BEC Written Response Practice

Mr. Jack Reed, President of Crest Inc., is deciding between issuing debt versus equity in order to raise the funds needed to build several new plants around the country. Reed has asked you, the CFO of the company, to write a memo outlining the advantages and disadvantages of using debt relative to equity. He also wants the memo to cover the impact that his decision might have on the firm's weighted average cost of capital and overall firm value. Type your overall communication:

A company's capital structure will consist of both debt and equity. The percentage allocated to both debt and equity requires an understanding of the advantages and disadvantages of each form of capital, as well as recognizing the impact that the decision will have on the firm's weighted average cost of capital and firm value. The principal disadvantage of issuing debt, from a cash flow perspective, is the interest tax shield. Interest costs associated with debt provide a deductible expense that lowers a company's overall tax burden, whereas dividends paid by a company to its stockholders do not provide a comparable tax benefit. Another advantage of debt stems from the fact that debt holders must be paid interest before stockholders receive dividends. As a result, debt is seen as a safer investment from the perspective of the investor and therefore costs less than equity from a required return perspective. The biggest disadvantage to debt is that it represents a fixed cost for the issuing company. Whereas dividends are issued at the discretion of the company, debt interest payments must be met if the company wishes to avoid defaulting on its obligation. This can be problematic in difficult economic environments when cash may be constrained. Another disadvantage of debt is the negative impact it can have on a company's financial ratios, including the debt to equity and interest coverage ratios. These ratios are often used by banks and other financial institutions to determine the risk associated with lending a company additional funds. Higher debt levels indicate higher levels of risk, equating to higher borrowing costs. The after-tax cost of debt and the cost of equity represents the principal components of the firm's weighted average cost of capital (WACC). As the goal of the company should be to minimize the WACC in order to increase firm value, debt financing appears advantageous due to its tax advantages and lower cots. While debt does represent a lower cost source of financing than equity, too much debt will cause an undesirable increase in the company's WACC. Additional borrowing may result in debt investors requiring a higher rate of return due to increased default risk. IN addition, equity holders will also require a higher rate of return as the likelihood of receiving dividends decreases when the company takes on more debt. Ultimately, the company must find an optimal ratio where the benefits of issuing additional debt outweigh the costs of issuing too much debt. If you have any questions regarding these issues, I am available for further discussion at your convenience.

The operations manager of a company noticed that the number of customer returns steadily increased over the last six months. Upon further investigation, it was determined that many of the returns were caused by poor product quality. You have been engaged as a consultant to assist the company is addressing this problem In a memo to the operations manager, discuss causes and solution to assist the company in addressing poor product quality.

After a thorough investigation into the increase in customer returns over the last six months, we have identified the primary driver as poor product quality. There are myriad causes for poor quality, and all need to be addressed, but there are also many solutions we can put into place that should help to reverse this trend and put the company into a better competitive position going forward. Poor product quality can result from problems in many places within a production process. From a human capital perspective, actions and behaviors by both management and by those who work for management can lead to poor quality. Poor planning, misguided incentives, lack of motivation, flawed decision making, and skill deficiencies are all examples of human capital issues that can negatively affect product quality. Machines can harm product quality because of wear and tear, poor maintenance, or improper utilization. Also, quality will suffer when poor-grade materials or the wrong materials are used for a given process. Failure to follow established procedures and/or outdated and inaccurate procedures are another cause of poor quality. In order to move forward and reverse this trend, we need to identify each of these problem areas and come up with effective and reasonable solutions. Investments in training, staff development, higher-quality machines and materials, and better defined processes are all issues that can be fixed. From an overall, entity-wide perspective, we should consider implementing total quality management. Within this process, we need to ensure that we are focusing on satisfying our customers. Key components of this process are continuous improvement, involving our workforce, delegating and empowering our workforce, and conducting quality audits and gap analysis. Improvement in quality will be reflected in a reduction in returns and will also help us reduce conformance costs (such as prevention and appraisal costs) and nonconformance costs (both internal and external failure costs). We can discuss the root causes of these poor-quality issues, as well as next steps toward solving them, when we next meet.

