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University of Alberta ENGM 401 & 620 Section X1 Fall 2010

Fundamentals of Engineering Finance Assignment #2 Due in class on September 23, 2010 Problem #1: (four parts) Select the most correct answer for each part. i) True or False: Work in progress is categorized as an asset valued at the total cost of manufacture just before the sale is booked and it is then converted to an expense after the payment has been received from the customer. ii) Which of the following statements is the most correct? a) Even for large changes in sales, SG&A is a fixed cost b) Sales costs done purely on commission are not variable and are best categorized in SG&A. c) In some companies, sales are categorized as part of COGS. d) The salary of a companys president is normally put into COGS e) COGS is always reported on the annual financial statements of public companies. iii) The Sisboombaa musical instrument company had gross revenue in the most recent quarter of $1,800k, COGS was $1,200k, contribution margin was $400k, SG&A was $300k, the operating income was $100k, and there was no other income. (assuming no interest, taxes, or depreciation). Contribution Margin for this company in the same quarter of the previous year had been approximately 30%, with the same level of sales, costs, and SG&A. Which statement is the most correct? a) In the most recent quarter the companys net revenue was $1,800k. b) In the most recent quarter the contribution margin was 33.3%. c) In the most recent quarter the company had no expenses for bad debt, allowances, or warranty. d) In the most recent quarter the net income was $100k. e) None of the other statements is correct. iv) Which statement is the most correct about the performance of the Sissboomba company? a) b) c) d) e) Margin percentage has gone up, likely due to reduced COGS. Margin percentage has remained the same. Margin percentage has remained the same, although the contribution margin has changed. Margin percentage has gone down, likely due to increased bad debt and warranties. There is not enough information to answer the question.

Problem #2: You have a small business that makes and sells titanium skateboard parts. You have a corporate bank account. The bank has approved a credit card for your business.

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University of Alberta ENGM 401 & 620 Section X1 Fall 2010

You have the following list of activities. You purchase a small used milling machine and tools on-line for $2500 using the company credit card. 2. You order and receive $1000 of titanium from a supplier. 3. You pay the monthly $50 invoice for your companys internet web site using on-line banking. 4. You move half of the titanium onto the shop floor (well, your garage actually) and a machinist (who you hired to do the work) starts fabrication. 5. You receive a paper copy in the mail of the suppliers invoice (the bill) for the titanium, but you put it in your Payables file folder and dont pay it right away. 6. You receive your credit card statement, and you pay off the credit card balance of $2500 in full. 7. The machinist tells you that the parts are ready, and gives you his invoice for $500 in shop labor costs. You can assume that there are no other direct costs in making the product, and that you pay the machinist right away. 8. You pay the supplier after 30 days. 9. You finish fabrication of a set of items with a cost of $850, of which titanium cost is $300 and shop floor labour is $550, and move them to finished product inventory. (Question: What book value do you think the items would have sitting in finished product inventory, the cost incurred in making it ($750) or its likely sale price ($2500)? Why?) 10. You sell all the items to a customer for $2500. 11. The customer pays you 30 days later. For each of the eleven steps listed, state whether a financial transaction has occurred. If there has been a transaction, then also state which accounts are involved, whether they are increasing and/or decreasing, and which has a credit and which has a debit. The accounts are: cash, payables (money a company owes its suppliers, money owed for salaries, etc.), inventory of raw materials, work in progress (value of partially completed products that are still being manufactured), inventory of finished goods, cost of goods sold, sales revenue, and accounts receivable (money due to be collected from a customer). Also answer the supplementary questions given in step 9. Note that Step 10 entails two sets of transactions.) Problem #3 Do Problem 3.3 in the course text. Problem #4 (ENGM 620 students only) Do Problem 3.5 in the course text.
MG Lipsett 2010


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