ProblemThis is a comprehensive problem all contained on this sprea.docx

ProblemThis is a comprehensive problem all contained on this
spreadsheet tab. FACTS:1. Elliott Incorporated manufactures
garden tools, and although the manufacturing equipment is
perfectly functional, it is not modern.2. Upgrading to modern
equipment would speed up the manufacturing process such that
direct labor and variable manufacturing costs would be
reduced by 40% on a per-unit basis. Hint: You do not need
current units produced to calculate this problem.3. The cost of
such an upgrade would equal $1,500,000 per year for
depreciation and financing costs net of tax benefits of these
costs.4. The additional costs would be accounted for as fixed
manufacturing overhead.5. Elliott is currently operating at full
capacity and management believes they could increase sales to
$6,000,000 at current prices if they had additional
capacity.Elliott's current sales and costs are as
follows:Sales$4,500,000Direct materials790,000Direct
labor1,530,000Manufacturing overhead–
variable364,500Manufacturing overhead–fixed750,000Selling
expenses–variable110,000Selling expenses–
fixed230,000Administrative expenses–
variable60,000Administrative expenses–fixed200,000a. Prepare
a CVP for Elliott based on the current production.b. Compute
contribution margin ratio for current production.c. Compute
breakeven dollars for current production.d. Prepare a CVP
based on the proposed equipment upgrade.e. Compute
contribution margin ratio based on the proposed equipment
upgrade.f. Compute breakeven dollars for current production.g.
Should Elliott proceed with the proposed upgrade?
RUNNING HEAD: NIKE1
Nike20

Nike
Anita Orzel
Southern New Hampshire University
October 9, 2016
Purpose of the Paper
The aim of the paper is to apply the microeconomic models in
the functioning of Nike to ensure that the firm undertakes
effective business decisions. The paper will focus on analyzing
the history of the Nike Company since its existence until today
and evaluate the supply and demand conditions that Nike
encounters in the sale of its products. Further, the paper focuses

on the price elasticity demand by analyzing the available
information that can affect the customer’s responsiveness to
purchase their commodities (Distelhorst, Hainmueller, & Locke,
2016). In addition, the paper will discuss the cost of the
production by analyzing the cost incurred by the Nike Company
in the production process and explore its market performance to
ensure that higher profit is generated. This can be done by
avoiding and addressing the barriers that are encountered by the
company in the marketplace. Finally, the paper will provide
effective recommendations that are required to be addressed by
the company to manage its future production. This is essential
to ensure that the firm achieves its set goals through the
evaluation of the demand trends and the price elasticity
(Distelhorst, Hainmueller, & Locke, 2016). This paper,
therefore, seek to critically analyze the history of Nike and the
current information regarding the goods and services traded by
the firm as well as the area of Nike’s operation to ensure
effective decisions are made by the firm.
The history of Nike Company
Nike Company aims to ensure that it brings inspiration and
innovation to the wide range of athletes in the world by
providing them with athletic kits and sporting equipment
(Chang & Ko, 2013). One of the most important aims of the
firm is to make a profit and ensure growth in order to keep its
stakeholders happy and in turn meet the customers’
requirements. Nike is a multinational firm that is involved in
the designing, manufacturing and the development of footwear,
kits, clothing, accessories and services. The firm was originally
known as the Blue Ribbon Sports (BRS) that was founded in
1964 by a distance runner Phil Knight and his coach Bill
Bowerman. Nike foundation was aimed at enhancing the
performance of trainees in sports by improving their sports kits
such as shoes to supplement the heavier kits that were viewed as
a burden to trainees during their training sessions. The firm
initially operated as a Japanese shoe distributor that facilitated
its sales and enhanced profit due to the lower retail price as

