Caterpillar, Inc. is a manufacturer of large earth-moving and mining equipment. This firm, and other heavy equipment manufacturers, have degrees of accounting operating leverage that are relatively high. Explain why
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Caterpillar, Inc. is a manufacturer of large earth-moving and mining equipment. This firm, and other heavy equipment manufacturers, have degrees of accounting operating leverage that are relatively high. Explain why.
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- Kunda and Sitwala Company is considering manufacturing special drill bits and other equipment for mining rigs. The proposed project is currently regarded as complementary to its other lines of business, and the company has certain expertise by virtue of its having a large mechanical engineering staff. Because of the large outlays required to get into the business, management is concerned that Kunda and Sitwala earn a proper return. Since the new venture is believed to be sufficiently different from the company’s existing operations, management feels that a required rate of return other than the company’s present one should be employed. The financial manager’s staff has identified several companies (with capital structures similar to that of Kunda and Sitwala) engaged solely in the manufacture and sale of mining drilling equipment whose common stocks are publicly traded. Over the last five years, the median average beta of these companies has been 1.28. The staff believes that 18…Consider the following conversation between Gary Means, manager of a division that produces industrial machinery, and his controller, Donna Simpson, a certified management accountant and certified public accountant: Gary: Donna, we have a real problem. Our operating cash is too low, and we are in desperate need of a loan. As you know, our financial position is marginal, and we need to show as much income as possibleand our assets need bolstering as well. Donna: I understand the problem, but I dont see what can be done at this point. This is the last week of the fiscal year, and it looks like well report income just slightly above breakeven. Gary: I know all this. What we need is some creative accounting. I have an idea that might help us, and I wanted to see if you would go along with it. We have 200 partially finished machines in process, about 20% complete. That compares with the 1,000 units that we completed and sold during the year. When you computed the per-unit cost, you used 1,040 equivalent units, giving us a manufacturing cost of 1,500 per unit. That per-unit cost gives us cost of goods sold equal to 1.5 million and ending work in process worth 60,000. The presence of the work in process gives us a chance to improve our financial position. If we report the units in work in process as 80% complete, this will increase our equivalent units to 1,160. This, in turn, will decrease our unit cost to about 1,345 and cost of goods sold to 1.345 million. The value of our work in process will increase to 215,200. With those financial stats, the loan would be a cinch. Donna: Gary, I dont know. What youre suggesting is risky. It wouldnt take much auditing skill to catch this one. Gary: You dont have to worry about that. The auditors wont be here for at least 6 to 8 more weeks. By that time, we can have those partially completed units completed and sold. I can bury the labor cost by having some of our more loyal workers work overtime for some bonuses. The overtime will never be reported. And, as you know, bonuses come out of the corporate budget and are assigned to overheadnext years overhead. Donna, this will work. If we look good and get the loan to boot, corporate headquarters will treat us well. If we dont do this, we could lose our jobs. Required: 1. Should Donna agree to Garys proposal? Why or why not? To assist in deciding, review the corporate code of ethics standards described in Chapter 1. Do any apply? 2. Assume that Donna refuses to cooperate and that Gary accepts this decision and drops the matter. Does Donna have any obligation to report the divisional managers behavior to a superior? Explain. 3. Assume that Donna refuses to cooperate; however, Gary insists that the changes be made. Now what should she do? What would you do? 4. Suppose that Donna is 63 and that the prospects for employment elsewhere are bleak. Assume again that Gary insists that the changes be made. Donna also knows that his supervisor, the owner of the company, is his father-in-law. Under these circumstances, would your recommendations for Donna differ?Finance rocks had decided to reduce its fixed costs by seller some of its manufacturing facilities and assigning the production of certain parts to a group of predecessors suppliers, by doing so the company is trying to adjusts its operating leverage, financial leverage or tax burden?
