Question 1
Please answer the question after the text "Case 5.1 MERCK ACQUISITION OF MEDCO On July 28, 1993, Merck & Company, then the world?s largest drug manufacturer, announced that it planned to acquire, for $6.6 billion, Medco Containment Services Incorporated, the largest prescription benefits management company (PBM) and marketer of mail-order medicines in the United States. This merger reflected fundamental changes taking place in the pharmaceutical industry. GROWTH IN MANAGED CARE Perhaps the most significant change involves the growth of managed care in the health care industry. Managed care plans typically provide members with medical insurance and basic health care services, using volume and long-term contracts to negotiate discounts from health care providers. In addition, managed care programs provide full coverage for prescription drugs more frequently than do traditional medical insurance plans. Industry experts estimate that by the turn of the century, 90% of Americans will have drug costs included in some kind of managed health care plan, and 60% of all outpatient pharmaceuticals will be purchased by managed care programs. The responsibility for managing the provision of prescription drugs is often contracted out by the managed care organizations to PBMs. The activities of PBMs typically include managing insurance claims, negotiating volume discounts with drug manufacturers, and encouraging the use of less expensive generic substitutes. The management of prescription benefits is enhanced through the use of formularies and drug utilization reviews. Formularies are lists of drugs compiled by committees of pharmacists and physicians on behalf of a managed care organization. Member physicians of the managed care organization are then strongly encouraged to prescribe from this list whenever possible. Drug utilization reviews consist of analyzing physician prescribing patterns and patient usage. They can identify when a patient may be getting the wrong amount or kind of medicine and when a member physician is not prescribing from a formulary. Essentially, this amounts to an additional opportunity for managed care or PBM administrators to monitor costs and consolidate decision-making authority. The key aspect of the shift to managed care is that the responsibility for payment is linked more tightly to decision making about the provision of health care services than it is in traditional indemnity insurance plans. The implications for drug manufacturers are far reaching. With prescription decision-making authority shifting away from doctors to managed care and PBM administrators, drug manufacturers? marketing strategies similarly will shift their focus from several hundred thousand doctors to a few thousand formulary and plan managers. This, in turn, will result in a dramatic reduction in the sales forces of pharmaceutical manufacturers. Several other significant changes in industry structure are expected to occur. Many industry experts predict that managed care providers will rely on a single drug company to deliver all of its pharmaceutical products and services rather than negotiating with several drug companies. This will favor those firms with manufacturing, distribution, and prescription management capabilities. In addition, many experts believe that only a handful of pharmaceutical companies will exist on the international scene in a few years. They point to intense competition, lower profits, and a decrease in the number of new drugs in the ?research pipeline? as contributing factors. BENEFITS OF THE ACQUISITION Merck & Company and Medco Containment Services Incorporated believe that a merger between the two firms will create a competitive advantage that will allow for their survival. Merck executives identify Medco?s extensive database as the key factor motivating the merger. Medco maintains a computer profile of each of its 33 million customers, amounting to 26% of all people covered by a pharmaceutical benefit plan. Medco clients include 100 Fortune 500 companies, federal and state benefit plans, and 58 Blue Cross/Blue Shield groups and insurance companies. Numerous opportunities exist for Merck to utilize the information contained in Medco?s database. First, the database will allow Merck to identify prescriptions that could be switched from a competitor?s drug to a Merck drug. Merck pharmacists will then suggest the switch to a patient?s doctor. This prospect of increasing sales is enormous. Second, the database will allow Merck to identify patients who fail to refill prescriptions. The failure to refill needed prescriptions amounts to hundreds of millions of dollars in lost sales each year. Finally, Merck will be able to use Medco?s computerized patient record system as a real-life laboratory with the goal of proving that some Merck drugs are worth the premium price charged. This will take place by identifying who takes what pill and combining that information with the patient?s medical records. This might allow Merck to establish the supremacy of its products. Additional benefits of the merger include $1 billion annual savings in redundant marketing operations and a reduction in Merck?s sales force as a result of more precise marketing strategies brought about by Medco?s database and the industry emphasis on marketing to plan managers instead of doctors. Merck & Company?s acquisition of Medco Containment Services Incorporated is essentially an attempt to increase market share in an industry with decreasing prices by capitalizing on the most valuable asset in the pharmaceutical industry?information. It also is intended to increase its competitive position in the growing managed care arena by aligning itself with a PBM. Merck & Company?s strategy was quickly emulated when British drug maker SmithKline Beecham announced plans to acquire Diversified Pharmaceutical Services Incorporated, one of the four largest drug wholesalers in the United States, from United Healthcare for $2.3 billion, and Roche Holdings Limited reported that it planned to acquire Syntex Corporation. Also, in the summer of 1994, Eli Lilly and Company announced its intention to acquire PCS Health Systems from McKesson Corporation for $4 billion. These mergers were not only a reaction to the changing industry structure but caused the change to accelerate. QUESTION C5.1.2 What is the role of prescription benefits management companies?,Hello Rachel, everything is ok, but can you expand on the subject up to 300-400 words?