CEO of ABC Inc, has asked for your advice about changing the company's inventory method from FIFO to LIFO. As the controller, you believe that LIFO is the best methodology for the company. Write a memo to the CEO supporting your recommendation to change to LIFO for inventory costing purposes. In your memo, explain the advantages and disadvantages of each method and identify conditions under which LIFO might produce advantages over FIFO.

Although a case can be made for using either FIFO or LFIO to account for our inventory, I believe the best method for us going forward is LIFO. Our current costing method FIFO, has several advantages and disadvantages. Under FIFO, the inventory items received first are sold first; this prevents our oldest inventory from becoming obsolete, which would require significant write-offs on our financial statements. Using FIFO results in more accurate balance sheet, as inventory totals will better reflect current prices. IN addition, during a rising cost environment, older (lower) costs will hit our income statement as cost of goods sold; this means that our costs will be lower and our profits will be higher, which improves our financial ratios. However, during a declining cost environment, FIFO will produce higher cost of goods sold and lower net income. LIFO (last in, first out) has many financial advantages as well. The charges to cost of goods sold will better reflect current price, which is considered to be a more conservative approach to producing the income statement. Under a declining price environment, a lower cost of goods sold will produce high net income and higher inventory total on the balance sheet. The opposite is of course true under a rising price environment, but lower taxable income means lower income taxes. Because we have seen significant inflation over the past decade (and we continue to forecast an inflationary environment for the short and long term), switching to LIFO will save us a lot of money on taxes paid going forward. I would be happy to discuss both FIFO and LIFO, and my recommended change to LIFO, at your earlier convenience.

A company's management is reviewing the annual billing for general liability insurance. The provider has offered the company two options for payment. The first option is to pay the entire premium in full at the time of commitment. The second option is to make a down payment of 30% of the premium at the time of commitment and to pay the remaining 70% of the premium, plus a 2% surcharge on the entire premium, over the 12-month policy period. As the financial analyst, you have been asked by management to evaluate these options. Write a memo to the CFO analyzing the effects of each payment plan on working capital and net income. Type your communication in the response are below.

As you know, our provider for general liability insurance has offered us two payment options for coverage during this upcoming policy year. It is important to note that our policy year is aligned with both our fiscal year and, of course, the calendar year. There are advantages and disadvantages to both options from a working capital and financial statement perspective, which I will cover below. The first option is to pay the entire annual amount at the time of commitment, which for us would be approximately one month prior to the beginning of the policy period. So we will owe a full amount on December 1, with the policy year beginning on January 1. Paying the full premium up front has a negative impact to working capital from a pure cash flow perspective. we will book a prepaid assets for the full amount of the premium paid for up from on our balance sheet, and over the course of the year the prepaid asset will be reduced on a monthly basis as we expense the cost on the income statement. The second option entails paying 30% of the annual premium owed up front, with the remaining 70% payable (along with a 2% percent premium surcharge) over the full 12 month policy period. So in this scenario, we would pay 30% of the annual premium on December 1 and then we would pay the remaining 70% (plus a 2% surcharge) across the next 12 months. The benefit to this option relative to the first option is that we are able to conserve cash and protect working capital in the early part of the period, allowing us to use that excess cash in other places. However, we will end up paying more over the course of the year because of the premium surcharge. This premium surcharge will lead to greater monthly expenses, therefore, lower net income relative to the first option.

The president of your company, Dave Smith, is concerned about fluctuations in exchange rates on your import and export business. He has asked how the company might protect itself against these risks. In a memorandum to the president, let him know your thoughts on how to reduce the risks of loss due to exchange rate fluctuations.

Exchange rate fluctuation is a common risk associated with international business. Frequently, companies in our situation turn to option contracts to hedge against the impact of these fluctuations. The concept is fairly straightforward but the specific instruments we might use could be complex. To protect our assets, such as accounts receivable denominated in a foreign currency, we would buy an option to sell the foreign currency upon collection at the rate that existed at the time of the sale (put option, worried about foreign currency decreasing in value, thus AR decreasing). When we collect our receivable, the option would allow us to exchange the foreign currency for U.S. dollars at the agreed upon exchange rate is not favorable at the time of collection. To ensure our liabilities do no increase, such as accounts payable denominated in a foreign currency, we could buy an option to purchase the foreign currency at the rate that existed at the time the accounts payable was incurred. When our payable comes due, the option would allow us to purchase the foreign currency at the agreed upon exchange rate if the spot rate is not favorable at the time of payment. These transactions can be structured as futures or forward contracts, or even leverage borrowing overseas, should the circumstance warrant. I would be glad to discuss these specific options with you.

