Diamond Industries, Inc., began business on January 2, 2011. Salaries were paid to employees on the last day of each month, and social security tax, Medicare tax, and federal income tax were withheld in the required amounts. An employee who is hired in the middle of the month receives half the monthly salary for that month. All required payroll tax reports were filed, and the correct amount of payroll taxes was remitted by the company for the calendar year. Early in 2012, before the Wage and Tax Statements (Form W-2) could be prepared for distribution to employees and for filing with the Social Security Administration, the employees’ earnings records were inadvertently destroyed.

None of the employees resigned or were discharged during the year, and there were no changes in salary rates. The social security tax was withheld at the rate of 6.0% and Medicare tax at the rate of 1.5% on salary. Data on dates of employment, salary rates, and employees’ income taxes withheld, which are summarized as follows, were obtained from personnel records and payroll records:

$$\begin{array}{lccc} \text { Employee } & \begin{array}{c} \text { Date First } \\ \text { Employed } \end{array} & \begin{array}{c} \text { Monthly } \\ \text { Salary } \end{array} & \begin{array}{c} \text { Monthly } \\ \text { Income Tax } \\ \text { Withheld } \end{array} \\ \hline \text { Beltran } & \text { Jan. 1 } & \$ 4,300 & \$ 681 \\ \text { Jeter } & \text { Apr. } 16 & 11,000 & 2,508 \\ \text { Lee } & \text { Aug. 1 } & 7,800 & 1,612 \\ \text { Rodriguez } & \text { Nov. } 16 & 3,000 & 356 \\ \text { Santana } & \text { Mar. } 1 & 6,120 & 1,145 \\ \text { Ramirez } & \text { May } 16 & 3,840 & 566 \\ \text { Ordonez } & \text { Dec. } 1 & 4,000 & 606 \end{array}$$

Instructions

1. Calculate the amounts to be reported on each employee’s Wage and Tax Statement (Form W-2) for 2011.
2. Calculate the following employer payroll taxes for the year: (a) social security; (b) Medicare; (c) state unemployment compensation at 4.4% on the first $9,000 of each employee’s earnings; (d) federal unemployment compensation at 0.8% on the first$9,000 of each employee’s earnings; (e) total.

Some days of the week are more dangerous than others, according to Traffic Safety Facts produced by the National Highway Traffic Safety Administration. The average number of fatalities per day for each day of the week are shown in the accompanying table. a. Using the midpoint of each year range (e.g., 1980 for the 1978– 1982 range), construct a time-series plot that shows the average fatalities over time for each day of the week. Be sure to label each line clearly as to which day of the week it represents. b. Write a sentence or two commenting on the difference in average number of fatalities for the days of the week. What is one possible reason for the differences? c. Write a sentence or two commenting on the change in average number of fatalities over time. What is one pos sible reason for the change?

$$\begin{matrix} \text{} & \text{Average Fatalities per Day (day of the week)}\\ \text{} & \text{Mon} & \text{Tue} & \text{Wed} & \text{Thurs} & \text{Fri} & \text{Sat} & \text{Sun} & \\ \text{1978-1982} & \text{103} & \text{101} & \text{107} & \text{116} & \text{156} & \text{201} & \text{159}\\ \text{1983-1987} & \text{98} & \text{96} & \text{99} & \text{108} & \text{140} & \text{174} & \text{140}\\ \text{1988-1992} & \text{97} & \text{94} & \text{97} & \text{106} & \text{139} & \text{168} & \text{135}\\ \text{1993-1997} & \text{97} & \text{93} & \text{96} & \text{102} & \text{129} & \text{148} & \text{127}\\ \text{1998-2002} & \text{99} & \text{96} & \text{98} & \text{104} & \text{129} & \text{149} & \text{130}\\ \text{Total} & \text{99} & \text{96} & \text{100} & \text{107} & \text{138} & \text{168} & \text{138}\\ \end{matrix}$$

Basic Boards makes keyboards that are sold to different customers in two main distribution channels. Recently, the company’s profitability has decreased. Management would like to analyze the profitability of each channel based on the following information:

$$\begin{array}{lrrr} &\textbf{Distribution} &\textbf{Distribution}\\ &\textbf{Channel A} &\textbf{Channel B} &\textbf{Total}\\\hline \text{Revenue} &\$2,599,506 &\$2,690,494 &\$5,290,000\\ \text{Customer-level costs} &\underline{~~1,627,047} &\underline{~~1,783,953} &\underline{~~3,411,000}\\ \text{Customer-level operating income} &\underline{\underline{\$~~~~972,459}} &\underline{\underline{\$~~~~906,541}} &\underline{\underline{\$1,879,000}}\\ \text{Customer-level operating income} \\ \text{as a percentage of revenue} &37.409\% &33.694\% &35.5\%\\ \end{array}$$