Question 2
The following transactions affected various funds and activities of the Town of Big Springs. 1. The Fire Department, a governmental activity, purchased $100,000 of water from the Water Utility Fund, a business-type activity. 2. The Big Springs Golf Course, an enterprise fund, reimbursed the General Fund $500 for office supplies that the General Fund had purchased on its behalf and that were used in the course of the fiscal year. 3. The General Fund made a long term loan in the amount of $50,000 to the Central Stores Fund, an internal service fund that services city departments. 4. The General Fund paid its annual contribution of $100,000 to the department service for interest and principal on the general obligation bonds due during the year. 5. The $5,000 balance in the capital projects fund at the completion of construction of a new Town Hall was transferred to the General Fund. Make the required journal entries in the general journal of the General Fund and any other fund(s) affected by the interfund transactions described. Also make entries in the governmental activities journal for any transaction(s) affecting a governmental fund. Do not make entries in the subsidiary ledgers. a Debits Credits 1. General Fund: Governmental Activities: Enterprise Fund: 2. General Fund: Governmental Activities: Enterprise Fund: 3. General Fund: Governmental Activities: Internal Service Fund: 4. General Fund: Governmental Activities: Debt Service Fund: 5. General Fund: Governmental Activities: Capital Projects Fund:
Question 3
AE18-8 Green with Envy provides environmentally friendly lawn services for homeowners. Its operating costs are as follows. Depreciation $2,621 per month Advertising 327 per month Insurance 3,604 per month Weed and feed materials 12 per lawn Direct labor 10 per lawn Fuel 2 per lawn Green with Envy charges $80 per treatment for the average single-family lawn. Determine the company's break-even point in (a) number of lawns serviced per month and (b) dollars. Break-even point in number of lawns Break-even point in dollars $ AE18-10 In the month of March, New Day Spa services 610 clients at an average price of $100. During the month, fixed costs were $17,960 and variable costs were 60% of sales. Determine the contribution margin in dollars, per unit, and as a ratio. Contribution margin in dollars $ Contribution margin per unit $ Contribution margin ratio % Using the contribution margin technique, compute the break-even point in dollars and in units. Break-even point in dollars $ Break-even point in units AE19-2 In the month of June, Angela's Beauty Salon gave 3,570 haircuts, shampoos, and permanents at an average price of $39. During the month, fixed costs were $16,670 and variable costs were 80% of sales. Determine the contribution margin in dollars, per unit, and as a ratio. (Round answers to 0 decimals, e.g. 20,000, except round contribution margin per unit to 2 decimal places, e.g. 5.50.) Contribution margin in dollars $ Contribution margin per unit $ Contribution margin ratio % Using the contribution margin technique, compute the break-even point in dollars and in units. (Round answers to 0 decimal places, e.g. 2,500.) Break-even point in dollars $ Break-even point in units Compute the margin of safety in dollars and as a ratio. (Round answers to 0 decimal places, e.g. 20,000.) Margin of safety in dollars $ Margin of safety ratio % AE19-3 Ger Company reports the following operating results for the month of August: Sales $310,000 (units 5,000); variable costs $214,200; and fixed costs $70,700. Management is considering three independent courses of action to increase net income. Compute the net income that would result from each of the independent actions below: (Round your answers to 0 decimal places, e.g. 52,500. When computing new selling price round your computation to 2 decimal places, e.g. 66.25 to arrive at the answer.) 1. Increase selling price by 10% with no change in total variable costs. $ 2. Reduce variable costs to 57% of sales. $ 3. Reduce fixed costs by $17,100. $ AE19-9 (a,b) Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance. Shown below are unit cost and sales data. Pairs of Shoes Pairs of Gloves Range Finder Unit sales price $105 $28 $244 Unit variable costs 59 12 204 Unit contribution margin $46 $16 $40 Sales mix 37% 44% 19% Fixed costs are $620,700. Compute the break-even point in units for the company. (Round computation for weighted-average contribution margin to 2 decimal places, e.g. 31.50 and final answer to 0 decimal places, e.g. 21,500.) Determine the number of units to be sold at the break-even point for each product line. (Round answers to 0 decimal places, e.g. 5,000.) Shoes Gloves Range finders ABE23-3 In Karnes Company it costs $35 per unit ($21 variable and $14 fixed) to make a