A job order costing system does which of the following? Select one: A. Is used to determine period costs in a service company B. Is used to determine unit costs when products are manufactured in a continuous flow process C. Allocates manufacturing costs to individual jobs to determine unit costs D. Both A and B E. None of the above

Answers

Answer 1

Answer: C. Allocates manufacturing costs to individual jobs to determine unit costs

Explanation:

Job order costing is used to identify the cost of producing a single units of a good. It is usually used by small to medium scale companies who produce per good or by companies that specialize in the production of a custom goods and services.

Under job order costing, manufacturing costs are allocated to individual jobs in order to determine what the individual jobs cost so that an appropriate selling price can be given.


Related Questions

Calculating Weighted Average Cost of Capital and Economic Value Added (EVA)
Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financing were used by the company: $2 million of mortgage bonds paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be relatively risky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays a marginal tax rate of 30 percent.
Required:
Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example, 4.36% would be entered as ".044".
Mortgage bonds __________
Unsecured bonds __________
Common stock __________

Answers

Answer:

Mortgage bonds after-tax cost:

= Interest rate * (1 - tax rate)

= 4% * ( 1 - 30%)

= 4% * 70%

= 2.8%

Unsecured bonds after-tax cost:

= 6% * (1 - 30%)

= 6% * 70%

= 4.2%

Common stock:

= Long term treasury rate + risk premium

= 4% + 8%

= 12%

Boston Railroad decided to use the high-low method and operating data from the past six months to estimate the fixed and variable components of transportation costs. The activity base used by Boston Railroad is a measure of railroad operating activity, termed "gross-ton miles," which is the total number of tons multiplied by the miles moved. Transportation Costs Gross-Ton Miles January $1,454,100 323,000 February 1,621,300 361,000 March 1,145,800 234,000 April 1,554,400 350,000 May 1,303,700 281,000 June 1,671,400 380,000 Determine the variable cost per gross-ton mile and the fixed cost. Variable cost (Round to two decimal places.) $fill in the blank 1 per gross-ton mile Total fixed cost $fill in the blank 2

Answers

Answer:

Results are below.

Explanation:

Giving the following information:

Transportation Costs Gross-Ton Miles

January $1,454,100 323,000

February 1,621,300 361,000

March 1,145,800 234,000

April 1,554,400 350,000

May 1,303,700 281,000

June 1,671,400 380,000

To calculate the variable and fixed cost under the high-low method, we need to use the following formulas:

Variable cost per unit= (Highest activity cost - Lowest activity cost)/ (Highest activity units - Lowest activity units)

Variable cost per unit= (1,671,400 - 1,145,800) / (380,000 - 234,000)

Variable cost per unit= $3.6

Fixed costs= Highest activity cost - (Variable cost per unit * HAU)

Fixed costs= 1,671,400 - (3.6*380,000)

Fixed costs= $303,400

Fixed costs= LAC - (Variable cost per unit* LAU)

Fixed costs= 1,145,800 - (3.6*234,000)

Fixed costs= $303,400

a. Performed $8,200 of services on account.
b. Collected $5,600 cash on accounts receivable.
c. Paid $1,450 cash in advance for an insurance policy.
d. Paid $400 on accounts payable.
e. Recorded the adjusting entry to recognize $300 of insurance expense.
f. Received $1,600 cash for services to be performed at a later date.
g. Purchased land for $9,000 cash. Purchased supplies for $350 cash.

Required:
Record each of the above transactions.

Answers

Answer and Explanation:

The journal entries are as follows:

a.

Accounts receivable 8200  

         To Service revenue  8200

(being services performed on account is recorded)  

b. Cash 5600  

          To Accounts receivable  5600

(Being collections on account is recorded)  

c. Prepaid insurance 1450  

           To Cash  1450

(being cash paid in advance for insurance is recorded)  

d. Accounts payable 400  

            to Cash  400

(Being record payment on account is recorded)  

e. Insurance expense 300  

           To Prepaid insurance  300

(Being  insurance expense is recorded)  

f. Cash 1600  

            to  Unearned revenue  1600

(Being cash received for services to be performed is recorded)  

g. Land 9000  

             To Cash  9000

(Being land purchased for cash is recorded)  

h. Supplies 350  

              To Cash  350

(being supplies purchased for cash is recorded)  

In order to remain certified, I have to:
Submit a renewal form.
Complete a seller training course every 2 years.
Complete a 30 minute refresher course.
Do nothing, the certificate never expires.