compared to the other German products (Distelhorst,
Hainmueller, & Locke, 2016). The sale of Nike’s brand has
improved over the years and its ‘swoosh’ logo is recognized
across the globe. The firm has been signed by various
organizations to design their products. The firm has seen a rise
in its popularity over the year and has shifted its focus to
various nations across the world and not only focus on the
United States and Japan. This, in turn, has helped the company
to break new records through its sales in the global setting
(Chang & Ko, 2013). The company has moved to the designing
and manufacturing of kits among other cross-training
accessories that has led the company being signed by the
international football teams such as Brazil football team and
U.S men’s and women’s soccer teams.
Its headquarters is in Portland, United States of America. It is a
public limited company traded in New York Securities
Exchange (NYSE) as Nike Inc (Banjo, 2014). It designs and
manufactures footwear and apparel products. Besides, it
involves in active marketing and sales of these products
worldwide. It has several stores that enable act as its
distribution centers. Some of its major stores are established in
Portland USA, Vietnam and China. It derives major sales
revenues from the sales of sportswear. As such, it’s the world’s
leading supplier of sportswear with over 44,000 employees in
2014 (Banjo, 2014). This paper analyses various costs that Nike
incurred between 2012 and 2016 financial years and explores
the market share of Nike against its major competitors in the
footwear market.
Supply and Demand Conditions
Nike Inc. is a US based athletic footwear and apparel company,
which has its stores in more than 50 countries around the world.
This section is going to discuss the supply and demand
conditions in case of this company. This section will evaluate
the trends in demand over time for Nike footwear products and
will explain its impact on the industry as well as firm.

Similarly, the analysis of data concerning demand and supply of
the firm’s product for recommendations will also be proposed in
this section.
Evaluation of Trends in Demand over Time and their Impact
In 2015, it was reported that Nike Inc., the leading brand in the
world for apparel and footwear, had experienced a 16% higher
demand for its shoes. The company experienced higher margins
while selling shoes to customers around the world. The demand
in 2015 had been seen on the increasing trend, which went on
the same even in the first two quarters of 2016 (Fox Business,
2015). The analysts have also predicted that future orders’
demand will further rise by 9% for Nike footwear products.
Such demand has not only been strong in United States, but it
has been so in other parts of the world too, such as Europe, East
Asia and Australia. Over the period of time, the company
through best performance, sustainability and innovation is
meeting the consumer demand. This innovation and improved
performance have also contributed towards the gradual rise in
demand of the company’s products around the world. The graph
below shows that the year 2015 had experienced a massive rise
in demand of Nike products.
When we look into the annual income records of Nike Inc., we
see that income has been increasing annually with a variable
percentage. The rise in annual income does show that there has
been gradual rise in demand for Nike footwear products, which
also shows that the market share of this company has been on
the rise for the last few decades. Similarly, price of related
goods produced by Nike has been increasing, and this increase
is both due to the price increase in raw materials and production
cost as well as the rise in demand. The consumer tastes have
also developed up to a larger extent and Nike has been
manufacturing versatile footwear products in order to
accommodate the higher demand of its shoes. Similarly, the rise
in population around the world and the company’s subsequent
expansion have also led to the consideration of this fact that

people are demanding the Nike’s footwear products more. Apart
from that, the manufacturing efficiency of the company has also
led to the accommodation of greater demand of Nike’s products.
In this regard, company’s expansion and overseas
manufacturing have also helped the company in meeting
customer demands. The impact of this rise in demand in case of
Nike Inc. has also been great, as the company has been able to
maintain its position as the leading footwear brand in the world.
Recommendations for Firm’s Future Actions based on Supply
and Demand
In the recent times, the economy on the global scale has slowed
down. Due to this, the consumer purchases are also down. In
this respect, over the last few years, the major threat for Nike
Inc. has been the economic recession. The economic crisis in
Asia has also mildly affected Nike’s business, because the
Nike’s products are mainly manufactured in Asia. This is in turn
because the material prices and labor costs are increasing.
Additionally, not only the local economy is affecting the growth
of this company, but also the international economy has not
been so kind over Nike’s business. Therefore, a weaker global
currency and recession in Asia would mean weaker sales for
Nike.
However, it should be noted that the footwear industry is quite
old, so the companies in this industry have been more focused
on grabbing the most market share rather than having more
market growth. The graph shown below will highlight the
largest market share of Nike Inc.
The competitive strength of Nike is also due to the significant
recognition of its brand around the world. Based on the past
data, it can be said that the supply and demand of Nike is
represented by a downward sloping demand curve and upward
sloping supply curve (Waddock & Rasche, 2012). Over the past
years, the product influence of this company has increase amid
emergence of the major sports events in different parts of the
world. Due to these sporting events, the popularity of the

