Question

Overview With the reporting of investments being dependent upon the intent of management, there is opportunity for misrepresentation and fraud. This discussion will allow you to develop expertise in analyzing, recording, and reporting investments in debt and equity securities in a real-life situation. Instructions Mary Burden is the CFO of Tidewell Corporation and Tommy Brown is the Treasurer. Mary has been with the company for seven years and Tommy just started earlier this year. They meet to discuss the classification of the corporation's investment portfolio. Mary notes that Tidewell Corporation is having a good year and net income is already more than was forecasted, so she proposes investments that have increased in value since last year be classified as available-for-sale. She also proposes that any that have decreased in value be classified as trading securities. Her logic is that this will result in some amount of reported loss, but that net income will still be more than forecasted. Also, by classifying the securities that have increased in value as available for sale, Tidewell Corporation will have some reserve gains for future periods. Tommy is not sure about Mary's proposal and thinks it would make more sense to classify the investments that have increased in value as trading, and subsequently sell them to capture the profit. He also believes that classifying the investments that have decreased in value as trading makes more sense, which will give the investments time to recover and not impact net income.

Answer 1

Joyce Morphy
Requirement 1
Selling Price per mile	$          0.50
Less : Variable cost per mile	$        (0.20)
Contribution margin per mile	$    0.30
Break Even = Fixed Cost / Contribution margin
$215 / $0.30	717	Miles
Working Note :
Calculation of Variable cost per mile using High low method :
	No of Miles	Total operating costs
High	4400	$                    1,095.00
Low	3300	$                       875.00
Variable cost per mile = (1095-875)/(4400-3300)	$    0.20	per Mile
At 4400 Miles, Total operating costs = $1095
Fixed cost + 4400*$0.20 = $1095
Fixed cost = 1095 - 4400*0.2
$                                                                    215.00
Requirement 2
At 4200 Miles,
Revenue	$   2,100.00
Less : Variable cost	$   (840.00)
Contribution margin	$   1,260.00
Less : Fixed cost	$    (215.00)
Net Operating income	$   1,045.00
Degree of Operating Leverage = Contribution Margin / Net Operating Income
$1260 / $1045	1.2057
Requirement 3
Degree of Operating Leverage = % change in Net income / % change in sales
1.2057 = % change in net income / (25%)
% change in net income = -25%*1.2057	-30.1425%