product that normally sells for $41. A foreign wholesaler offers to buy 4,054 units at $28 each. Karnes will incur special shipping costs of $2 per unit. Assuming that Karnes has excess operating capacity, indicate the net income (loss) Karnes would realize by accepting the special order. (If a box should be blank enter a 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.) Reject Order Accept Order Net Income Increase(Decrease) Revenues $ $ $ Costs-Variable manufacturing Shipping Net Income $ $ $ The special order should be . ABE23-4 Bartley Manufacturing incurs unit costs of $7.97 ($4.95 variable and $3.02 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 14,400 of the assembly part at $5.79 per unit. If the offer is accepted, Bartley will save all variable costs but no fixed costs. Complete the analysis showing the total cost saving, if any, Bartley will realize by buying the part. (If a box should be blank enter a 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).) Make Buy Net Income Increase (Decrease) Variable manufacturing costs $ $ $ Fixed manufacturing costs Purchase price Total annual cost $ $ $ The decision should be to the part. ABE23-6 Felton Company has a factory machine with a book value of $80,443 and a remaining useful life of 5 years. A new machine is available at a cost of $203,040. This machine will have a 5-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $612,240 to $406,900. Complete the analysis showing whether the old machine should be retained or replaced. (If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).) Retain Equipment Replace Equipment Net 4-Year Income Increase (Decrease) Variable manufacturing costs $ $ $ New machine cost Total $ $ $ The old factory machine should be . ABE23-7 Derby, Inc. manufactures golf clubs in three models. For the year, the Eagle line has a net loss of $3,450 from sales $200,650, variable expenses $174,100, and fixed expenses $30,000. If the Eagle line is eliminated, $15,560 of fixed costs will remain. Complete the analysis showing whether the Eagle line should be eliminated. (If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.) Continue Eliminate Net Income Increase (Decrease) Sales $ $ $ Variable expense Contribution margin Fixed expenses Net Income $ $ $ The Eagle product line should be . AE20-6 On January 1, 2011 the Batista Company budget committee has reached agreement on the following data for the 6 months ending June 30, 2011. Sales units: First quarter 5,700; second quarter 7,000; third quarter 7,200 Ending raw materials inventory: 50% of the next quarter's production requirements Ending finished goods inventory: 30% of the next quarter's expected sales units Third-quarter production: 7,390 units The ending raw materials and finished goods inventories at December 31, 2010, follow the same percentage relationships to production and sales that occur in 2011. 5 pounds of raw materials are required to make each unit of finished goods. Raw materials purchased are expected to cost $6 per pound. Complete the production budget by quarters for the 6-month period ended June 30, 2011. BATISTA COMPANY Production Budget For the Six Months Ending June 30, 2011 Quarter Six 1 2 Months Add: Total required units Less: Required production units Complete the direct materials budget by quarters for the 6-month period ended June 30, 2011. BATISTA COMPANY Direct Materials Budget For the Six Months Ending June 30, 2011 Quarter Six 1 2 Months Direct materials per unit ? ? Total pounds needed for production Add: Total materials required Less: Direct materials purchases ? $ ? $ Total cost of direct materials purchases $ $ $ AE20-12 Garza Company expects to have a cash balance of $48,024 on January 1, 2010. Relevant monthly budget data for the first 2 months of 2010 are as follows. Collections from customers: January $88,740, February $156,600. Payments for direct materials: January $52,200, February $73,080. Direct labor: January $31,320, February $46,980. Wages are paid in the month they are incurred. Manufacturing overhead: January $21,924, February $26,100. These costs include depreciation of $1,044 per month. All other overhead costs are paid as incurred. Selling and administrative expenses: January $15,660, February $20,880. These costs are exclusive of depreciation. They are paid as incurred. Sales of marketable securities in January are expected to realize $10,440 in cash. Garza Company has a line of credit at a local bank that enables it to borrow up to $26,100. The company wants to maintain a minimum monthly cash balance of $20,880. Complete the cash budget for January and February. (List multiple entries from largest to smallest amounts, e.g. 10, 5, 1 for January. If answer is zero, please enter 0, do not leave any fields blank.) GARZA COMPANY Cash Budget For