The company allocates distribution costs to the two channels as follows:

$$\begin{array}{lrl} &\textbf{Total} &\textbf{Allocation basis}\\\hline \text{Distribution costs}\\ \text{Marketing costs}& \$560,000 &\text{Channel revenue}\\ \text{Administration costs}& \$240,000&\text{Customer-level costs}\\ \end{array}$$

Based on a special study, the company allocates corporate costs to the two channels based on the corporate resources demanded by the channels as follows: Distribution Channel A, $440,000, and Distribution Channel B,$500,000. If the company were to close a distribution channel, none of the corporate costs would be saved.

1. Calculate the operating income for each distribution channel as a percentage of revenue after assigning customer-level costs, distribution costs, and corporate costs.

2. Should Basic Boards close down any distribution channel? Explain briefly.

3. Would you allocate corporate costs to divisions? Why is allocating these costs helpful? What actions would it help you take?

Sherene Nili manages a company that makes wedding gowns. She produces both a custom product that is made to order and a standard product that is sold in bridal salons. Her accountant prepared the following forecasted income statement for March, which is a busy month:

Ms. Nili already has orders for the 10 custom dresses refl ected in the March forecasted income statement. The depreciation charges are for machines used in the respective product lines. Machines depreciate at the rate of$1 per hour based on hours used, so these are variable costs. In March, cutting and sewing machines are expected to operate for 900 hours, of which 600 hours will be used to make custom dresses. The rent is for the building space, which has been leased for several years at $7,000 per month. The rent, heat, and light are allocated to the product lines based on the amount of fl oor space occupied.

A valued customer, who is a wedding consultant, has asked Ms. Nili for a special favor. This customer has a client who wants to get married in early April. Ms. Nili’s company is working at capacity and would have to give up some other business to make this dress. She can’t renege on custom orders already agreed to, but she can reduce the number of standard dresses produced in March to 10. Ms. Nili would lose permanently the opportunity to make up the lost production of standard dresses because she has no unused capacity for the foreseeable future. The customer is willing to pay$24,000 for the special order. Materials and labor for the order will cost $6,000 and$10,000, respectively. The special order would require 140 hours of machine time. Ms. Nili’s company would save 150 hours of machine time from the standard dress business given up. Rent, heat and light, and other production costs would not be affected by the special order.

Required
What is the minimum price Ms. Nili should accept to take the special order?

See Table down below showing financial statement data and stock price data for Mydeco Corp.

a. In what year was Mydeco's net income the lowest?

b. In what year did Mydeco need to reduce its cash reserves?

c. Why did Mydeco need to reduce its cash reserves in a year when net income was reasonably high?

2012–2016 Financial Statement Data and Stock Price Data for Mydeco Corp

Mydeco Corp. 2012–2016 $\hspace{30mm}$ (All data as of fiscal year end; in $million)$

