you calculated a number of student.)
(3) However, the Camp expects that the number of student who come to the Camp will not be changed next year. How much should the Camp charge each student for it to break even next year given increased costs? (Show how you calculated a monthly camp fee.)
Situation 2:
To understand cost and revenue structure of the Camp this year, you want to visualize cost and revenue data of the Camp.
(1) Develop cost and revenue data set (Use Homework template)
(2) Create a line chart using the data set you have created. The line chart should show five lines (such as fixed cost, variable cost, total cost, average cost, and total revenue lines) at the same time. Edit your chart properly. Especially, you must edit the horizontal axis (called x-axis) and vertical axis (called y-axis)
1. Right click anywhere of the chart
2. Click “Chart Element,” which looks like a cross “+” in order to edit your scatterplot graph properly
3. Click “Axis Title” by putting a check mark in the box
4. Write an appropriate Titles of horizontal X-axis (label of independent variable), and vertical Y-axis (label of dependent variable)
5. Write the Chart title
2. Capital Budgeting
Situation:
Suppose you are a Cost-Benefit analyst in the State of Ohio. The State is planning to construct a new highway. Should the State adopt this construction project? Evaluate this project using cost-benefit analysis (CBA) technique and the following information:
Costs of the project
Cost item Estimated Value (annually) Year
Construction cost of the highway $ 90 2018-2020
Traffic congestion during construction period $ 7 2018-2020
Maintenance cost of the highway $ 16 2021-2028
Negative effect of highway on environment $ 5 2021-2028
Benefits of the project
Benefit item Estimated Value (annually) Year
Reduced commute time $ 120 2021-2028
Additional revenue (i.e. toll fees) $ 10 2021-2028
Inflation and Interest rates
The State expects that inflation rate will be 3.5 percent annually and interest rate will be 2 percent annually.
(1) Using information above, conduct a cost-benefit analysis and provide your Excel output.
(2) Based on the CBA result, would you like to recommend this project? Why? Why not?
3. Long-Term Financing
Situation 1:
Suppose you are a bond investor. You are planning to buy a 3 percent $100,000 U.S. Treasury note, which is U.S. long-term bond, with semiannual interest payment and a remaining life of 7 years, through the website of Japan Bank. Current interest rates in financial market are 5 percent. (Note: You will receive an interest each end of period)
(1) How much should you pay to purchase the bond? (In other words, what is an appropriate purchase price of the bond?)
(2) Show your Excel output (Use the homework template)
(3) Should youbuy the bonds at a discount? Why? Or, should you pay more than face value of the bond? (In other word, do you need to pay a premium?) Why?
Situation 2:
The City of Elkhart plans to issue a $2,000,000 bond. The money is to build a new elementary school. The bond matures in 10 years, and requires semiannual interest payments. The sated interest rate (coupon rate) is 6 percent, but rates have fallen to 5.96 percent in the market.
(1) How much will the City receive when it issues the bond? (In other words, what is an appropriate selling price of the bond?)
(2) Show your Excel output (Use the homework template)
(3) Should the City offer to sell (issue) the bonds at a discount? Why? Or, will the City be able to charge a premium for the bond? Why?
Situation 3:
Mishawaka Church borrowed $30,000 to build a new build for the Youth. The Church used a mortgage arrangement with an IU-Credit Union, agreeing to repay the principal and interest at a 2 percent rate in 7 annual installments.
(1) How much will it pay the bank each year? (Note: It is more common for a mortgage to require equal payments at the end of each period throughout the term of the loan).
(2) Show your Excel output (Use the homework template)
4. Managing Short-Term Resources and Obligations
Situation 1:
After Mishawaka Church has constructed a new Youth Center, the Church borrows $5,000 from IU-Credit Union to purchase equipment (such as computers, tables and chairs) for Youth Center. This short term loan agreement shows a 7 percent interest per year. During 2015, the Church borrows $5,000 on October 28th and repay the principal on November 2nd, 2015—exactly 6 days later.
(1) How much interest ($) should the Church pay on November 2nd, 2015 (Show how you calculate it).
(2) How much (principal plus interest) should the Church pay back on November 2nd, 2015 (Show how you calculate it).
Situation 2:
Suppose you are a public officer in the Office of Procurement in the U.S. Department of Defense. The Department purchases 5,500 helicopters annually from the Boeing Company. Each helicopter costs the Department $1,000,000. The cost to place an order for the helicopter—which covers the employee staff time, shipping costs, the Department receiving center for inventorying, for example—is estimated at $3,000 per order. Carrying costs includes out-of-pocket costs and capital costs. Out-of-pocket costs related to carry costs (for storing the helicopters, verifying the inventory periodically, etc.) are estimated at $200 per helicopters annually. To calculate capital costs per helicopter related to carrying costs, the Department use a 2 percent interest rate. (Note: Please read Appendix of Chapter 7)
(1) Calculate capital costs per helicopter (Show how you calculate it).
(2) Calculate a total carrying cost per helicopter year (Show how you calculate it).
(3) How many helicopters should be ordered at a time (Show how you calculate it)?
5. Accountability and Control
Situation:
The Elm Road Elementary School had expected to have a total enrollment of 450 students who would each have needed 4 books at a cost of $65 each. But, they spent $100,000 for textbooks for the fall 2015 semester.
(1) What is their budget amount for textbooks? (Show how you calculate it).
(2) What is their textbook expenditure variance? (Show how you calculate it).
(3) Is it favorable or unfavorable? Why?
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