the Months Ending February 28, 2010 January February Beginning cash balance $ $ Add: Receipts Total receipts Total available cash Less: Disbursements Total disbursements Excess (deficiency) of available cash over cash disbursements Financing Ending cash balance $ $ AE20-14 NIU Company's budgeted sales and direct materials purchases are as follows. Budgeted Sales Budgeted D.M. Purchases January $279,400 $41,910 February 307,340 48,895 March 377,190 57,277 NIU's sales are 40% cash and 60% credit. Credit sales are collected 10% in the month of sale, 50% in the month following sale, and 36% in the second month following sale; 4% are uncollectible. NIU's purchases are 50% cash and 50% on account. Purchases on account are paid 40% in the month of purchase, and 60% in the month following purchase. (Round all calculations and answers to 0 decimal places, e.g. 2,510.) Complete the schedule of expected collections from customers for March. NIU COMPANY Expected Collections from Customers March March cash sales $ Collection of March credit sales Collection of February credit sales Collection of January credit sales Total collections $ Complete the schedule of expected payments for direct materials for March. NIU COMPANY Expected Payments for Direct Materials March March cash purchases $ Payment of March credit purchases Payment of February credit purchases Total payments $
Question 4
Capstan Autos operated an East Coast dealership for a major Japanese car manufacturer. Capstan's owner, Sidney Capstan, attributed much of the business's success to its no-frills policy of competitive pricing and immediate cash payment. The business was basically a simple one?the firm imported cars at the beginning of each quarter and paid the manufacturer at the end of the quarter. The revenues from the sale of these cars covered the payment to the manufacturer and the expenses of running the business, as well as providing Sidney Capstan with a good return on his equity investment. By the fourth quarter of 2015 sales were running at 250 cars a quarter. Since the average sale price of each car was about $20,000, this translated into quarterly revenues of 250 ? $20,000 = $5 million. The average cost to Capstan of each imported car was $18,000. After paying wages, rent, and other recurring costs of $200,000 per quarter and deducting depreciation of $80,000, the company was left with earnings before interest and taxes (EBIT) of $220,000 a quarter and net profits of $140,000. The year 2016 was not a happy year for car importers in the United States. Recession led to a general decline in auto sales, while the fall in the value of the dollar shaved profit margins for many dealers in imported cars. Capstan more than most firms foresaw the difficulties ahead and reacted at once by offering 6 months' free credit while holding the sale price of its cars constant. Wages and other costs were pared by 25% to $150,000 a quarter, and the company effectively eliminated all capital expenditures. The policy appeared successful. Unit sales fell by 20% to 200 units a quarter, but the company continued to operate at a satisfactory profit (see table). The slump in sales lasted for 6 months, but as consumer confidence began to return, auto sales began to recover. The company's new policy of 6 months' free credit was proving sufficiently popular that Sidney Capstan decided to maintain the policy. In the third quarter of 2016 sales had recovered to 225 units; by the fourth quarter they were 250 units; and by the first quarter of the next year they had reached 275 units. It looked as if by the second quarter of 2017 the company could expect to sell 300 cars. Earnings before interest and tax were already in excess of their previous high, and Sidney Capstan was able to congratulate himself on weathering what looked to be a tricky period. Over the 18-month period the firm had earned net profits of over half a million dollars, and the equity had grown from just over $1.5 million to about $2 million. Sidney Capstan was first and foremost a superb salesman and always left the financial aspects of the business to his financial manager. However, there was one feature of the financial statements that disturbed Sidney Capstan?the mounting level of debt, which by the end of the first quarter of 2017 had reached $9.7 million. This unease turned to alarm when the financial manager phoned to say that the bank was reluctant to extend further credit and was even questioning its current level of exposure to the company. Mr. Capstan found it impossible to understand how such a successful year could have landed the company in financial difficulties. The company had always had good relationships with its bank, and the interest rate on its bank loans was a reasonable 8% a year (or about 2% a quarter). Surely, Mr. Capstan reasoned, when the bank saw the projected sales growth for the rest of 2017, it would realize that there were plenty of profits to enable the company to start repaying its loans. QUESTION: Was his company really in trouble? Find attached the summary of the income statement