The price of gasoline has quadrupled in the past year and is expected to remain at an all-time high indefinitely, while personal income is expected to remain unchanged. Guzzling Motors Inc. manufactures only one high-priced automobile that consumes vast quantities of gasoline. As the accounting manager, draft a memo to the president of the company that contemplates the impact of these economic conditions on consumer disposable income, product substitution, and market demand for your product. Suggest two ways to stimulate demand for your product in these adverse economic conditions.

Given the drastic increase in gasoline prices and the stagnation of consumer income, I am increasingly concerned about the adverse impact these conditions may have on our ability to stay in business with only one product line. While consumer income has been stagnant, the price of gasoline has quadrupled, causing consumers to reassess their choice of vehicle as the cost of gasoline requires an ever increasing proportion of their individual budgets. I am concerned that consumers will have less disposable income to spend and will look to purchase cars that are less expensive than our higher priced automobile. In addition, the consumer is likely to substitute an economy car that consumes less gasoline when they replace their older vehicles. Taken together, I am concerned that market demand for our product will decrease. With only one product line, our lack of diversified products will make it impossible for us to stay in business if these adverse economic conditions persist over the long term. As a result, I think we should consider strategies that might help us survive in this economy. In addition to expanding our product line, perhaps one way we might stimulate demand for our product is to offer deep discounts on the price of our car. Alternatively, we might consider subsidizing the cost of gasoline for our consumers for a period of time. I'd be happy to discuss these concerns in more detail at your convenience.

your client is considering voluntary adoption of section 404 of SOX, which involves management assessment of IC and the independent attestation. The client's CFO has asked for advice regarding the benefits of voluntary compliance with 404. Write a memo to the CFO discussing the benefits of adopting these requirements.

I am delighted to hear you are considering voluntary compliance with section 404 of SOX. As you know, the act requires a comprehensive self assessment of your entity's ICFR, representation by management regarding the effectiveness of controls, and attestation by an independent public accountant regarding the fairness of your assessment. All of these requirements have benefits to you. The comprehensive review of ICFR has a number of benefits because it requires executives and managers to consider the effectiveness of multiple dimensions of IC. We recommend that your company undertake a comprehensive review of IC using an established criteria, such as the Committee of Sponsoring Organizations Internal Control Framework (CRIME). Using the COSO framework, your company will be able to evaluate your control environment as well as evaluate risk assessment techniques, information and communication procedures at the transaction, account and financial statement levels. The review will highlight any existing weaknesses in your internal controls and will also promote an entity wide understanding of controls. In addition, management's assertion regarding the effectiveness of IC is beneficial because it communicates, in a very visible way, management's commitment to strong internal controls. The engagement of an auditor to provide an opinion regarding mgmts assertion will not only provide confirmation of management's assertion, but will also provide you with a critique of your internal controls. The extra set of eyes provides a useful fresh perspective. Ultimately, if you decide to go public, a major hurdle of public filing, compliance with Sarbanes Oxley requirements, will have been addressed. There are many advantages to voluntarily complying with Sarbanes Oxley requirements, including the self discovery of your own evaluation, the communication of management's commitment and the review by outside parties. We are delighted that you are giving serious consideration. If we can do anything to help in this ongoing effort, please do not hesitate to call.

You are a newly licensed CPA working for Hurricane Glass, a glass manufacturing company. Your manager is considering implementing flexible budgeting. Prepare a memo to your manager describing flexible budgeting and its advantages and disadvantages.