Answers

Complete a seller training course every 2 years

In order to remain certified, you have to complete a seller training course every 2 years. Option B. This is further explained below.

What is the training course?

Generally, the training course is simply defined as several types of training courses, and each one teaches a certain set oaf abilities.

In conclusion, Every two years, you must retake a seller training course to keep your certification current.

Read more about training course

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Alpha Industries stock sold for $39 a share at the beginning of the year. During the year, the company paid a dividend of $3 a share and then ended the year with a stock price of $37. The change in the stock price is best described as a:

Answers

Answer: c. capital loss.

Explanation:

A capital loss refers to a scenario where the price of a security falls below the price at which it was purchased. This is what happened to the Alpha Industries stock above as the price dropped from $39 to $37 which led to a capital loss of $2.

The dividends paid seem to outweigh the capital loss but we cannot be certain of this unless we know the tax rate being applied to the dividends and because these are usually high, the after tax dividends might have been lower the capital loss of $2.

Machinery was purchased for $340,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundation and installing the machinery. It is estimated that the machinery will have a $60,000 salvage value at the end of its 5-year useful life. Annual depreciation expense using the straight-line method will be a. $78,800. b. $57,200. c. $66,800. d. $56,000.

Answers

Answer:

$66,800

Explanation:

Depreciation is used in expensing the cost of an asset

Depreciation reduces the value of an asset

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

Cost = $340,000. + $14,000 + $40,000 = $394,000

($394,000 - $60,000) / 5 = $66,800

is solicitation with the promise of reward is the highest level of sexual harassment

Answers

Answer:

false

Explanation:

false. XxXXXXXXZXXXXX

Saddle Inc. has two types of handbags: standard and custom. The controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of activity-based costing and wants to see how the results would differ if this system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the company’s operations. Standard Custom Direct labor costs $60,000 $103,000 Machine hours 1,400 1,290 Setup hours 96 400 Total estimated overhead costs are $300,000. Overhead cost allocated to the machining activity cost pool is $195,000, and $105,000 is allocated to the machine setup activity cost pool.
1. Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e.g. 12.25.)
2. Compute the overhead rates using the activity-based costing approach. (Round answers to 2 decimal places, e.g. 12.25.)
3. Determine the difference in allocation between the two approaches. (Round answers to 0 decimal places, e.g. 1,225.)

Answers

Answer:

Saddle Inc.

1. Overhead rate using the traditional (plantwide) approach is:

= $1.84

2. The overhead rates using activity-based costing approach are:

Machining = $72.49

Machine setup = $211.69

3. The difference in allocation between the two approaches:

Differences:

ABC approach        $121,808   $178,188   $299,996

Using plantwide     $110,400  $189,520  $299,920

Differences              $11,408    -$11,332             $76

Explanation:

a) Data and Calculations:

Total estimated overhead costs = $300,000

Machining activity = $195,000

Machine setup activity = $105,000

                             Standard   Custom     Total

Direct labor costs $60,000 $103,000  $163,000

Machine hours           1,400        1,290       2,690

Setup hours                    96          400          496

Overhead rate based on direct labor costs = $1.84 ($300,000/163,000)

Overhead rates using activity-based costing approach:

Machining = $72.49 ($195,000/2,690)

Machine setup = $211.69 ($105,000/496)

Allocation of overhead costs:

                                 Standard   Custom         Total

Using plantwide       $110,400  $189,520  $299,920

Using ABC:

Machining                $101,486    $93,512    $194,998

Machine setup           20,322      84,676      104,998

Total costs               $121,808   $178,188   $299,996

Differences:

ABC approach        $121,808   $178,188   $299,996

Using plantwide     $110,400  $189,520  $299,920

Differences               $11,408    -$11,332            $76

The net income of a company for the year was $500,000. The company has no preferred stock. Common stockholders' equity was $1,200,000 at the beginning of the year and $2,500,000 at the end of the year. Calculate the rate of return on common stockholders' equity.