company has increased quite significantly and it has also
permitted the company to establish as well as maintain high
prices for its products.
Based on these facts and analysis, it is recommended that Nike
Inc. should produce the quantity where its supplies are limited
enough so as to keep the prices higher. One example of this
suggestion is that when the company will release a new shoe
product, the production will be made at a high price so that
customers will anyway be interested to buy that. This tactical
strategy will help Nike use its influence for maintenance of its
profitable production in the future as well.
Examination of Price Elasticity of Demand for Nike’s Products
Determination of Price Elasticity of Demand for Nike’s Product
Price elasticity of demand is generally defined as measure of
the relation between a change in the price of product and change
in the quantity demanded of the same (Hubbard, & O’Brien,
2015). This is also used for the evaluation of price sensitivity.
It also determines the measure of responsiveness of demand to
the change in price of a product. Based on the past data, it can
be seen that the price of the Nike’s footwear products has been
on the rise. There has been a gradual rise in the price of Nike
footwear products. Similarly, amid several factors, the demand
for Nike’s products has also been rising even when prices are
kept high. Although there are substitutes available to the Nike’s
products, but still there has been a higher demand for the Nike’s
products. It can be said that the price elasticity of demand for
the case of Nike is less than one. This is also because the
change in quantity demanded for Nike’s products is smaller than
the change in price maintained or kept by the company for its
footwear products. This is also because the company has a fixed
market share and which is more than any other company in this
industry. This is why the Nike’s products are not substituted
much by the consumers and therefore change in demand is not
much. So the price elasticity of demand for Nike can be
considered as less than 1.
Factors Affecting Consumer Responsiveness to Price Changes

for Nike’s Footwear Products
The pricing decisions are very important for the companies such
as Nike Inc. The main reasons for this fact are that pricing is
one of the most significant parts of marketing mix, which also
brings the revenue for company. Similarly, for the case of Nike,
once it has set a price, then the customers will demonstrate a
higher resistance for any attempts of change in price. Price also
has an important implication for the product positioning.
Based on these facts, we can say that demand curve of the
company’s products is downward sloping. This mainly shows
that the consumers will likely to have lesser demand of the
product when the price is going up. Since the price elasticity of
demand for Nike Inc. is less than 1, so the customers will still
be highly responsive to the products of the firm even when
prices are raised. One factor that will affect the responsiveness
of the customers to the changes in price would be that when the
company does not release new products. The customers have
always been impressed with innovative footwear products that
Nike introduces every year. Similarly, most of the products of
the company are region-specific. If the quality of the products is
not high, then the customers will not be interested in buying the
products of this company. In addition to that, the customers will
also not be responsive much to these price changes when the
substitute products are for sale in low prices and have higher
quality.
Assessment of Impact of Price Elasticity of Demand on Pricing
Decisions and Revenue Growth of Firm
In business economics, it is often heard that the price elasticity
of demand has a great important for pricing decisions. In case
of Nike Inc., the price elasticity of demand of less than 1 shows
that consumers are least bothered by the manipulations in the
price of Nike’s footwear products. From the Nike’s point of
view, price should demonstrate a clear reflection of the
production as well as advertising costs that are included in
bringing the products to the market place. When we talk about
the impact of price elasticity of demand, it is known that the