I understand that for the first time, our company is considering the implementation of flexible budgeting for the upcoming fiscal year. I think this will serve us very well going forward, as it represents an improved approach to understanding the variances that naturally result when actual performance differs from our budgeted projections. The key attribute of the flexible budget is that by using actual volume totals, the flexible budget provides an expected cost structure and bottom-line result based on an adjusted volume figure that differs from the original master budget. Put another way, if everything was exactly in line with what we budgeted except for volume, how would that have changed our overall costs and bottom line? From here, we compare the "flexible budget" output to actual results for both revenues and costs in order to determine the impact of variances outside of pure volume differences. As with the implementation of any new methodology, it is important to understand the advantages and disadvantages of moving forward. There are advantages to using flexible budgeting. Flexible budgeting allows us to look at different volume levels in order to determine where we may have achieved cost efficiencies and inefficiencies. We can also use flexible budgeting to forecast bottom-line profits or losses based solely on selling more or fewer units than the master budget predicts. However, volume alone is not enough to explain variances between budgets and actuals. Flexible budgeting facilitates variance analysis by isolating per-unit revenue, per-unit variable costs, and overall fixed costs from volume for comparisons between actuals and budgets. Flexible budgeting does have disadvantages. Per-unit revenues, per-unit variable costs, and fixed costs are required to utilize flexible budgeting and, as such, the accuracy of these numbers from a budgeting standpoint is critical. Also assessing the relevant range is extremely important because within this range, cost behaviors are expected to hold true; outside of this range, standards per unit and fixed costs may vary dramatically. I am excited that we are considering this path as a potential budgeting methodology in the future. If you have any questions regarding the information I have provided here, I am happy to meet with you to further discuss this approach.

You are the internal audit manager for Clove Co. You have been asked to explain to the CEO how technology can help with internal control monitoring. In a memo to the CEO, contrast ongoing and separate evaluations as described in COSO, and explain at least two advantages of using technology to facilitate these monitoring activities.

I understand you are looking to use technology to help improve our internal control monitoring process. Although technology is an investment in terms of both time and money, the very positive and significant impact that it will have in helping us meet our internal control objectives will make the investment very worthwhile. As one of the components of COSO's Internal Controls- Integrated Framework, monitoring provides the critical function of regularly assessing whether the company's established internal controls covering the high-level components, as well as the principles within each component, are present and functioning. In other words, have all of the controls we have put into place been functioning as planned in order to achieve our operating, reporting, and compliance objectives? Within the monitoring component of the framework, both ongoing and separate evaluations should be deployed to regularly assess our internal controls. Ongoing evaluations are performed on a more regular basis across all levels of an organization and serve the purpose of providing information quickly. These evaluations, which are performed by the managers and other individuals directly involved in the process, tend to be used for higher-risk elements such as cash transactions that need more frequent monitoring. Separate evaluations are often performed byy parties outside of the actual process (such as an internal audit group or a business process improvement team) and will occur on a more regular, periodic basis. These evaluations are often used for lower risk areas like equipment location tracking. As with many processes, technology can be used to enhance the speed and effectiveness of monitoring activities. For example, systems can track when the evaluations occurred, who conducted them, when the next evaluations should occur, evaluation results, and whether identified deficiencies were reported to the appropriate parties. A specific example of how technology can hep enhance our monitoring process is the handheld scanner, which can be used to quickly identify where items such as movable equipment are located and whether those locations align with our inventory records. Another advantage of technology is its reporting capacity; from the evaluations conducted, reports an be generated that identify high, medium, and low risks, and any changes in risks based on our evaluations. Ultimately, both ongoing and separate types of evaluations are critical to the monitoring function. Technology can be a huge asset for us for both types of evaluations as we necessarily improve our monitoring process to ensure that we are meeting our internal control requirements. If you have any questions or would like to discuss this further, please do not hesitate to contact me.