Answers

Answer:

27.03%

Explanation:

Average common stockholders' equity = (1,200,000+2,500,000) / 2

Average common stockholders' equity = $3,700,000 / 2

Average common stockholders' equity = $1,850,000

Rate of return on common stockholders' equity = Net Income / Average common stockholders' equity

Rate of return on common stockholders' equity = $500,000 / $1,850,000

Rate of return on common stockholders' equity = 0.27027

Rate of return on common stockholders' equity = 27.03%

All of the following will improve a firm's liquidity position except: Answer A)increase long-term debt and invest the money in marketable securities B)increase accounts receivable turnover C)increase inventory turnover D)increase the average collection period

Answers

Answer:

i think answer B is right

but i am not sure

For each item indicate whether it would appear on the income statement, balance sheet, or retained earnings statement: a. Service Revenue select a financial statement b. Utilities Expense select a financial statement c. Cash select a financial statement d. Accounts Payable select a financial statement e. Supplies select a financial statement f. Salaries and Wages Expense select a financial statement g. Accounts Receivable select a financial statement h. Common Stock select a financial statement i. Equipment select a financial statement j. Advertising Expense select a financial statement k. Dividends select a financial statement l. Notes Payable select a financial statement

Answers

Answer:

Indication of Financial Statement Items:

Item                                                    Financial Statement

a. Service Revenue                           Income Statement

b. Utilities Expense                           Income Statement

c. Cash                                              Balance Sheet

d. Accounts Payable                         Balance Sheet

e. Supplies                                        Balance Sheet

f. Salaries and Wages Expense       Income Statement

g. Accounts Receivable                   Balance Sheet

h. Common Stock                            Balance Sheet

i. Equipment                                     Balance Sheet

j. Advertising Expense                    Income Statement

k. Dividends                                     Retained Earnings Statement

l. Notes Payable                               Balance Sheet

Explanation:

a) Company A's Income Statement is a financial statement that shows its financial performance in terms of profitability.  It contains the revenue and expenses.  It determines the net income (excess of revenue over expenses).

b) Company A's Balance Statement is a financial statement that indicates its financial position by showing the assets, liabilities, and equities.

c) The statement of retained earnings is a financial statement that connects its income statement to the balance sheet.  It shows the movement in the retained earnings.

Jenna is a single taxpayer. During 2018, she earned wages of $110,000. She doesn't itemize deductions, so she will take the standard deduction to calculate 2018 taxable income. In addition, during the year she sold common stock that she had owned for five years for a net profit of $7,800. How much does Jenna owe to the IRS for taxes

Answers

Answer:

Jenna

The amount of tax that Jenna owes to the IRS for taxes (Tax Liability) for 2018 is:

= $23,520.

Explanation:

a) Data and Calculations:

Earned wages for 2018 = $110,000

Standard deduction =         (12,000) for a single taxpayer

Taxable income =               98,000

Capital gains from common stock = $7,800

Capital gains tax rate for a single = 0% (below $40,000)

Taxable income = $98,000

Tax rate (24%) for income over $82,500

Tax liability = $23,520 ($98,000 * 24%)

Locus Company has total fixed costs of $112,000. Its product sells for $35 per unit and variable costs amount to $25 per unit. Next year Locus Company wishes to earn a pretax income that equals 10% of fixed costs. How many units must be sold to achieve this target income level?
A.1,120.
B. 8,214.
C.11,200.
D.12,320.
E.14,080.

Answers

Answer:

D.12,320.

Explanation:

The computation of the number of units to be sold for attaining the target income level is given below:

Target profit

= 10% of fixed cost

= 10% of 112,000

= 11200

Now  

Sales needed = (Fixed costs +target profit) ÷ unit contribution margin

= (112,000+11,200) ÷ (35-25)

= 123,200 ÷ 10

= 12,320 units

Chad is the founder of a firm producing self-driving vehicles. Because the industry is so new and chaotic, Chad favors a top-down strategic planning approach in which he exerts strong control over all aspects of the business, from product development and design to manufacturing and marketing. What is wrong with this scenario

Answers

Answer:

a. The self-driving vehicle industry is changing too much for the top- down approach to be effective.

Explanation:

The top-down strategic planning approach involves the company goals and their subdivisions. The aim is to gradually move from the top to down in a specific hierarchy. This approach lies on higher authority and in contrast the bottom-up strategy favors decision making that gives complete staff a voice.

Exercise 19-17 (Algo) EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options [LO19-5, 19-6, 19-7, 19-8] On December 31, 2020, Berclair Inc. had 380 million shares of common stock and 4 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 96 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2021. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2021, was $600 million. Also outstanding at December 31 were 30 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2020, for 30 million common shares at an exercise price of $56 per share. During 2021, the market price of the common shares averaged $70 per share. Required: Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Do not round intermediate calculations.)