$$\begin{array}{lccccc} \text{Income statement} & 2012 & 2013 & 2014 & 2015 & 2016 \\ \text{Revenue} & 401.9 & 361.6 & 429.6 & 513.6 & 602.6 \\ \underline{\text{Cost of Goods Sold}} & (192.1) & (175.4) & (207.1) & (248.3) & (295.8)\\ \text{Gross Profit} & 209.8 & 186.2 & 222.5 & 265.3 & 306.8\\ \text{Sales and Marketing} & (65.0) & (64.4) & (84.3) & (104.9) & (121.1)\\ \text{Administration} & (61.8) & (57.1) & (59.0) & (66.9) & (79.8)\\ \underline{\text{Depreciation $\And$ Amortization}} & (27.5) & (26.3) & (32.5) & (38.3) & (40.1)\\ \text{EBIT} & 55.5 & 38.4 & 46.7 & 55.2 & 65.8\\ \underline{\text{Interest Income (Expense)}} & (32.4) & (31.8) & (32.0) & (37.0) & (40.9)\\ \text{Pretax Income} & 23.1 & 6.6 & 14.7 & 18.2 & 24.9\\ \underline{\text{Income Tax}} & (8.1) & (2.3) & (5.1) & (6.4) & (8.7)\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Shares outstanding (millions)} & 56.8 & 56.8 & 56.8 & 56.8 & 56.8\\ \text{Earnings per share} & \$0.26 & \$0.08 & \$0.17 & \$0.21 & \$0.29\\ \text{Balance Sheet} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Assets}\\ \text{Cash} & 49.4 & 68.0 & 91.7 & 80.4 & 83.6\\ \text{Accounts Receivable} & 87.6 & 70.6 & 69.3 & 77.4 & 84.2\\ \text{Inventory} & 33.5 & 32.2 & 27.3 & 30.2 & 35.8\\ \text{Total Current Assets} & 170.5 & 170.8 & 188.3 & 188.0 & 203.6\\ \text{Net Property, Plant $\And$ Equip.} & 244.3 & 243.3 & 306.1 & 349.6 & 347.9\\ \text{Goodwill $\And$ Intangibles} & 365.5 & 365.5 & 365.5 & 365.5 & 365.5\\ \text{Total Assets} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Liabilities $\And$ Stockholders’ Equity}\\ \text{Accounts Payable} & 18.8 & 18.8 & 22.4 & 27.1 & 30.3\\ \text{Accrued Compensation} & 7.6 & 6.3 & 7.5 & 7.7 & 9.4\\ \text{Total Current Liabilities} & 26.4 & 25.1 & 29.9 & 34.8 & 39.7\\ \text{Long-term Debt} & 498.9 & 498.9 & 572.2 & 597.5 & 597.5\\ \text{Total Liabilities} & 525.3 & 524 & 602.1 & 632.3 & 637.2\\ \text{Stockholders’ Equity} & 255.0 & 255.6 & 257.8 & 270.8 & 279.8\\ \text{Total Liabilities $\And$ Stockholders’ Equity} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Statement of Cash Flows} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Depreciation $\And$ Amortization} & 27.5 & 26.3 & 32.5 & 38.3 & 40.1\\ \text{Chg. in Accounts Receivable} & 3.9 & 17.0 & 1.3 & (8.1) & (6.8)\\ \text{Chg. in Inventory} & (2.9) & 1.3 & 4.9 & (2.9) & (5.6)\\ \underline{\text{Chg. in Payables $\And$ Accrued Comp.}} & 1.7 & (1.3) & 4.8 & 4.9 & 4.9\\ \text{Cash from Operations} & 45.2 & 47.6 & 53.1 & 44.0 & 48.8\\ \underline{\text{Capital Expenditures}} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Cash from Investing Activities} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Dividends Paid} & (5.2) & (5.2) & (5.2) & (5.2) & (5.6)\\ \text{Sale (or purchase) of stock} & — & — & — & — & —\\ \underline{\text{Debt Issuance (Pay Down)}} & — & — & 73.3 & 25.3 & —\\ \text{Cash from Financing Activities} & (5.2) & (5.2) & 68.1 & 20.1 & (5.6)\\ \text{Change in Cash} & 13.4 & 18.6 & 23.7 & (11.3) & 3.2\\ \text{Mydeco Stock Price} & \$7.02 & \$3.55 & \$5.86 & \$8.33 & \$11.57\\ \end{array}$$

$

Consider that Painless Dental Clinics, Inc., offers three basic dental services. Here are its prices and costs:

Variable costs include the labor costs of the dental hygienists and dentists. Fixed costs of $400,000 per year include building and equipment costs, marketing costs, and the costs of administration. Painless Dental Clinics is subject to a 30 percent tax rate on income.

A cleaning “unit” is a routine teeth cleaning that takes about 45 minutes. A filling “unit” is the work done to fill one or more cavities in one session. A capping “unit” is the work done to put a crown on one tooth. If more than one tooth is crowned in a session, then the clinic counts one unit per tooth (e.g., putting crowns on two teeth counts as two units).

Required
Painless Dental Clinics, Inc., is considering becoming more specialized in cleanings and fillings. What would be the company’s revenues per year if the number of cleanings increased to 2,000 per year, the number of fillings increased to 1,000 per year, while the number of cappings dropped to zero? With this change in product mix, the company would increase its fixed costs to$450,000 per year. What would be the effect of this change in product mix on the clinic’s earnings after taxes per year? If the clinic’s managers seek to maximize the clinic’s after-tax earnings, would this change be a good idea?

See Table down below showing financial statement data and stock price data for Mydeco Corp.

a. What is Mydeco's market capitalization at the end of each year?

b. What is Mydeco's market-to-book ratio at the end of each year? Windows.

c. What is Mydeco's enterprise value at the end of each year?