Your company trades internationally and has a strong import/export business. The company's exports are increasing and the dollar is getting stronger in relation to the company's trading partners. In the midst of all this good news, profitability is falling. In a memo to stockholders, explain why this might be happening

Our company has enjoyed enormous success in our international operations in the past year. Revenues have been increasing while the U.S. dollar has been strengthening. In the face of all this good news our earnings have not increased nearly as much as revenues. This leaves some of our investors and owners puzzled. Our international sales are settled in foreign currency. In other words we collect foreign money, not U.S. dollars, for our sales. Our collections have to be translated or exchanged into U.S. dollars before we count our revenues. So even though our revenues are increasing, the strengthening U.S. dollar means that these amounts are translating into fewer U.S. dollars. As a result, our revenues are increasing faster than our profitability. Our stronger dollars go further overseas, however. Purchases of supplies in international markets are less expensive. These results are not uncommon as we regularly engage in the risks of international business.

Sox 2002, memo discussing the expanded role of a company's audit committee in light of the provisions of the Sarbanes-Oxley Act

The following memorandum formally responds to your inquiry regarding the changing roles and responsibilities of audit committees since the passage of SOX 2002. The establishment of an audit committee as a subcommittee of the board of directors has long been regarded as a "best practice" for corporate governance. Typically audit committees are composed of outside directors (non-employees) who act as a liaison between the board of directors and the auditors. The audit committee is meant to enhance internal control by ensuring auditor independence, moderating disputes between the auditor and management, and evaluating internal controls. The Sarbanes-Oxley act does not change the long-established best idea of the audit committee, but does make the existence of a committee a legal requirement and makes qualification for membership on the committee and the minimum activities of the committee more specific and a matter of law and regulation. Under SOX, publically traded companies are required to maintain an audit committee that is directly responsible for appointment, compensation and oversight of the auditor engaged by the publically traded company. Audit committee must meet independence standards established by the law and at least one member of the committee must be a financial expert within the meaning of the law. Failure to include a financial expert required self-disclosure by the audit committee. Audit committees must also develop whistleblower procedures to ensure opportunities for communication of audit, accounting or internal control issues to the committee for evaluation and possible action. In addition, the audit committee is the recipient of numerous disclosures from management and the external auditor and is responsible for specific reporting. The various sections of the SOX act are rigorous and place significant reporting burdens on management and the board of directors in the name of improved internal control. The existence of the audit committee is meant to serve as tangible evidence that those charged with governance are actively engaged in monitoring internal control and the audit of their company's financial statements. I would be glad to discuss the specific requirements of the SOX act at any time convenient to you.

3wats, Inc. is discussing the data storage possibilities for their highly mobile workforce. Currently, data is stored on laptop hard drive and is not centrally available. Management is concerned about data security, accessibility, and costs. Prepare a memo to management discussing various option for data storage for a highly mobile workforce including advantage, disadvantages, and costs

The following memorandum is intended to outline various options for data storage for 3WAT, Inc.'s mobile workforce and address data safety, data integrity, and data access issues. The company's current approach allows for storage of data on the individual laptops of 3WAT's highly mobile workforce. The somewhat obvious weaknesses in doing business this way include compromised data safeguarding, loose controls over data, and uneven access to information. Data safeguarding issues should be initially addressed with a mobile device security policy specifically addressing handheld devices. Information technology policies should include an educational component and be joined with companion human resources policies that address the consequences of noncompliance with the mobile device security policy. Effective policies will mirror controls that remove users from security decisions. Users must, for example, be required to use passwords for access to company networks, be limited to using only company-owned devices for company data, and take responsibility for assigned hardware. Improved controls and uniform access to data can be accomplished in a range of ways. Connections to company networks may take the form of virtual private networks (VPNs) that connect to 3WAT's internal network or the use of cloud computing. VPNs are more secure but more expensive. The cloud will be less expensive; however, the company's security requirements may require more rigorous controls than those afforded by the cloud. The mobile workforce is an important tactic in modern business. An enterprise architecture that addresses data safety, data integrity, and data access issues is vitally important. I have outlined a few issues and solutions or action steps in the preceding memorandum and look forward to the opportunity to assist in the revisions to the company's infrastructure and to incorporate these approaches into a revised policy.