Answers

Answer:

Berclair Inc.

Basic earnings per share = $1.87

Diluted earnings per share = $1.70

Explanation:

a) Data and Calculations:

                                             Common Stock     Cumulative Preferred Stock

Dec. 31, 2012 Outstanding     380,000,000           4,000,000 shares

Dividend rate                                                                              9%

Stock par value                                                                         $100

Total value of stock                                                                $400 million

Annual preferred dividend                                   $36 million ($400 m * 9%)

March 1, 2021 Treasury stock (96,000,000)

July 1, 2021 Stock dividend       14,200,000 (284,000,000 * 5%)

October 1, 2021 Treasury stock 4,000,000

Outstanding shares               302,200,000         4,000,000 shares

Stock options                           30,000,000

Total shares and options      332,200,000

Net income for the year = $600,000,000

Preferred stock dividend       36,000,000

Earnings for available for

common stockholders     $564,000,000

Basic earnings per share = $1.87 ($564,000,000/302,200,000)

Diluted earnings per share = $1.70 ($564,000,000/332,200,000)

three (3) State taxes and briefly describe each

Answers

The three state taxes are what you earn, taxes on what you buy, and taxes on what you own.

Earn: individual income taxes, corporate income taxes, payroll taxes, and capital gains taxes;

Buy: sales taxes, gross receipts taxes, value-added taxes, and excise taxes;

Own: property taxes, tangible personal property taxes, estate, and inheritance taxes, and wealth taxes.

Harry is a 70-year-old retiree who joined the AARP. To celebrate, he took his daughter to a restaurant and flashed his new AARP card when the check came, earning him a 15 percent discount. What kind of benefit has Harry just used

Answers

Answer: c. material

Explanation:

Material benefits refer to the financial benefits that one gets from being part of a group. They usually refer to group members getting discounts on certain things as well as being charged with a different rate than others.

Henry being in the AARP gets the material benefit of being able to get discounts at many different stores and businesses. It is the country's way of trying to ease the burden of being retired after working for so long.

Desks by Daisy sells a student desk for $100 per unit. The variable cost per desk is $40 and Daisy's fixed costs of producing the desks equals $15,000 per month. Daisy needs to sell _______ desks per month in order to break-even.

Answers

Answer:

250

Explanation:

Breakeven quantity are the number of  units produced and sold at which net income is zero

Breakeven quantity = fixed cost / price – variable cost per unit

$15,000 / (100 - 40)

$15,000 / 60

250

You view tea and scones as perfect complements, and you prefer to consumer one cup of tea with one scone. Also, your indifference curves are plotted with tea on the vertical axis. If you presently have two cups of tea and one scone, what this the marginal rate of substitution (MRS) at this point

Answers

Answer:

Infinity

Explanation:

In the case when the tea and scones are considered to be the perfect complements also you give preference one cup of tea over the one scone

Plus the indifferent curve with tea should be plotted on the vertical axis

So in the case when there is 2 cups of tea with one scone so at this point, the MRS should be at infinity as the indifference curve should be in downward sloping because we presume that there is preferences done at monotonicity

Ruby is considering a college degree. She learned that the total costs (including the tuition, fees, and forgone wages) of a college degree is $120,000. Her annual income with a college degree will be $14,000 higher than a high school graduate. She is planning to work for 15 years after graduation. How does her ROI on college change if she decides to work for 30 years instead of 15 years

Answers

Answer: Increase of 3.2%

Explanation:

Return on Investment (ROI) is the return that Ruby would make over her college degree fees.

It is the internal rate of return that would equate her future earnings to the investment in college fees.

Change in ROI = 11.18% - 7.98

= 3.2%

Increase of 3.2%

Depreciation by Units-of-activity Method A diesel-powered tractor with a cost of $259,000 and an estimated residual value of $7,400 is expected to have a useful operating life of 85,000 hours. During April, the tractor was operated 200 hours. Determine the depreciation for the month. If required, carry out any division to two decimal places.