Nike Inc. will have to take it into consideration before
increasing the price. The less than 1 price elasticity of demand
for this company will be true to some extent to which the price
can be increased. However, the company should stop increasing
the price, or maintain the fixed price, or it should decrease the
price when in future the price elasticity of demand becomes
more than 1 or becomes zero. This situation means that the
customers are already not much responsive to the company’s
products after price changes and further change in price will
mean the decline in the product’s demand. Therefore, the
company should make sure that the price elasticity of demand is
less than 1 when price change decisions are to be made. When
the price elasticity of demand is more than 1, then it will badly
affect the Nike’s price decisions. Similarly, it will also affect
the revenue growth of the firm if price decisions are not taken
with respect to the value of price elasticity of demand.
IV. Examination of Nike Inc's Cost of Production
a. Analysis of Nike Inc's Various costs, their trends over time
and how they have impacted the profitability of this firm
Nike Incorporation incurs various costs. Such costs
include Costs of raw materials and labor. These are categorized
under Cost of goods sold (COGS). The second category of costs
that Nike incurred is operating expenses. Nike’s fiscal year ends
on June 30th every year. Therefore, its expenditure for five
financial years was examined in this paper. The years under
consideration ranges from financial year ending June 2012 to
financial year ending 2016 as presented in the table below:
Table 1: Nike Inc Costs of operations for financial year ended
2012 up to 2016
The Year Ending June 30th
2012
In Billion $s
2013
In Billion $s
2014
In Billion $

2015
In Billion $
2016
In Billion $
COGS plus D&A
13.62
14.41
15.34
16.76
17.99
COGS excluding D&A
13.23
13.95
14.82
16.15
17.34
Gross Incomes
10.53
10.93
12.44
13.94
14.47
Operating Expenses
SG & A
7.41
7.77
8.77
9.89
10.47
Unusual Expenses
0.017

0.148
0.071
0.615
0.072
Pretax Incomes
2.98
3.27
3.54
4.21
4.62
(MarketWatch Inc, 2016)
Cost of Goods Sold (COGS)
This cost involves finances that Nike uses for purchasing,
transporting and storing its raw materials. Such raw materials
include leather and plastic. These raw materials enable Nike to
produce footwear used for athletics. However, it's essential to
note that this company outsources most of its footwear products
(Locke, Kochan, Romis and Qin, 2007). For instance, its
independent contractors manufactured 43%, 28% and 25% of its
products. These percentages represent contractors from
Vietnam, China, and Indonesia consecutively.
The amount that Nike uses for COGS shows an increasing
trend from the financial year ended June 2012 to fiscal year
ended June 2016. Such amounts include $ 13.62, 14.41, 15.34,
16.76 and 17.99 respectively (Lechner, Lorenzoni, Tundis,
2016). These figures are in billions of United States dollar ($).
This increasing trend in COGS shows that Nike incurs an
increasing expense in materials and labor. The company has a
better strategy of outsourcing raw materials in countries like
Vietnam and China (Helper and Krueger, 2015). However, the
cost of labor increases with a higher margin compared to the
cost of raw materials. Such increase in the cost of labor compels
its contractors to spend more on hiring. They transfer such
expenditure to Nike.
Operating Expenses
These costs include overhead, rent and indirect expenses