Jane smith is a client that has come to you seeking start-up advice on designing an accounting system to accumulate the costs associated with her new home construction business, a business in which each home is uniquely designed and built. She doesn't understand the difference between a job-order costing system and a process costing system. Draft a memo to jane explaining the difference between the two systems. In your memo, explain why the job-order costing system is most appropriate way to track costs for her business and how each of the following records will help her accumulate costs associate with each home: - Job Cost Sheet - Materials Requisition Form - Labor Time Tickets

The purpose of this memo is to differentiate between job-order costing and process costing and to help you select a system that is appropriate for your construction business. Job-order costing and process costing are two cost accumulation systems that can be used to track and accumulate the costs associated with manufacturing products. While both systems are used to assign costs to inventory and cost of goods sold, each system employs a different methodology to assign those values. A process costing system averages product costs, including direct materials, direct labor, and overhead, and applies those costs to a large number of homogeneous products. Unlike a process costing system, a job-order costing system allocates those same costs to each individual job. Because each of the homes you build is unique and easily identifiable, a job-order costing system is the most appropriate cost system for use in your business. It is essential that you understand the records you will use to track the profitability of each job. The job cost record summarizes the direct materials, direct labor, and overhead for each job and ultimately enables you to determine the final cost of constructing the home. The materials requisition form feeds into the job cost record. While construction supplies may be purchased in bulk for several jobs at once time, a materials requisition form identifies the construction materials used on each individual job. Labor time tickets serve the same function as a materials requisition form in that they enable payroll expenses to be assigned to individual jobs based on the amount of time actually spent on each project. Please contact us with any additional questions you might have. Our firm would be pleased to help you implement a job-order cost accounting system in your business at your earliest convenience.

Allpro is a start-up company that manufactures golf clubs. The owner of the company is upset because Allpro has reported losses for the last three quarters, despite increased production and the acquisition of new customers. The owner is worried about his ability to obtain additional financing. In reviewing the operating performance of Allpro, you notice the company's income statement has been prepared using variable costing. You know that although the company is not required to use GAAP, the absorption costing method may be a better method for Allpro to use for Financial Reporting purposes. As the senior accountant, draft a memo to the owner explaining the differences between variable and absorption costing and how a change in methodology could impact the company's profitability.

The purpose of this memo is to explain the differences between variable costing and absorption costing, two methods commonly used to prepare the income statement, and to explain how a change in methodology can impact your reported profitability. The primary difference between the variable costing method and the absorption costing method is the treatment of fixed factory overhead. Under variable costing, fixed factory overhead is treated as a period cost and is immediately expensed on the income statement in the period incurred. Only variable manufacturing costs such as direct materials, direct labor, and variable overhead costs are included in the calculation of cost of goods sold and ending inventory. In contrast, fixed factory overhead is treated as a product cost under the absorption costing method and is included in both the ending inventory and cost of goods sold calculations. When fixed factory overhead is included in ending inventory under absorption costing, this defers the recognition of the expense on the income statement, which can positively impact net income. If all production is sold each period, then net income will be the same under both variable costing and absorption costing. However, if the units produced exceed the units sold, net income will be higher under the absorption method because some of the fixed factory overhead remains in the ending inventory account. On the other hand, if sales exceed units produced, then net income will be lower under the absorption costing method because a larger portion of fixed factory overhead is expensed via the cost of goods sold account on the income statement. In Allpro's case, absorption costing would be a better method to use for external financial reporting because production exceeds sales. Using the absorption costing method would allow Allpro to defer some of the fixed factory overhead costs to inventory, until a later point in time when the company is generating more revenue. This would allow the company to report higher income in the current period. If you need additional information or have any other questions, please contact me at your convenience.

Having decreased the number of employees and their profitability over the past 2 years, creative solutions, Inc. has shrunk from a large to a medium sized corp. IN an effort to save money, the CEO wants to consolidate the responsibilities of the security admin with the computer programmer and data admin with the database admin. As the current CIO, draft a memo to Bob Gill, CEO, explaining why the segregation of duties is so important with regards to: 1. the security admin taking over the responsibilities of the computer programmer. 2. Data admin taking on the responsibilities of the database admin.