- Hyundai Heavy Industries Co. is one of Korea’s largest industrial producers.According to an article in BusinessWeek Online, the company is not only the world’s largest shipbuilder but also manufactures other industrial goods ranging from construction equipment and marine engines to building power plants and oil refineries worldwide. Despite being a major industrial force in Korea, several of the company’s divisions are unprofitable, or “bleeding red ink” in the words of the article. Indeed, last year the power plant and oil refineries building division recorded a $105 million loss, or 19 percent of its sales. Hyundai Heavy Industries recently hired a new CEO who is charged with the mission of bringing the un-profitable divisions back to profitability. According to BusinessWeek,Hyundai’s profit-driven CEO has provided division heads with the followingultimatum: “... hive off money-losing businesses and deliver profits within ayear—or else resign.” Suppose you are the head of the marine…You are the manager of an oil company, and safety/environmental issues are an important part of the business. While it is clearly important to comply with existing safety and environmental regulations, is legal compliance sufficient for maximizing shareholder value? If compliance is not sufficient, how much more should the firm spend on safety and environmental concerns?Yatta Net International has manufacturing, distribution, retail, and consulting divisions. Projects undertaken by the manufacturing and distribution divisions tend to be low-risk projects, because these divisions are well established and have predictable demand. The company started its retail and consulting divisions within the last year, and it is unknown if these divisions will be profitable. The company knew that opening these new divisions would be risky, but its management believes the divisions have the potential to be extremely profitable under favorable market conditions. The company is currently using its WACC to evaluate new projects for all divisions. If Yatta Net International does not risk-adjust its discount rate for specific projects properly, which of the following is likely to occur over time? Check all that apply. The firm will accept too many relatively risky projects. The firm will become less valuable. The firm will accept too many relatively safe…
- You are the management accountant of a manufacturing company where production is capital intensive, using machinery that is estimated to have a five-year life. The present machinery is now approximately three years old. While raw material inventories have a low turnover due to supply problems, finished goods are turned over rapidly and there is minimal work-in-progress at any one time. The technology incorporated in the means of production is thought to be stable. In recent years, it has not been possible to increase the price of the company’s outputs beyond the rate of general inflation without diminishing market share, due to keen competition in this sector. The company does not consider that it has cash flow problems. The company is all equity financed. Although a bank overdraft is a permanent feature of the balance sheet, this is primarily due to customers being given a 60-day credit period, while most suppliers are paid within 30 days. There is always a positive balance of…Imagine you are the manager of operations for a manufacturing company. Your vice president wants to expand production by building a new facility, and she would like you to develop a business case for the project. Assume that your company’s weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work on the business case, you surmise that this is a fairly risky project because of a recent slowing in product sales. In fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital. Your vice president suggests that the project could be financed from a mix of retained earnings (50%) and bonds (50%). She reasons that retained earnings do not cost the company anything because it is cash you already have and the after-tax cost of debt is only 7%. That would lower your weighted…Imagine you are the manager of operations for a manufacturing company. Your vice president wants to expand production by building a new facility, and she would like you to develop a business case for the project. Assume that your company’s weighted average cost of capital is 13%, the after-tax cost of debt is 7%, preferred stock is 10.5%, and common equity is 15%. As you work on the business case, you surmise that this is a fairly risky project because of a recent slowing in product sales. In fact, when using the 13% weighted average cost of capital, you discover that the project is estimated to return about 10%, which is quite a bit less than the company’s weighted average cost of capital. Your vice president suggests that the project could be financed from a mix of retained earnings (50%) and bonds (50%). She reasons that retained earnings do not cost the company anything because it is cash you already have and the after-tax cost of debt is only 7%. That would lower your weighted…
- fintech corporation, a large multinational firm, has various business units operating in diverse industries. it has been observed that managerial employment risk is at its lowest when the firm maintains relatively high levels of diversification. investors in the company face lower risk when the firm adopts a strategy of... related linked diversification. related constrained diversification. single business strategies. higher levels of firm diversification.Alfa-Group, together with its subsidiaries as a group, is principally engaged in the provision of integrated logistic services, which include the planning, procurement and logistics management of construction materials mainly for infrastructure projects in Banten Province.Mr. Dono suggested in his report that no depreciation is required for the warehouses since they are investment properties rather than property, plant and equipment.Warehouses are investment properties because rental is charged to the customers if they delay the receipt of cargoes from the warehouses. Required: Assume that you are Mr. Kasino, the finance manager, and draft a report for Mr. Indro, the Chairman of Alfa-Group. In your report, you should discuss and comment on Mr. Dono’s argument that the warehouses should be treated as investment properties so thatthey are not subject to depreciation.Company B uses a responsibility reporting system to measure the performance of its three investment centers: Planes, Taxis, and Limos. Segment performance is measured using a system of responsibility reports and return on investment calculations. The allocation of resources within the company and the segment managers’ bonuses are based in part on the results shown in these reports.Recently, the company was the victim of a computer virus that deleted portions of the company’s accounting records. This was discovered when the current period’s responsibility reports were being prepared. The printout of the actual operating results appeared as follows. Planes Taxis Limos Service revenue $ ? $450,000 $ ? Variable costs 5,000,000 ? 320,000 Contribution margin ? 180,000 380,000 Controllable fixed costs 1,500,000 ? ? Controllable margin ? 70,000 176,000 Average operating assets 25,000,000 ? 1,600,000 Return on investment 12% 10% ? InstructionsDetermine the missing pieces…