incurred in producing a community or a service. For instance,
Nike Inc committed $ 7.41, 7.77, 8.77, 9.89 and 10.47 billion
respectively under the period of five years. This trend shows a
continuous increase in Nike's operating expenses. Such growth
in costs occurs due to increases in insurance premiums and
overheads that this company remits. These costs fall under
operating expenses. Therefore, their increase increases overall
costs of production in this company.
How COGS and Operating Expenses affected the profitability of
Nike Inc
The Gross incomes had an increasing trend for the period
studied. These include $10.53, 10.93, 12.44, 13.94 and 14.47
billion respectively. These statistics shows that the increase in
COGS was directly related to increasing in Gross Incomes.
Therefore, there was an offsetting balance by increasing
incomes when COGS increased. Likewise, the increase in
Operating expenses corresponded to the increase in pretax
earnings.
b. Application of the Concepts of Variable and Fixed Costs to
Nike Inc for Informing its Output Decisions
Nike can incur variable costs in labor, Research &
development, and raw materials. Nike can increase its
production if it reduces expenditure per unit of raw materials.
As such, it can acquire larger quantities of raw materials at
lower prices. Likewise, it should cut spending on a unit of
labor. Such process implies that Nike will hire many employees
thus increasing its levels of output. However, Nike Inc should
increase expenditure on research and development to boost its
sales and manufacture skills. However, it should reduce its
fixed cost since such loss reduces retained profits. Such profit
is essential to invest in research and development activities.
V. Exploration of the overall market in which Nike Inc Operates
a. Discussion of Nike Inc and Its Competitors’ Market Shares
and its Trend over Time
The competitors of Nike Inc are Adidas, Puma, Sketcher
and Under Amour Inc (Park and Kincade, 2010). However,

analysis of Nike, Adidas and Puma will be conducted in this
section. First, analysis of individual market share controlled by
these firms is calculated from their respective revenues. The
period under consideration is 2010 to 2015. The calculations for
Nike, Adidas and Puma’s Market shares are shown below.
Revenue in 2010 (in $ billions)
Nike Inc 11.52, Adidas 7.14 and Puma 1.89; Total Revenues =
20.55
Nike's Market Share=11.52/20.55*100% = 56.0583= 56.06%
Adidas' Market Share= 7.14/20.55*100% = 34.7445 = 34.74%
Puma's Market Share = 1.89/20.55*100% = 9.197 = 9.20%
Revenue in 2011(in $ billions)
Nike Inc 13.43, Adidas 8.08 and Puma 1.99: Total Revenues =
23.50
Nike's Market Share = 13.43/23.50*100% = 57.1489 = 57.14%
Adidas' Market Share = 8.08/23.50*100% = 34.3830 = 34.38%
Puma's Market Share = 1.99/23.50*100% = 8.478 = 8.48%
Revenue in 2012 (in $ billions)
Nike 13.51, Adidas, 9.14 and Puma 2.11: Total Revenues =
24.76
Nike's Market Share = 13.51/24.76*100%= 54.56%
Adidas' Market Share = 9.14/24.76*100%= 36.91%
Puma's Market Share = 2.11/24.76*100% = 8.52%
Revenues in 2013 (in $ billions)
Nike 14.64, Adidas 9.07 and Puma 1.88: Total Revenues =
25.59
Nike's Market Share = 14.64/25.59*100% = 57.2098 = 57.21%
Adidas' Market Share = 9.07/25.59*100% = 35.44%
Puma' Market Share = 1.88/25.59*100% = 7.3466 = 7.35%
Nike 16.21, Adidas 8.1 and Puma 1.56: Total Revenues = 25.87
Nike's Market Share = 16.21/25.87*100 = 62.659 = 62.66%
Adidas' Market Share = 8.1/25.87*100 = 31.31%
Puma's Market Share = 1.56/25.87*100 = 6.03%
Nike 18.32, Adidas 9.13 and Puma 1.65; Total Revenues =