Answers

Answer:

the depreciation expense is $592

Explanation:

The computation of the depreciation expense is shown below:

= (cost  - residual value) ÷ useful operating life × operated in april month

= ($259,000 - $7,400)  ÷ 85,000 hours × 200 hours

= $592

Hence, the depreciation expense is $592

The same should be considered and relevant too

On-Time Delivery Company acquired an adjacent lot to construct a new warehouse, paying $31,000 in cash and giving a short-term note for $278,000. Legal fees paid were $2,220, delinquent taxes assumed were $15,700, and fees paid to remove an old building from the land were $20,800. Materials salvaged from the demolition of the building were sold for $4,600. A contractor was paid $939,400 to construct a new warehouse. Determine the cost of the land to be reported on the balance sheet.

Answers

Answer:

the cost of the land that should be reported on the balance sheet is $343,120

Explanation:

The calculation of the cost of the land that should be reported on the balance sheet is given below:

= cash payment + Short term note payable + legal fees paid + delinquent taxes + fees paid for removing out the old building - salvage value

= $31,000 + $278,000 + $2,220 + $15,700 + $20,800 - $4,600

= $343,120

hence, the cost of the land that should be reported on the balance sheet is $343,120

The following data come from the financial records of Campbell Corporation for Year 3: Sales $ 840,000 Interest expense 5,000 Income tax expense 25,500 Net income 25,500 Required How many times was interest earned in Year 3

Answers

Answer:

the times was interest earned in Year 3 is 11.2 times

Explanation:

The computation of the times interest earned ratio is given below:

The times interest earned ratio is

= (Net income+ Income tax expense+ Interest expense) ÷ Interest expense

= ($25,500 + $25,500 + $5,000) ÷ $5,000

= 11.2 times

Hence, the times was interest earned in Year 3 is 11.2 times

The same is to be relevant

A new kind of smartphone is selling for $500. The first cell phone costs $300 to produce, and each subsequent phone costs $325 to produce. What is the producer surplus for this market when selling four cell phones at this rate

Answers

Answer:The profit is $740

Explanation:4(500)-[3(320)+300]

4x500=2000

3x320=960+320=1260

2000-1260=$740

The Northern Division of Southwest Clothing Inc. forecasts (has budgeted) the following income statement for the upcoming year: Sales $850,000 Variable Costs (520,000) Contribution Margin 330,000 Fixed Costs (480,000) Operating loss ($150,000) Unfortunately, every other division in the company is also expecting an operating loss for the coming year. The company's management is considering shutting down the Northern Division and has determined that $350,000 of the $480,000 Fixed Costs shown would be eliminated if that happens. If the Northern Division is shutdown, what is the change (impact) in Southwest's forecast operating results

Answers

Answer:

Operating loss will decrease by $20,000

Explanation:

Operating loss from normal business activities and if the division is not shut down = $150,000.

Operating loss if division is shut down by the management = $130,000 ($480,000 - $350,000) because the management has determined that $350,000 of the $480,000 Fixed Costs shown would be eliminated if that happens.

So, if the Northern Division is shutdown, the Operating loss will decrease by $20,000 (From $150,000 to $130,000)

Dome Metals has credit sales of $144,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume the firm adopts new credit terms of 5/10, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 10 percent. The new credit terms will increase sales by 20% because the 5% discount will make the firm's price competitive.

Required:
a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted?
b. Should the firm offer a discount?

Answers

Answer:

a. The net change in income if the new credit terms are adopted is a net gain of $2,880.

b. Since the discount of 5% will result in a net gain which is $2,880, the firm should offer a discount.

Explanation:

a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted?

Old sales = $144,000

New Sales = Old sales * (100% + Percentage sales increase) = $144,000 * (100% + 20%) = $172,800

Increase in Sales = New Sales - Old sales = $172,800 - $144,000 = $28,800

Increase in Profit from new sales = Profit Margin * Increase in Sales = 25% * $28,800 = $7,200

Average Accounts Receivable without discount = Average Collection Period * Average daily Sales = 120 * ($144,000 / 360) = $48,000

Average Accounts Receivable with discount = Average Collection Period * Average daily Sales = 10 * ($172,800 / 360) = $4,800

Reduction in Accounts Receivable = Average Accounts Receivable without discount - Average Accounts Receivable with discount = $48,000 - $4,800 = $43,200

Loan balance as a result of reduction in accounts receivable. Therefore, we have:

Interest Saving = Interest Rate * Loan Reduction = 10% * $43,200 = $4,320

Cost of Discount = Discount Rate * New Sales = 5% * $172,800 = $8,640

Net Gain (loss) = Increase in Profit form new sales + Interest Saving - Cost of Discount = $7,200 + $4,320 - $8,640 = $2,880

Therefore, the net change in income if the new credit terms are adopted is an net gain of $2,880.

b. Should the firm offer a discount?

