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# ECON 705, Assignment 4<br/><br/><br/> The Mapple Tax Agency

provides tax services to individuals and small businesses. The small agency has 6 CPAs that can do individual and/or business returns. The number of individual returns or business returns each CPA is capable of during a typical week are given in the following table.
CPA Number of individual return Number of business returns
Ahab 9 6
Boomer 6 9
Elijah 10 8
Ishmael 10 5
Starbuck 7 7
Stubb 12 4
Boomer, for example, could complete 6 individual returns or 9 business returns or any linear combination of the two, such as 2 individual returns and 6 business returns. The table does not mean Boomer can do 6 individual returns and 9 business returns in the same week.
1.    Which CPA has the absolute advantage in doing individual returns?
2.    Which CPA has the absolute advantage in doing business returns?
3.    What is Ishmael's opportunity cost of an individual return, in terms of business returns foregone?
4.    What is Stubb's opportunity cost of a business return, in terms of individual returns foregone?
5.    Which CPA has the comparative advantage in individual returns?
6.    Which CPA has the comparative advantage in business returns?
Assuming the agency uses the CPAs to maximize the production of one activity, given the level of the other activity, fill in the following table. You are given the number of individual returns and need to calculate the maximum number of business returns given that number individual returns. You are essentially reporting five points along the agency's production possibilities frontier. Record your answers to two decimal places. (Yes, partial returns are allowed.)
Number of individual returns Number of business returns
0 (enter as the answer to question 7)
13 (question 8)
26 (question 9)
39 (question 10)
52 (question 11)
54 0

, part 2
This part is similar to part 1, but instead of being given the number of returns per week, you are given the time per return, in hours. Each CPA works 40 hours for the week. The productivity of the 6 CPAs differs from part 1. CPA Hours per individual return Hours per business return
Ahab 3 10
Boomer 4.5 7
Elijah 7 4
Ishmael 4 5
Starbuck 4 8
Stubb 6 6
12. If each CPA split their time equally between doing individual returns and business returns, how many individual returns could be completed in a week? (Partial returns are allowed.)
13. If each CPA split their time equally between doing individual returns and business returns, how many business returns could be completed in a week? (Partial returns are allowed.)
14.    If you used the concept of comparative advantage to maximize the number of business returns given the number of individual returns you gave in question (12), how many business returns could be completed?
15.    If you used the concept of comparative advantage to maximize the number of individual returns given the number of business returns you gave in question (13), how many individual returns could be completed?

Assignment 3 part 2a
You are an executive in a conglomerate with five lines of business. There are no economies of scope (this will be discussed in a future module). Those lines of business order services (accounting, information technology, and warehousing) from three "service divisions" of the company. You are given the following information for the revenues, direct costs (e.g., costs of production), and capital (e.g., value of the property, plant, and equipment) associated with these five lines of business, as well as the total variable costs from the three 'internal services' divisions. (You are ignoring fixed corporate overhead costs which will not change with a change in the size of the conglomerate.) All dollar amounts are in millions of dollars.

Business # 1 2 3 4 5
Revenue \$15 \$20 \$15 \$20 \$30
Total direct costs \$12 \$18 \$10 \$15 \$25
Capital invested \$5 \$8 \$20 \$25 \$22

Service division Total variable costs
1 \$2
2 \$3
3 \$5

For each business, calculate the return on capital, but ignore the indirect costs from the three service divisions. This is calculated as (revenue - total direct costs)/capital invested. You will enter this information, to three decimal places, in Moodle. A return of 12.46 percent would be reported as 0.125.

part 2b
As an executive in this company you are concerned with the following: (1) the businesses have little incentive to reduce their request for services from the three service divisions; (2) the service divisions are unable to tie their requested budgets to the value of their services; and (3) some of the businesses may have low returns on capital and should be sold off. To initially address these issues you are imposing an internal pricing system, where each of the three service divisions charges the businesses for the services provided. The expected percentage allocation of the variable costs from each to service division to each business are given in the matrix below. Notice that the sum of any allocations from a service division sum to 1.0.

Allocation share to each business from each service division
Service division 1 2 3 4 5
1  0.10  0.15  0.20  0.25  0.30
2  0.25  0.20  0.15  0.10  0.30
3  0.30  0.20  0.15 0.10  0.25

Use this information to allocate the service divsions' variable costs to the five businesses. Recalculate the return on capital for each of the five businesses. You will enter this information, to three decimal places, in Moodle.

Suppose that the market rate of return for similarly risky investments is 14 percent. If you took the approach of Goizueta at Coca-Cola, which businesses should be sold?

Assignment 3 part 1
You are given the following information for a company:

Total revenue 22,000,000
Total non-capital costs 12,100,000
Capital equipment purchase price and original market value 13,000,000
Equipment salvage value, as percent of purchase price 14%
Depreciable life of the capital equipment, years 10
Annual return on capital invested in a similarly risky investment 7%

1. Assuming that the tax laws require accountants to use a 10-year straight-line depreciation of the original purchase price net of the salvage value (e.g., a \$10,000 piece of equipment with a salvage value of \$1,000 would have annual depreciation of (\$10,000 - \$1,000)/10 = \$900), calculate the annual accounting profits.

2. Calculate the economic profits using the average annual opportunity cost of the capital. See ML203's third example for guidance.

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