29.10
Nike's Market Share = 18.32/29.10*100 = 62.9553 = 62.96%
Adidas' Market Share = 9.13/29.1*100 = 31.37%
Puma's Market Share = 1.65/29.1*100=5.67%
Nike Inc. has the highest market in the footwear market. It
has continued higher revenues from the market as opposed to its
closest competitors. This company maintains a market share
above 50% for the period considered. Such trends show that
Nike Inc is a market leader in the footwear industry. Adidas has
managed a second place after Nike for the whole period under
consideration. However, it had a market share of 8% for the
period under consideration. Such percentage was lower than
Nike's share. Puma Inc was the worst performer at this time. It
had a market share at around 6% for the entire period. This
shows that it posed worst sales revenues for the period under
consideration.
(Statista Inc, 2015)
b. Analysis of the Barriers to Entry in the Market Where Nike
Inc Operates
Barriers to entry in a market occur due to five forces that
define the intensity of competition in a particular industry
(Mahdi, Abbas, Mazar and George, 2015). These factors include
industrial rivalry, bargaining power of suppliers and buyers.
The fourth element is the threat of substitutes and the fifth is
the threat of new entrants. First, the amount of capital needed in
an entry in footwear market is relatively high. As such, only
Puma and Adidas are challenging Nike in this category (Mahdi
et al. 2015). However, they are lagging regarding market share.
Secondly, Nike offers specialized sports shoes. As such,
athletes looking for shoes to run on will consider its products
despite the existence of cheaper substitutes such as sandals.
Thirdly, the intensive industrial rivalry would deter other firms
from entering footwear market. However, Nike has devices
mechanism that enables it to sell its products efficiently and
maintain a higher market share in this industry. Therefore,
barriers such as capital and technological advances enable Nike

to stage appropriate competition in the market. As such, it new
competitors in the footwear industry must invest massively to
acquire a small market share in this industry. These facts show
that Nike can control the footwear market in future.
c. Description of the Market Structure for Nike Inc and How it
Impacts Nike's Ability to Influence the Market
Nike Inc operates a monopolistic competition market
structure. This is evident in some ways. First, Nike Inc's main
competitors are Adidas and Puma Inc. These incorporations
have higher concerns in producing apparel products rather than
footwear. Only Adidas provides sports shoes that offer direct
rivalry to Nike. However, Nike applies differentiation strategies
in manufacturing its products. It implies that Nike Inc targets
particular market that other firms in the footwear market don't
satisfy. As such, its products don't face the problem of
substitution from other footwear such as sandals or open shoes
(Auer and Schoenle, 2016). It specifically designs and
manufactures products that meet the needs of athletes.
Secondly, not all firms in footwear industry have similar
resources. For instance, Under Amour and Sketchers are
relatively smaller than Adidas and Nike.
Herfindahl-Hirschman Index (HHI) for three major firms
considered in (a) above is calculated below. The base year is
2015; market share (MS) for Nike = 62.962= 3,963.96+MS for
Adidas = 31.962 =1021.44 and MS for Puma=5.672=32.14. The
totals of Market share squared= 3,963.96+1021.44+32.14=
5,017.54. Any value above 2,500 on (HHI) scale shows a higher
concentration of the market. Since this figure is less than
10,000 (pure monopoly), it shows that Nike is operating a
monopolistic competition market structure.
VI. Recommendations
a. How Nike Can Manage its Future Production
Nike subcontracts its production needs in China,
Vietnam, and Indonesia. This process increases the cost of labor
and overall costs of goods sold (COGS). Therefore, Nike should
establish its production units in these economies. It can achieve

this by merging or acquiring its current subcontractors in these
economies. Such initiative would reduce its COGS and expenses
incurred on rent and insurance. Different contractors incur
various operating costs, and they transfer such payments to
Nike.
b. How Nike's Position Within the Market Will Allow it to
Achieve Recommendations For Future Production
Nike has the largest market share in the footwear market.
This is evident from the bar graph in (Va) above. It has higher
revenues that can allow it to receive adequate profits. It can
utilize its massive after-tax profits to acquire its major
contractors, especially in China and Vietnam. Such process
would allow Nike to reduce disparities in expenses that such
contractors incur in their respective economies.
c. Description of How Nike Can Sustain its Success Going
Forward
Nike is currently the market leader in the footwear market.
Therefore, it should invest in Research and Development
(R&D). Such investment will enable its design team to
understand the changing needs of its target market. As such, it
will design and produce athletic shoes that meet current and
future demands. It's unfortunate that Nike didn't have any
investment in R&D for the period investigated in Table 1.
Therefore, it should consider this proposal and increase its
attractiveness to shoppers.
References