The purpose of this memo is to provide Creative Solutions, Inc. information on why proper segregation of duties is important, and why certain positions within an organization should not be combined if at all possible. I understand that it is easy to think that the same personnel would have the IT training to handle both the security administrator and the computer programmer positions, but this scenario presents a large security threat for Creative Solutions. While security administrators are the people who are responsible for restricting access to systems, applications, or databases to the appropriate personnel, the computer programmers are responsible for writing and/or maintaining application programs. If the person who is in charge of restricting access is also a programmer for that system, then that person could give himself/herself or another person access to areas they are not authorized to enter within Creative Solutions' network. This security bypass would also allow that person to steal organizational information or assets (e.g., embezzling of funds) without anyone knowing about it. While it is understandable that Creative Solutions could save money by combining the two positions, it could also lose much more if an employee took advantage of this security breach. It is also my understanding that Creative Solutions would like to have the data administrator take on the responsibilities of the database administrator. While this scenario does not present a security risk per se, it would not be recommended because the two positions require different levels of skill sets. A database administrator, a more technical position, is responsible for the actual database software, while a data administrator, a more administrative position, is responsible for the definition, planning, and control of the data within a database or databases. A data administrator would most likely not have enough knowledge or training to be able to successfully perform the duties of a database administrator.

Advanced International Research, a not for profit entity, recently embarked on a new research project to study company behaviour and how companies adapt to the market structures in which they operate. A senior analyst, Joe Smith, studied the market behaviour of six companies in various industries and summarized his findings as follows: Deluxe wheels co: luxury hubcaps and sports cars. Few other small firms. Due to unique product able to establish its own prices BiCor Inc. : regional utility co, no direct competition. Demand is virtually inelastic Quality Electronics: produces customized high-end electrical products. relatively few firms produce these precision products = company has direct control over product quantities and price. Paper Product co: produces end user notebooks, folders, and writing instruments. many small companies in their market who produce similar products. Product prices driven by market. New Mexico Telephone Co. : sole provider of internet until 3 years ago when deregulation became effective. now there are several large providers of these services in the market. Providers compete on product/service offerings and customer service but control the quantity and price of offerings. In preparation for the upcoming quarterly meeting, smith's supervisor has asked him to prepare a research memo for the head of corporate research that will include a separate paragraph for each of the six companies explaining: - the company's market structure - current barrier to enter the company's industry - a market strategy that would work best for the company given its market structure

The purpose of this memo is to provide a brief summary of the results of market research performed on six companies operating in various industries. The ultimate goal of this project was to identify the market structure within which each company operates, the type of barriers to entry that exist for that market, and to determine a market strategy that would work best for each company given its market structure. Deluxe Wheels Company operates in a monopolistic competition market structure which includes numerous small firms establishing their product prices based on product differentiation. Barriers to enter this type of market are low, as evidenced by the numerous competitors. The competitive market strategy that would work best for the company would be to focus on maintaining its existing market share by enhancing the differentiation of its existing product offerings. BiCor, Inc. is a standalone electric utility company with no competition. Because of this distinguishing feature, its market structure would be classified as a monopoly. The barriers to entry for this regional market are virtually insurmountable. Given that demand for BiCor's products is inelastic and there are no competitors, the company should use a competitive market strategy that focuses on profit maximization without regard to changes in market share. Quality Electronics, Inc. operates in an oligopoly market structure as a small number of companies are able to exert control over production volumes and price. There are high barriers of entry to the company's market due to the type of technology, established customer relationships, and economies of scale. Because this industry could be still moderately competitive, Quality Electronics should focus on maintaining or building market share through advertising channels and proper adaption to both price and product volume changes of its competitors. Paper Products Company operates in a market environment where there is perfect competition, as evidenced by the existence of many competitors producing very similar (undifferentiated) products. There are no barriers to enter or exit this market. The marketing strategy of the company should be to try and maintain its market share by being responsive to changes in competitor's prices and market conditions. Genuine Purses, Inc. operates in a monopolistic competition market as evidenced by its product differentiation and a highly elastic downward sloping demand curve. Barriers for companies to enter this market are low. Company management would most likely use a competitive market strategy that would focus on maintaining its existing market share by enhancing the differentiation of its purse and wallet products. New Mexico Telephone Company was, until recently, operating in a monopoly structure. With the advent of deregulation, a small number of new market participants created some level of competition. Because each market participant is able to control the level and prices on services offered, the market structure that New Mexico Telephone Company now operates in is an oligopoly. Despite some competition, barriers to entry are still high. To be successful in this market, the company should focus on maintaining or building market share through advertising channels and proper adaption to both price and product volume changes of its new competitors. Please note that I will provide a more thorough presentation of my research results at the upcoming quarterly research meeting. If you have any additional questions before then please feel free to contact me.