2012–2016 Financial Statement Data and Stock Price Data for Mydeco Corp

Mydeco Corp. 2012–2016 $\hspace{30mm}$ (All data as of fiscal year end; in $million)$

$$\begin{array}{lccccc} \text{Income statement} & 2012 & 2013 & 2014 & 2015 & 2016 \\ \text{Revenue} & 401.9 & 361.6 & 429.6 & 513.6 & 602.6 \\ \underline{\text{Cost of Goods Sold}} & (192.1) & (175.4) & (207.1) & (248.3) & (295.8)\\ \text{Gross Profit} & 209.8 & 186.2 & 222.5 & 265.3 & 306.8\\ \text{Sales and Marketing} & (65.0) & (64.4) & (84.3) & (104.9) & (121.1)\\ \text{Administration} & (61.8) & (57.1) & (59.0) & (66.9) & (79.8)\\ \underline{\text{Depreciation $\And$ Amortization}} & (27.5) & (26.3) & (32.5) & (38.3) & (40.1)\\ \text{EBIT} & 55.5 & 38.4 & 46.7 & 55.2 & 65.8\\ \underline{\text{Interest Income (Expense)}} & (32.4) & (31.8) & (32.0) & (37.0) & (40.9)\\ \text{Pretax Income} & 23.1 & 6.6 & 14.7 & 18.2 & 24.9\\ \underline{\text{Income Tax}} & (8.1) & (2.3) & (5.1) & (6.4) & (8.7)\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Shares outstanding (millions)} & 56.8 & 56.8 & 56.8 & 56.8 & 56.8\\ \text{Earnings per share} & \$0.26 & \$0.08 & \$0.17 & \$0.21 & \$0.29\\ \text{Balance Sheet} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Assets}\\ \text{Cash} & 49.4 & 68.0 & 91.7 & 80.4 & 83.6\\ \text{Accounts Receivable} & 87.6 & 70.6 & 69.3 & 77.4 & 84.2\\ \text{Inventory} & 33.5 & 32.2 & 27.3 & 30.2 & 35.8\\ \text{Total Current Assets} & 170.5 & 170.8 & 188.3 & 188.0 & 203.6\\ \text{Net Property, Plant $\And$ Equip.} & 244.3 & 243.3 & 306.1 & 349.6 & 347.9\\ \text{Goodwill $\And$ Intangibles} & 365.5 & 365.5 & 365.5 & 365.5 & 365.5\\ \text{Total Assets} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Liabilities $\And$ Stockholders’ Equity}\\ \text{Accounts Payable} & 18.8 & 18.8 & 22.4 & 27.1 & 30.3\\ \text{Accrued Compensation} & 7.6 & 6.3 & 7.5 & 7.7 & 9.4\\ \text{Total Current Liabilities} & 26.4 & 25.1 & 29.9 & 34.8 & 39.7\\ \text{Long-term Debt} & 498.9 & 498.9 & 572.2 & 597.5 & 597.5\\ \text{Total Liabilities} & 525.3 & 524 & 602.1 & 632.3 & 637.2\\ \text{Stockholders’ Equity} & 255.0 & 255.6 & 257.8 & 270.8 & 279.8\\ \text{Total Liabilities $\And$ Stockholders’ Equity} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Statement of Cash Flows} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Depreciation $\And$ Amortization} & 27.5 & 26.3 & 32.5 & 38.3 & 40.1\\ \text{Chg. in Accounts Receivable} & 3.9 & 17.0 & 1.3 & (8.1) & (6.8)\\ \text{Chg. in Inventory} & (2.9) & 1.3 & 4.9 & (2.9) & (5.6)\\ \underline{\text{Chg. in Payables $\And$ Accrued Comp.}} & 1.7 & (1.3) & 4.8 & 4.9 & 4.9\\ \text{Cash from Operations} & 45.2 & 47.6 & 53.1 & 44.0 & 48.8\\ \underline{\text{Capital Expenditures}} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Cash from Investing Activities} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Dividends Paid} & (5.2) & (5.2) & (5.2) & (5.2) & (5.6)\\ \text{Sale (or purchase) of stock} & — & — & — & — & —\\ \underline{\text{Debt Issuance (Pay Down)}} & — & — & 73.3 & 25.3 & —\\ \text{Cash from Financing Activities} & (5.2) & (5.2) & 68.1 & 20.1 & (5.6)\\ \text{Change in Cash} & 13.4 & 18.6 & 23.7 & (11.3) & 3.2\\ \text{Mydeco Stock Price} & \$7.02 & \$3.55 & \$5.86 & \$8.33 & \$11.57\\ \end{array}$$

$

See Table down below showing financial statement data and stock price data for Mydeco Corp.

a. How did Mydeco's book debt-equity ratio change from $2012$ to $2016$?

b. How did Mydeco's market debt-equity ratio change from $2012$ to $2016$.

c. Compute Mydeco's debt-to-enterprise value ratio to assess how the fraction of its business that is debt financed has changed over the period.