Auer, R. A., & Schoenle, R. S. (2016). Market structure and
exchange rate are pass-through. Journal of International
Economics, 98(7), 60-77.
Banjo, H. (2014). Inside Nike’s struggle to balance cost and
worker safety in its operations. The Wall Street Journal, 7(3),
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Chang, Y. & Ko, Y. (2013). The brand leadership: Scale
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http://dx.doi.org/10.1057/bm.2013.23
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16-on-higher-demand-for-apparel-shoes.html
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Rise in demand
by20112012201320142015201620170.040.050.080.090.160.090.
11
Market Shares in Footware Industry
Nike
20102011201220132014201556.0657.1454.5657.2162.6662.96A
didas20102011201220132014201534.7434.38000000000000336.
90999999999999735.4431.3131.37Puma2010201120122013201
420159.19999999999999938.488.527.356.035.67
spreadsheet tab. Process Job Costing and Equivalent Units of
ProductionBay Manufacturing produces paint. The company has
two processes: mixing and packaging.The ingredients for the
paint are mixed in large batches and then transferred to the
packagingdepartment, where one-gallon cans are filled, capped,
labeled, and boxed.There was no work in process on February 1.
The materials are all brought to the packaging job up frontand
charged to the job. Nothing is transferred to finished goods

until the entire job is complete. Thematerials costs include the
packaging, material, and the cost transferred from the mixing
department.On February 2, 15,000 gallons (job 2-1) were
transferred into the packaging department from themixing
department and completed on February 19.The costs incurred to
complete job 2-1 in the packaging department are as follows:
Materials56,250 Labor10,250 Overhead (applied based on
direct labor hours)7,500On February 20, another 20,000 gallons
(job 2-2) were transferred into the packaging department.Job 2-
2 was 50% complete as to labor at the end of the month.The
costs incurred (unit cost unchanged from job 2-1) to complete
job 2-2 in the packagingdepartment are as follows:
Materials75,000 Labor12,500 Overhead (applied based on
direct labor hours)10,000INSTRUCTIONS:1. Compute the
physical units of production.2. Compute the cost per unit to
complete packaging for labor, materials, overhead, and total.3.
Compute equivalent units and cost of work in process as of the
end of February.4. Record journal entries for: a. the
movement of materials from materials inventory to each job
b. the allocation of payroll to each job c. the application of
overhead to each job d. the movement of work in process to
finished goods
Sheet1This is a comprehensive problem all contained on this
spreadsheet tab. You are to prepare a cash flow statement, a
verticalanalysis, a horizontal analysis, and some ratio
calculations. Scroll down the spreadsheet to complete each
part.Philadelphia Widget Corporation is in the process of
preparing financial statements for the year ended
12/31/2015.They have completed the balance sheet and income
statement as shown.Philadelphia Widget CorporationIncome
StatementFor the year ended 12/31/2015Revenue1,235,000Cost
of Goods Sold806,656Gross Profit428,344Administrative
Expenses: Salaries212,450 Rent82,500 Depreciation24,800
Total Administrative Expense319,750Operating
Profit108,594Gain on Sale of Equipment4,500Interest

