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Question –

Answer the following questions in Microsoft Excel File with a separate, labelled tab for each question. Format the spreadsheets so that they are easy to follow and calculations are readily apparent. Verbal answers need to be detailed and clear.


LIBERTY Corporation operates a Marketing Research department. This department compiles information from published sources, and from its own consumer studies, to assist marketing personnel in forecasting product demand and making pricing and promotion decisions. A large marketing research firm has bid $280,000 per year for a three-year contract to perform the same services. For the most recent year, LIBERTY’s controller determined the cost of operating the Marketing Research department t o be $346,000:


Salary and fringes:

Senior researcher$68,000

Staff researcher 48,000

Clerical staff 70,000

VP Marketing (1) 62,000

Occupancy (2) 31,000

Subscriptions and travel (3) 67,000

Represents 30% of cost of the VP, who is estimated to spend 30% of his time on marketing research issues Occupancy costs are $31/sq ft: depreciation, $14; utilities, $11; maintenance, $6.

Utilities are 70% variable; maintenance is an allocation of fixed costs. There are no plans for alternate use of the space. Subscriptions and travel costs would be borne by outside research firm.



Determine the cost differential to LIBERTY of outsourcing versus retaining this function. Discuss the factors that LIBERTY management should consider in making this decision.


Chapman, Inc. is a manufacturer with a calendar accounting year. A physical inventory is taken on January 1, and any items not in inventory are charged to cost of goods sold. a. In late March, Chapman signed a $3,600,000 contract with Hawthorn, Inc. for production and installation of custom machinery at Hawthorn’s plant. On December 22, Chapman shipped Hawthorn the completed machinery, and billed Hawthorn $3,600,000, debiting a receivable and crediting revenue. Chapman also debited COGS and credited inventory for $2,750,000, the cost of producing the machinery. The machinery is of no use to Hawthorn without installation and calibration by Chapman employees. This work had not begun as of December 31.


  1. This year, Chapman began selling multi-year extended service contracts on some of its products. Chapman sold $3,800,000 of service contracts, recording the entire amount as revenue. Of that amount, 80% relates to service to be performed in future years.
  2. In August, Chapman signed a lease on an office building to be used for administrative (not manufacturing) purposes. An advance rent payment of $1,000,000 was made and debited to Prepaid Rent. The controller forgot to make the year-end adjusting entry to record the expiration of $450,000 of this prepayment during 2013.


d. In December, Chapman shipped goods on consignment to a dealer, booking revenue of $350,000 and cost of goods sold of $235,000. None of these goods had actually been sold to customers by year-end.e. Two years ago, Chapman acquired another manufacturing company whose operations have been integrated with Chapman’s. The acquisition price included $1,000,000 for customer lists, which has not been amortized. An appraiser with expertise in this industry estimates that the customer lists have lost 40% of their original value due to competitive changes in the industry. Chapman’s management disregarded this appraisal in preparing the financial statements.For 2013, Chapman reported operating income (before interest and taxes) of $20,000,000. Compute the correct amount of operating income/loss, showing any necessary calculations and explaining your reasoning.