2012–2016 Financial Statement Data and Stock Price Data for Mydeco Corp

Mydeco Corp. 2012–2016 $\hspace{30mm}$ (All data as of fiscal year end; in $million)$

$$\begin{array}{lccccc} \text{Income statement} & 2012 & 2013 & 2014 & 2015 & 2016 \\ \text{Revenue} & 401.9 & 361.6 & 429.6 & 513.6 & 602.6 \\ \underline{\text{Cost of Goods Sold}} & (192.1) & (175.4) & (207.1) & (248.3) & (295.8)\\ \text{Gross Profit} & 209.8 & 186.2 & 222.5 & 265.3 & 306.8\\ \text{Sales and Marketing} & (65.0) & (64.4) & (84.3) & (104.9) & (121.1)\\ \text{Administration} & (61.8) & (57.1) & (59.0) & (66.9) & (79.8)\\ \underline{\text{Depreciation $\And$ Amortization}} & (27.5) & (26.3) & (32.5) & (38.3) & (40.1)\\ \text{EBIT} & 55.5 & 38.4 & 46.7 & 55.2 & 65.8\\ \underline{\text{Interest Income (Expense)}} & (32.4) & (31.8) & (32.0) & (37.0) & (40.9)\\ \text{Pretax Income} & 23.1 & 6.6 & 14.7 & 18.2 & 24.9\\ \underline{\text{Income Tax}} & (8.1) & (2.3) & (5.1) & (6.4) & (8.7)\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Shares outstanding (millions)} & 56.8 & 56.8 & 56.8 & 56.8 & 56.8\\ \text{Earnings per share} & \$0.26 & \$0.08 & \$0.17 & \$0.21 & \$0.29\\ \text{Balance Sheet} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Assets}\\ \text{Cash} & 49.4 & 68.0 & 91.7 & 80.4 & 83.6\\ \text{Accounts Receivable} & 87.6 & 70.6 & 69.3 & 77.4 & 84.2\\ \text{Inventory} & 33.5 & 32.2 & 27.3 & 30.2 & 35.8\\ \text{Total Current Assets} & 170.5 & 170.8 & 188.3 & 188.0 & 203.6\\ \text{Net Property, Plant $\And$ Equip.} & 244.3 & 243.3 & 306.1 & 349.6 & 347.9\\ \text{Goodwill $\And$ Intangibles} & 365.5 & 365.5 & 365.5 & 365.5 & 365.5\\ \text{Total Assets} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Liabilities $\And$ Stockholders’ Equity}\\ \text{Accounts Payable} & 18.8 & 18.8 & 22.4 & 27.1 & 30.3\\ \text{Accrued Compensation} & 7.6 & 6.3 & 7.5 & 7.7 & 9.4\\ \text{Total Current Liabilities} & 26.4 & 25.1 & 29.9 & 34.8 & 39.7\\ \text{Long-term Debt} & 498.9 & 498.9 & 572.2 & 597.5 & 597.5\\ \text{Total Liabilities} & 525.3 & 524 & 602.1 & 632.3 & 637.2\\ \text{Stockholders’ Equity} & 255.0 & 255.6 & 257.8 & 270.8 & 279.8\\ \text{Total Liabilities $\And$ Stockholders’ Equity} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Statement of Cash Flows} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Depreciation $\And$ Amortization} & 27.5 & 26.3 & 32.5 & 38.3 & 40.1\\ \text{Chg. in Accounts Receivable} & 3.9 & 17.0 & 1.3 & (8.1) & (6.8)\\ \text{Chg. in Inventory} & (2.9) & 1.3 & 4.9 & (2.9) & (5.6)\\ \underline{\text{Chg. in Payables $\And$ Accrued Comp.}} & 1.7 & (1.3) & 4.8 & 4.9 & 4.9\\ \text{Cash from Operations} & 45.2 & 47.6 & 53.1 & 44.0 & 48.8\\ \underline{\text{Capital Expenditures}} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Cash from Investing Activities} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Dividends Paid} & (5.2) & (5.2) & (5.2) & (5.2) & (5.6)\\ \text{Sale (or purchase) of stock} & — & — & — & — & —\\ \underline{\text{Debt Issuance (Pay Down)}} & — & — & 73.3 & 25.3 & —\\ \text{Cash from Financing Activities} & (5.2) & (5.2) & 68.1 & 20.1 & (5.6)\\ \text{Change in Cash} & 13.4 & 18.6 & 23.7 & (11.3) & 3.2\\ \text{Mydeco Stock Price} & \$7.02 & \$3.55 & \$5.86 & \$8.33 & \$11.57\\ \end{array}$$

$

MUF, a Chartered Accounting firm, has provided audit and tax services to businesses in the London area for over 50 years. Recently, the firm decided to use ABM and activity-based costing to assign its overhead costs to those service functions. Ginny Fior is interested in seeing how the change from the traditional to the activity-based costing approach affects the average cost per audit job. The following information has been provided to assist in the comparison:

$$\begin{array}{ll} \text{Total direct labor costs} & \text{400,000 pound}\\ \text{Other direct costs} & \underline{\text{120,000 pound}}\\ \text{Total direct costs} & \underline{\underline{\text{520,000 pound}}}\\ \end{array}$$

The traditional costing approach assigned overhead costs at a rate of 120 percent of direct labor costs.