Expense(42,115)Net Income70,979Philadelphia Widget
CorporationBalance SheetAs of 12/31/2015, 12/31/2014, and
12/31/2013201520142013Cash119,41189,564105,644Accounts
Receivable85,45583,11878,400Inventory41,30048,56062,600Pre
paid Expenses14,50018,10024,000 Total Current
Assets260,666239,342270,644Land50,00050,00050,000Building
s and Equipment182,450172,450166,800Accumulated
Depreciation78,900103,55062,600109,85054,580112,220 Total
Assets414,216399,192432,864Accounts
Payable62,52551,48045,200Wages
payable4,5004,5001,500Unearned Revenue3,000- 0- 0Current
Portion of Long-Term Debt50,00050,00050,000 Total Current
Liabilities120,025105,98096,700Long-Term
Debt175,000225,000275,000Common Stock, 3500 shares
outstanding35,00035,00035,000Retained
Earnings84,19133,21226,164 Total Stockholders'
Equity119,19168,21261,164Total Liabilities and
Equity414,216399,192432,864A. Prepare a Statement of Cash
Flow using the indirect method for 2015 using the above
statements and the following additional information: 1.
Equipment costing $30,000 was purchased in 2015. 2.
Equipment having an original cost of $20,000 and accumulated
depreciation of $8,500 was sold for $16,000 during 2015. 3. A
dividend of $20,000 was declared and paid in 2015.Philadelphia
Widget CorporationStatement of Cash FlowFor the year ended
12/31/2015B. Prepare a vertical analysis (1 year) of the income
statement above and a horizontal analysis (2 years) of the
balance sheet.Philadelphia Widget CorporationVertical Analysis
of Income StatementPhiladelphia Widget CorporationHorizontal
Analysis of Balance Sheet* n/c = not calculableC. Calculate the
following ratios based on 12/31/2015 numbers: 1. Earnings per
share 2. Return on common stockholder's equity 3. Return on
assets 4. Current ratio 5. Acid-test ratio 6. Accounts
receivable turnover

spreadsheet tab. On 1/1/2015, Starburst Company issued 10-
year bonds with a face value of $550,000 at 103. The bonds
carry a stated interest rate of 7%, withinterest payable semi-
annually on January 1 and July 1. Starburst uses the straight-
line method of amortizing bond premium or discount.(a) Prepare
the journal entry to record the issuance of the bonds.(b) Prepare
the journal entry to record payment of interest on July 1, 2015.
(c) Prepare the adjusting entry to record the accrual of interest
on December 31, 2015.(d) Prepare the balance sheet
presentation for the bond on 12/31/2015.(e) Prepare the balance
sheet presentation for the bond on 12/31/2016.
Solution
s:DateAccountDebitCreditStarburst CorporationBalance Sheet
(Partial)12/31/15Starburst CorporationBalance Sheet
(Partial)12/31/16
spreadsheet tab. The stockholders equity section of the balance
sheet of Frederick Mining Company is as follows:Frederick
Mining CompanyEquity Section of Balance Sheet as of January
1, 2016Common stock, $10 par value, 200,000 shares authorized
120,000 shares issued1,200,000Paid-in capital in excess of par
value3,711,250Retained earnings4,651,255 Total
equity9,562,505Create a journal entry (if needed) for each of
the following items. Prepare an updated equity section of the
balance sheet as of December 31, 2016. Scroll down past the

journal entry section to see the heading for
this.1/28/16Frederick Mining enters into a loan-modification
agreement with the bank, agreeing to appropriate $550,000 of
retained earnings to loan repayment.2/15/16Frederick Mining
board of directors declares a $1.50-per-share dividend payable
on 3/31/2016 to shareholders of record as of 3/15/2016.
Frederick uses a dividends account to record dividends
declared.3/31/16Cash dividend declared on 2/15/2016 is
paid.7/22/16Frederick Mining board of directors declares a 10%
stock dividend to be paid 8/15/2016 to shareholders of record as
of 8/1/2016. The market value of the stock is $59 immediately
prior to the declaration.8/15/16Stock dividend declared on
7/22/16 is paid.9/18/16Frederick Mining buys back 6,000 shares
of company stock on the open market for $52 per share. The
purchased shares are not retired but are held in
treasury.12/31/16Frederick Mining had the following income
and expense account balance as of 12/31/2016. Close out
income.DebitCreditSales revenue6,890,000Cost of goods
sold4,752,600Administrative salary expense436,500Office
expense118,560Depreciation expense12,000Transportation
expense18,400Interest expense82,80012/31/16Close out
dividends.Journal EntriesDebitCreditFrederick Mining
CompanyEquity Section of Balance Sheet as of December 31,
2016

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