Since the discount of 5% will result in a net gain which is $2,880, the firm should offer a discount.

Dake Corporation's relevant range of activity is 2,200 units to 5,000 units. When it produces and sells 3,600 units, its average costs per unit are as follows: Average Cost per Unit Direct materials $ 6.85 Direct labor $ 2.80 Variable manufacturing overhead $ 1.50 Fixed manufacturing overhead $ 3.00 Fixed selling expense $ 0.90 Fixed administrative expense $ 0.60 Sales commissions $ 0.70 Variable administrative expense $ 0.60 If 2,600 units are produced, the total amount of direct manufacturing cost incurred is closest to: rev: 12_18_2020_QC_CS-244896 Multiple Choice $28,990 $36,790 $25,090 $30,810

Answers

Answer: $25,090

Explanation:

Direct manufacturing costs are the direct material and direct labor costs tha were incurred to produce the goods in question.

Direct manufacturing costs = (Direct materials per unit + Direct labor per unit) * number of units produced

= (6.85 + 2.80) * 2,600

= 9.65 * 2,600

= $25,090

If the slope of the budget line changes, there MUST have been a change in the consumer's preferences. an increase in the consumer's income. a change in the price of at least one good. a change in the price of both goods. None of these

Answers

Answer:

you change in the price of at least one good

Suppose I want to open my own restaurant. Currently I am working asa Financial Analyst at a top bank earning $175,000 a year, which I willhave to quit to open a restaurant. I am also going to invest $100,000of my savings which were earning an average annual rate of 6%.Whatis my opportunity cost(implicit cost) of opening the restaurant

Answers

Answer: $181000

Explanation:

Amount earned in a bank = $175000

Money invested = $100000

Interest Rate = 6%

Interest earned will be:

= 6% × $100000

= $6000

Therefore, the total earnings when the individual is working in the bank will be:

= $175000 + $6000

= $181000

Therefore, the pportunity cost of opening the restaurant will be the income that's foregone when working in the bank which is $181000.

The management of Fuzzy Button Clothing Company controls 58% of the company's stock. The firm did not meet any of its quarterly sales projections for the last year. Some of the firm's institutional investors are worried that the firm's poor performance is partly because management has not been focused on maximizing shareholder wealth. Which of the following measures would the institutional investors most likely want to see implemented?
A. They would like to see the size of the board of directors increased, because larger boards usually implement a higher degree of corporate governance.
B. They would like to see that the company has an interlocking board of directors with one of the company's strategic partners
C. They would like to see that the majority of the company's board of directors is composed of true outsiders.
It is reasonable to assume that a firm's management is going to be ultimately motivated to act in their own best interest. It can be a serious problem for shareholders if management's self-interests do not align with shareholders' self-interests. Select the statement that best describes the board of directors' actions in the following scenario:
Happy Lion Manufacturing Inc. currently has $1.1 billion in cash on its balance sheet. The CFO thinks the firm will need $600 million in cash to finance operations for the next year. The CFO has recommended that the firm keep the excess cash in a marketable securities portfolio to allow for unexpected costs. However, the board of directors has decided that the firm will pay this money out to the shareholders in the form of a cash dividend.
D. The board's decision will give management the incentive to make decisions that are not in the shareholders' best interest.
E. The board's decision will help align management's interests with the shareholders' interests.
F. The board's decision is extremely risky and not very practical Flash Player WIN 32,0,0.387

Answers

Answer:

Fuzzy Button Clothing Company

1. The measure that the institutional investors would most likely want to see implemented is:

C. They would like to see that the majority of the company's board of directors is composed of true outsiders.

Happy Lion Manufacturing Inc.

2. The statement that best describes the board of directors' actions in the following scenario is:

E. The board's decision will help align management's interests with the shareholders' interests.

Explanation:

a) Data and Calculations:

Fuzzy Button Clothing Company

Management control = 58%

Institutional and other stockholders = 42% (100% - 58%)

Happy Lion Manufacturing Inc.

Cash on its balance sheet = $1.1 billion

Cash needed to finance operations next year = $600 million

Excess cash = $500 million ($1.1 billion Minus $600 million)

CFO's recommendation = keep excess cash in a marketable securities for unexpected costs

Board of directors' decision = pay the excess out to the shareholders in the form of a cash dividend.

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