Data for activity-based costing of the audit function follow.

$$\begin{array}{llll} \textbf{Activity} & \textbf{Cost Driver} & \textbf{Activity Cost Rate} & \textbf{Activity Usage}\\ \\ \text{Professional development} & \text{Number of employees} & \text{2,000 pound per employee} & \text{50 employees}\\ \text{Administration} & \text{Number of jobs} & \text{1,000 pound per job} & \text{50 jobs}\\ \text{Client development} & \text{Number of new clients} & \text{5,000 pound per new client} & \text{29 new clients}\\ \end{array}$$

1. Using traditional costing and direct labor cost as the cost driver, calculate the total costs for the audit function. What is the average cost per job?

2. Using activity-based costing to assign overhead, calculate the total costs for the audit function. What is the average cost per job?

3. Calculate the difference in total costs between the two approaches. Why would activity based costing be the better approach for assigning overhead to the audit function?

During the early part of the 20th century, sulfanilamide (an antibacterial drug) was only administered by injection or in a solid pill. In 1937, a pharmaceutical company decided to market a liquid formulation of the drug. Since sulfanilamide was known to be highly insoluble in water and other common pharmaceutical solvents, a number of alternative solvents were tested and the drug was found to be soluble in diethylene glycol (DEG). After satisfactory results were obtained in tests of flavor, appearance, and fragrance, 240 gallons of sulfanilamide in DEG were manufactured and marketed as Elixir Sulfanilamide. After a number of deaths were determined to have been caused by the formulation, the Food and Drug Administration (FDA) mounted a campaign to recall the drug and recovered about 232 gallons. By this time, 107 people had died. The incident led to passage of the 1938 Federal Food, Drug, and Cosmetic Act that significantly tightened FDA safety requirements. Not all of the quantities needed in solving the following problems can be found in the text. Give sources of such information and list all assumptions. a) The dosage instructions for the elixir were to “take 2 to 3 teaspoons in water every four hours.” Assume each teaspoon was pure DEG, and estimate the volume (mL) of DEG a patient would have consumed in a day. b) The lethal oral dose of diethylene glycol has been estimated to be 1.4 mL DEG/kg body mass. Determine the maximum patient mass $\left(\mathrm{lb}_{\mathrm{m}}\right)$ for which the daily dose estimated in Part (a) would be fatal. If you need values of quantities you cannot find in this text, use the Internet. Suggest three reasons why that dose could be dangerous to a patient whose mass is well above the calculated value. c) Estimate how many people would have been poisoned if the total production of the drug had been consumed. d) List steps the company should have taken that would have prevented this tragedy.

Bergen Corporation has three divisions: pulp, paper, and fibers. Bergen’s new controller, David Fisher, is reviewing the allocation of fixed corporate-overhead costs to the three divisions. He is presented with the following information for each division for 2017:

$$\begin{matrix} & \text{Pulp} & \text{Paper} & \text{Fibers}\\ \text{Revenues} & \text{\$19,600,000} & \text{\$34,200,000} & \text{\$51,000,000}\\ \text{Direct manufacturing costs} & \text{7,000,000} & \text{15,600,000} & \text{22,200,000}\\ \text{Division administrative costs} & \text{6,600,000} & \text{4,000,000} & \text{9,400,000}\\ \text{Division margin} & \text{\$6,000,000} & \text{\$14,600,000} & \text{\$19,400,000}\\ \text{Number of employees} & \text{600} & \text{300} & \text{1,100}\\ \text{Floor space (square feet)} & \text{106,400} & \text{70,680} & \text{202,920}\\ \end{matrix}$$

Until now, Bergen Corporation has allocated fixed corporate-overhead costs to the division on the basis of division margins. Fisher asks for a list of costs that comprise fixed corporate overhead and suggests the following new allocation bases:

$$\begin{matrix} \text{Fixed Corporate-Overhead Costs} & \text{} & \text{Suggested Allocation Bases}\\ \text{Human resource management} & \text{\$4,600,000} & \text{Number of employees}\\ \text{Facility} & \text{6,400,000} & \text{Floor space (square feet)}\\ \text{Corporate administration} & \text{9,200,000} & \text{Division administrative costs}\\ \text{Total} & \text{\$20,200,000}\\ \end{matrix}$$

1. Allocate 2017 fixed corporate-overhead costs to the three divisions using division margin as the allocation base. What is each division's operating margin percentage (division margin minus allocated fixed corporate-overhead costs as a percentage of revenues)? 2. Allocate 2017 fixed costs using the allocation bases suggested by Fisher. What is each division's operating margin percentage under the new allocation scheme?

