Old Turkey Mash

Old Turkey Mash is a whiskey manufactured by distilling grains and corn and then aging the mixture for five years in 50-gallon oak barrels. Distilling requires about a week and aging takes place in carefully controlled warehouses. Before it ages, the whiskey is too bitter to be consumed. Aging mellows the brew (and ultimately the consumer). The cost of the product prior to aging is $100 per barrel (direct plus indirect costs of distilling). In the aging process, each barrel must be inspected monthly and any leaks repaired. Every six months the barrels are rotated and sampled for quality. Costs of direct labor and materials in the aging process (excluding the cost of oak barrels) amount to $50 per barrel per year (all variable). As the whiskey ages, evaporation and leakage cause each 50-gallon barrel to produce only 40 gallons of bottled whiskey. New oak barrels cost $75 each and cannot be reused. After aging, they are cut in half and sold for flowerpots. The revenues generated from sales of the pots just cover the costs of disposing of the used barrels. As soon as the whiskey is aged five years, it is bottled and sold to wholesalers.

While domestic consumption of whiskey is falling, an aggressive international marketing campaign has opened up new international markets. The firm is in the third year of a five-year campaign to double production. Because it takes five years to increase production (an additional barrel of mash produced today does not emerge from the aging process for five years), the firm is adding 100,000 gallons of distilled product each year. Prior to the expansion, 500,000 distilled gallons were produced each year. Distilled output is being increased 100,000 gallons a year for five years until it reaches 1 million gallons. Distilled output is currently 800,000 gallons and is projected to rise to 900,000 gallons next year. The accompanying table describes production, sales, and inventory in the aging process.

Warehousing rental costs to age the base-year production of 10,000 barrels per year are $1 million per year. Additional warehouse rental costs of $40,000 per year must be incurred to age each additional 2,000 barrels (100,000 distilled gallons). All costs incurred in warehousing are treated as handling or carrying costs and are written off when incurred. Bottled Old Turkey is sold to distributors for $15 per gallon. These income statements summarize the firm’s current operating performance:

Management is quite concerned about the loss that is projected for the third year of the expansion (the current year). The president has scheduled a meeting with the local bank to review the firm’s current financial performance. This bank has been lending the firm the capital to finance the production expansion.

Required:

a. Instead of writing off all the warehousing and oak barrel costs, prepare revised income statements for years 1 through 3, treating the warehousing and barrel costs as product costs.
b. Which set of income statements (those given or the ones you prepared) should the president show the bank at the meeting? Justify your answer.
c. At least 2 pages, APA format, at least 2 references, must incorporate opportunity costs, sunk costs, relevant costs, cost variation, CVP Analysis, accounting costs, and cost estimation methods as much as possible.
   

 

 

 

 

 

 

 

 

Eastern University Parking

Background

Eastern University faces a shortage of parking spaces and charges for parking. For nearby parking (e.g., behind the business school), faculty and staff pay $180 per year. Parking in lots Z and B, which are north and south of the campus and involve about a 10-minute walk to the business school, costs $124 per year. In setting these prices, the university seeks to recover the costs of parking and to manage the queue of people wishing to park on campus. The current $180 and $124 fees cover the costs of surface spaces. Lots Z and B have lower fees to compensate people for the longer walks and to encourage them to park in outlying lots. University officials say this fee structure, when multiplied by the number of parking stickers of each type sold, covers the cost of running the parking office and building new spaces.

The cost of providing a parking space consists of costs of construction of the space, maintenance, and security. The construction cost is the annual amount required to repay the cost of grading, draining, and asphalting the space. Maintenance includes snow removal, line painting, fixing the gates after the arms are broken by irate faculty members searching for a space, and patching the asphalt. Security costs include all costs of the parking officers who ticket the cars of staff and students parked illegally.

The university recently evaluated a proposal to construct an enclosed, multi-floor parking facility. Design estimates place the construction cost at $12,000 per enclosed space. The equivalent cost of a surface space is $900. The university uses a 10 percent cost of capital. (Assume that this is an appropriate interest rate.) To compensate the university for the cost of the capital involved in building parking garages, parking fees would have to be at least $1,200 per space per year, as opposed to $90 per space per year for the surface space. Because the university does not believe that faculty, staff, and students are willing to pay more than $1,200 per year for a covered parking space, no plans exist to build a parking building.

Required:

Critically evaluate Eastern University’s costing of parking permits. What do you think accounts for the university administration’s reluctance to build a parking garage?

Minimum 600 words – at least 3 references from a creditable source. APA format. References need to be in APA format.

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