Question 5
13) Several years ago, Durham City issued $1 million in zero coupon bonds due and payable in 2010. The bonds were sold at an amount to yield investors 6% over the life of the bonds. During the current year, how much interest expenditures would Durham City recognize related to these bonds? A. Difference between the present value of the bonds at the beginning of the period and the present value of the bonds at the end of the period B. None C. Face amounts of bonds times 6% D. Book value of bonds times 6% 14) As used in governmental accounting, expenditures are decreases in A. Net Assets. B. Net Economic Resources. C. Net Financial Resources. D. Net Cash. 15) Which of the following funds would use the modified accrual basis of accounting in preparing its fund financial statements? A. City Motor Pool Internal Service Fund B. City Employee Pension Trust Fund C. City Hall Capital Project Fund D. City Electric Utility Enterprise Fund 16) Employees of the City of Orleans earn 10 days paid leave for each 12 months of employment. The city has a policy that employees must take their vacation days during the year following the year in which it is earned. If they do NOT take vacation in the allotted period, they forfeit the benefit. Traditionally, employees have taken 80% of the vacation days earned. During the current year, employees earned $400,000 in vacation pay. Assuming the city maintains its records in a manner to facilitate the preparation of its fund financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period? A. Debit Expenditures: $320,000; Credit Vacation Pay Payable: $320,000 B. No entry required. C. Debit Expenses: $400,000; Credit Vacation Payable: $400,000 D. Debit Expenditures: $400,000; Credit Vacation Payable: $400,000 17) Employees of the General Fund of Scott City earn 10 days of vacation for each 12 months of employment. The city permits employees to carry the vacation days forward as long as they wish. During the current year, employees earned $800,000 of vacation benefits, of which the city estimates that $500,000 will be taken in the next year, with the balance being carried forward. Assuming that the city maintains its records in a manner that facilitates the preparation of its fund financial statements, which of the following entries is the correct entry in the General Fund to record the vacation pay earned during the current period? A. Debit Vacation Expense: $800,000; Credit Vacation Pay Payable: $800,000 B. No entry required. C. Debit Expenditures: $500,000; Credit Vacation Pay Payable: $500,000 D. Debit Expenditures: $800,000; Credit Vacation Pay Payable: $800,000 18) Assume the City of Juneau maintains its records to facilitate the preparation of its government-wide financial statements. The city pays its employees biweekly on Friday. The fiscal year ended on Wednesday, June 30. Employees were paid on Friday, June 25. The employees paid from the General Fund earned $120,000 on Monday, Tuesday, and Wednesday (June 28, 29, and 30). They will earn $80,000 on Thursday and Friday (July 1 and 2). What entry, if any, should be made on June 30? A. Debit Expenses: $120,000; Credit Wages and Salaries Payable: $120,000 B. No entry is required. C. Debit Expenditure: $200,000; Credit Wages and Salaries Payable: $200,000 D. Debit Expenditures: $120,000; Credit Wages and Salaries Payable: $120,000 19) As used in defining the modified accrual basis of accounting, the term available means A. collection in cash is reasonably assured. B. collected within the current period or expected to be collected soon enough to pay liabilities of the current period. C. will be received in cash within 60 days of year?s end. D. received in cash. 20) Under the modified accrual basis of accounting, derived nonexchange revenues are recognized when A. the underlying exchange transaction occurs. B. the underlying exchange transaction occurs, and they are measurable and available to finance expenditures of the current period. C. they are measurable and available to finance expenditures of the current period. D. they are earned. 21) The modified accrual basis of accounting is used in presenting the fund financial statements of governmental funds because it A. is the superior method of accounting for the economic resources of any entity. B. provides information as to whether or not the entity achieved interperiod equity. C. is budget-oriented while facilitating comparisons among entities. D. results in accounting measurements based on the substance of transactions.