The National Oceanic and Atmospheric Administration reports the following record high temperatures (degrees Fahrenheit) in 50 U.S. cities. These data are also provided in the file XR02056.

,City Temperature Mobile, AL 105 Juneau, AK 90 Phoenix, AZ 122 Little Rock, AR $\quad 112$ Los Angeles, CA $\quad 110$ Denver, CO 105 Hartford, CT 102 Wilmington, DE 102 Miami, FL 98 Atlanta, GA $\quad 105$ Honolulu, HI 95 Boise, 10 111 Chicago, IL 104 Indianapolis, IN $\quad 104$ Des Moines, IA 108 Wichita, KS 113 Louisville, KY 106 New Orleans, LA 102 Portland, ME 103 Baltimore, MD 105 Boston, MA 102 (continued)

City Temperature Detroit, MI 104 Duluth, MN 97 Jackson, MS 107 St. Louis, MO $\quad 107$ Great Falls, MT $\quad 106$ Omaha, NE $\quad 114$ Reno, NV 108 Concord, $\mathrm{NH}$ Atlantic City, NJ 106 Albuquerque, NM $\quad 107$ Buffalo, NY 99 Charlotte, NC $\quad 104$ Bismarck, ND $\quad 111$ Cleveland, $\mathrm{OH}$ Oklahoma City, OK $\quad 110$ Portland, OR $\quad 107$ Pittsburgh, PA 103 Providence, RI $\quad 104$ Columbia, SC 107 Sioux Falls, SD $\quad 110$ Nashille, TN $\quad 107$ Houston, TX 109 Salt Lake City, UT $\quad 107$ Burlington, VT 101 Norfolk, VA 104 Seattle, WA 100 Charleston, WV 104 Milwaukee, WI 103

$$\begin{array}{ll}\text { Cheyenne, WY } & 100\end{array}$$

a. Construct a stem-and-leaf display for these data.

See Table down below showing financial statement data and stock price data for Mydeco Corp.

a. What were Mydeco's gross margins each year?

b. Comparing Mydeco's gross margin, EBIT margin, and net profit margin in $2012$ to $2016$, which margins improved?

2012–2016 Financial Statement Data and Stock Price Data for Mydeco Corp

Mydeco Corp. 2012–2016 $\hspace{30mm}$ (All data as of fiscal year end; in $million)$