You have been hired as a controller of Hughes Co., a small but growing business that manufacture high-end electronics distributed through retail superstores. You plan to prepare the current-year budget based on the previous year's actual revenues and expenses. The company has never had a formal budget Write a memo to the CEO justifying the need to establish a formal budget. Discuss the advantages and disadvantages of the budget process. Type your communication in the reponse below.

The purpose of this memorandum is to recommend the development of our company's first formal budget. Since starting with Hughes Co., I have been more impressed each day with the company's growth and future potential. Controlling that growth and maximizing that potential is the objective of a formal budget and, in particular, a formal budgeting process. The formal budget will serve us in providing a roadmap that shows how we will achieve our strategic goals. In addition, it provides an internal operational benchmark that will allow us to compare our expected performance to achieved results and thereby confirm our progress or let us know where corrections are needed. To be effective, the budget requires significant management commitment and organization participation to ensure that internal benchmarks and standards are viewed as fair and achievable. Initially the introduction of the budget process may be viewed as bureaucratic and limiting flexibility, but formalizing the financial planning and operational actions of the company will ultimately be viewed as an excellent tool for leveraging organizational resources if there is sufficient participation by both decision makers and stakeholders. Typically the budget begins with some basic guidelines that would be provided by you. These guidelines would include your assessment of our goals, our environment and setting the tone for the budget. Perhaps the most important feature of that tone is that we take budgeting and organizational participation very seriously. Budgeted sales performance and expected costs would involve sales, marketing and operational personnel. Our process would require agreement upon the standards used to develop expected sales volume, manufacturing costs and related revenue and expense values. Failure to achieve that agreement is certain to produce resistance to the budget and defeat its purpose. The obvious pitfall is that obtaining consensus is time consuming and often exhausting. The benefit is agreement on a plan that we can all work together to achieve rather than fight. Our budget will give us a financial model that we can translate into operational unit based standards that will provide managers in operations with immediate feedback and executive management with an early warning system. The effective budget begins with an effective budget process that will start with us and consensus by all. I hope you agree with my assessment of the need for a formal budget and I look forward to meeting with you soon to begin this process.

In the past, XYZ Co. has used forward contracts effectively to offset price volatility for the purchase of raw materials. The CEO is considering extending this practice for the purchase of additional raw materials. Write a memo to the CEO describing the factors that should be considered in deciding whether to extend this practice.

for many years now, our company has used long forward contracts to lock in prices for the purchases of raw materials. Given that we are looking to extend this practice to hedge additional purchases, there are several factors that need to be taken into account before making a final decision. Regardless of whether prices increase or decrease, using forward contracts does allow us to hedge against volatility by locking in a purchase price several months in advance of the actual purchase. In taking long positions, we have benefited by securing lower prices in a rising price environment. As long as prices continue to rise, this strategy will remain successful. In addition, the customized nature of forward contracts (as opposed to the standardized nature of futures contracts) has always allowed us to set notional amounts and settlement dates that work best for us and our counterparties. However, there are risks that we need to be aware of if we continue to use (and expand on) this strategy. If prices decline, we will have locked in a higher purchase price for our raw materials. The market risk associated with this strategy reflects our potential loss from a situation such as falling prices. Another relevant risk is credit risk, which relates to our counterpartys not fulfilling their end of the contract; this scenario is most likely to occur when their position moves against them (which would happen if prices rise). In an unregulated market such as the forward market, there is no mechanism that automatically prevents credit risk. Terms and conditions may be established in the contract to protect both parties, but forward contracts are generally settled only at settlement date without a daily mark-to-market feature (found in futures contracts) that would automatically help to offset this risk. I am available to discuss all of the factors i have outlines above at your earliest convenience.