$$\begin{array}{lccccc} \text{Income statement} & 2012 & 2013 & 2014 & 2015 & 2016 \\ \text{Revenue} & 401.9 & 361.6 & 429.6 & 513.6 & 602.6 \\ \underline{\text{Cost of Goods Sold}} & (192.1) & (175.4) & (207.1) & (248.3) & (295.8)\\ \text{Gross Profit} & 209.8 & 186.2 & 222.5 & 265.3 & 306.8\\ \text{Sales and Marketing} & (65.0) & (64.4) & (84.3) & (104.9) & (121.1)\\ \text{Administration} & (61.8) & (57.1) & (59.0) & (66.9) & (79.8)\\ \underline{\text{Depreciation $\And$ Amortization}} & (27.5) & (26.3) & (32.5) & (38.3) & (40.1)\\ \text{EBIT} & 55.5 & 38.4 & 46.7 & 55.2 & 65.8\\ \underline{\text{Interest Income (Expense)}} & (32.4) & (31.8) & (32.0) & (37.0) & (40.9)\\ \text{Pretax Income} & 23.1 & 6.6 & 14.7 & 18.2 & 24.9\\ \underline{\text{Income Tax}} & (8.1) & (2.3) & (5.1) & (6.4) & (8.7)\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Shares outstanding (millions)} & 56.8 & 56.8 & 56.8 & 56.8 & 56.8\\ \text{Earnings per share} & \$0.26 & \$0.08 & \$0.17 & \$0.21 & \$0.29\\ \text{Balance Sheet} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Assets}\\ \text{Cash} & 49.4 & 68.0 & 91.7 & 80.4 & 83.6\\ \text{Accounts Receivable} & 87.6 & 70.6 & 69.3 & 77.4 & 84.2\\ \text{Inventory} & 33.5 & 32.2 & 27.3 & 30.2 & 35.8\\ \text{Total Current Assets} & 170.5 & 170.8 & 188.3 & 188.0 & 203.6\\ \text{Net Property, Plant $\And$ Equip.} & 244.3 & 243.3 & 306.1 & 349.6 & 347.9\\ \text{Goodwill $\And$ Intangibles} & 365.5 & 365.5 & 365.5 & 365.5 & 365.5\\ \text{Total Assets} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Liabilities $\And$ Stockholders’ Equity}\\ \text{Accounts Payable} & 18.8 & 18.8 & 22.4 & 27.1 & 30.3\\ \text{Accrued Compensation} & 7.6 & 6.3 & 7.5 & 7.7 & 9.4\\ \text{Total Current Liabilities} & 26.4 & 25.1 & 29.9 & 34.8 & 39.7\\ \text{Long-term Debt} & 498.9 & 498.9 & 572.2 & 597.5 & 597.5\\ \text{Total Liabilities} & 525.3 & 524 & 602.1 & 632.3 & 637.2\\ \text{Stockholders’ Equity} & 255.0 & 255.6 & 257.8 & 270.8 & 279.8\\ \text{Total Liabilities $\And$ Stockholders’ Equity} & 780.3 & 779.6 & 859.9 & 903.1 & 917.0\\ \text{Statement of Cash Flows} & 2012 & 2013 & 2014 & 2015 & 2016\\ \text{Net Income} & 15.0 & 4.3 & 9.6 & 11.8 & 16.2\\ \text{Depreciation $\And$ Amortization} & 27.5 & 26.3 & 32.5 & 38.3 & 40.1\\ \text{Chg. in Accounts Receivable} & 3.9 & 17.0 & 1.3 & (8.1) & (6.8)\\ \text{Chg. in Inventory} & (2.9) & 1.3 & 4.9 & (2.9) & (5.6)\\ \underline{\text{Chg. in Payables $\And$ Accrued Comp.}} & 1.7 & (1.3) & 4.8 & 4.9 & 4.9\\ \text{Cash from Operations} & 45.2 & 47.6 & 53.1 & 44.0 & 48.8\\ \underline{\text{Capital Expenditures}} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Cash from Investing Activities} & (26.6) & (23.8) & (97.5) & (75.4) & (40.0)\\ \text{Dividends Paid} & (5.2) & (5.2) & (5.2) & (5.2) & (5.6)\\ \text{Sale (or purchase) of stock} & — & — & — & — & —\\ \underline{\text{Debt Issuance (Pay Down)}} & — & — & 73.3 & 25.3 & —\\ \text{Cash from Financing Activities} & (5.2) & (5.2) & 68.1 & 20.1 & (5.6)\\ \text{Change in Cash} & 13.4 & 18.6 & 23.7 & (11.3) & 3.2\\ \text{Mydeco Stock Price} & \$7.02 & \$3.55 & \$5.86 & \$8.33 & \$11.57\\ \end{array}$$

$

Suppose a name-brand drug has been deemed effective for reducing hypertension (high blood pressure). The developing company gets to keep a patent on the drug for a specific period of time before other companies can develop a generic form of the drug. Suppose the patent period is about to expire, and another company produces a generic version of this drug. The Food and Drug Administration (FDA) wants to know whether the generic drug is at least as effective as the name-brand drug in reducing blood pressure. The following hypotheses will be used: $H_{0}: \mu_{\mathrm{G}}=\mu_{\mathrm{N}}$ versus $\mathrm{H}_{a}: \mu_{\mathrm{G}}<\mu_{\mathrm{N}}$ where $\mu_{G}$=true mean reduction in blood pressure using the generic drug, $\mu_{N}$=true mean reduction in blood pressure using the name-brand drug. In the context of this situation, which of the following describes a Type I error? (a) The FDA finds sufficient evidence that the generic drug does not reduce blood pressure as much as the namebrand drug when, in fact, it does not. (b) The FDA finds sufficient evidence that the generic drug does not reduce blood pressure as much as the name-brand drug when, in fact, it does. (c) The FDA finds sufficient evidence that the generic drug does reduce blood pressure as much as the name-brand drug when, in fact, it does not. (d) The FDA finds sufficient evidence that the generic drug does reduce blood pressure as much as the name-brand drug when, in fact, it does. (e) The FDA does not find sufficient evidence that the generic drug is as effective in reducing blood pressure as the name-brand drug when, in fact, it is.