No references needed. This would need to be done live at 4:30pm est tomorrow and completed by 6:30pm est
64 1 GCOM 7020: STRATEGIC COST MANAGEMENT FINAL EXAM Name ___________________________________________ computing id ______________ INSTRUCTIONS: This is independent exam. You may use only your one page of notes. You have 3 hours to complete the exam. Treat each numbered question independently. Show work (computations) where indicated. No points will be awarded for problems where you are required to show work and you do not do so. Exams must be signed with your complete Honor Pledge when submitted. The penalty for not writing the complete Honor Pledge and signing it is 5%. This exam is worth 50 points. There are 11 pages in this exam. Make sure you have all 11 pages. The questions begin on page 2. Background information that you will need and formulas that might prove useful to answer many of the exam questions are in the background information, which begins on page 9. You may separate the background information from this exam. You do not need to submit the background information with the exam. Please write and sign your complete Honor Pledge below: 2 During November 2019, LVMH Moët Hennessy Louis Vuitton SE (“LVMH”), the world’s leading luxury group and Tiffany Co. (“Tiffany” or “the Company”), the global luxury jeweler, announced that LVMH will acquire Tiffany Co. for approximately $16.2 billion. Way before this merger was announced, LVMH financial analysts did some due diligence that included analyses similar to the following. Unless otherwise noted, for all questions assume that cost of sales is a variable cost and all other costs are fixed costs. 1. Compute Tiffany’s breakeven point in sales dollars for fiscal year 2019. Show work. 3 points ________________ Put answer here 2. Refer to the breakeven number you computed in question #1. The actual (or real) breakeven point is likely not the breakeven point you computed. For each item circle whether the breakeven number computed in question #1 is likely understated, overstated or not affected. a. Tiffany Co. maintains two separate distribution centers in close proximity to one another in New Jersey. Both are dedicated to warehousing merchandise. The costs related to these distribution centers are included in cost of sales. Understated Overstated No effect b. Included in SG&A costs are advertising, marketing, public, and media relations costs. In fiscal year 2010, these costs totaled $314.9 million. Understated Overstated No effect c. Included in SG&A costs are commissions for their retail sales force. Understated Overstated No effect 3 3. The following questions relate to breakeven forecasts for fiscal year 2020 assuming LVMH acquires Tiffany Co. Assume (1) Tiffany will be a separate division of LVMH – think of LVMH and Tiffany Co. as separate product lines; (2) the sales mix percentages for both companies are the same as in fiscal year 2019 for Tiffany Co. and 2018 for LVMH; (3) SG&A costs related to Tiffany Co. are expected to decrease 40%; (4) cost of sales related to Tiffany Co. are expected to decrease 15%; (5) the conversion rate from EUR to U.S $ is 1:1; and (6) there will be no other changes to operations, prices, or costs for either company. a. Forecast the breakeven point in sales for the newly formed company that will include LVMH and Tiffany Co. for the next year. Show work. 5 points ______________________________ Put answer here b. Forecast the breakeven point in sales for Tiffany Co. for the next year. Show work. 1 point _______________ Put answer here 4. Assume that Tiffany’s operating leverage is relatively low. For each of the following items, indicate whether it is an advantage, disadvantage, or neither for Tiffany Co. to have low operating leverage. Circle A for advantage; D for disadvantage; or N for neither. Treat each lettered item independently. 2 points a. As a retailer of goods which are discretionary purchases, the Company's sales results are particularly sensitive to changes in economic conditions and consumer confidence. A D N b. Sales volume has increased in each of the last 3 years. A D N 4 The analyses and questions that follow are the types of analyses and questions that Tiffany’s management would perform and ask. Unless otherwise noted, for all questions assume that cost of sales is a variable cost and all other costs are fixed costs. All remaining questions relate to Tiffany Co. 5. The Company is working with the Academy of Motion Picture Arts and Sciences (the Academy) to include in the gift bags of certain Academy Award nominees the Tiffany 1837® narrow bracelet in sterling silver. The bracelet retails for $355. The Company will provide these bracelets at no charge to the Academy. Given the information provided, indicate in dollars your best estimate of the opportunity costs and the marginal costs management must consider when deciding to give away a bracelet. Treat each lettered question independently and write your answers in the spaces provided. Show work. a. Assume the bracelets given to the Academy are in inventory – that is, they have already been made. Currently, there is demand for the bracelet. Thus, the Company can sell the bracelet at its retail price. 3 points ____________________ _________________ Opportunity cost Marginal cost b. Assume that the Company will make bracelets specifically for the Academy. There is no demand for these extra bracelets, which means the Company cannot sell the bracelets made specifically for the Academy. 3 points ____________________ _________________ Opportunity cost Marginal cost 6. Tiffany Co. is working with the Academy of Motion Picture Arts and Sciences (the Academy) to include in the gift bags of certain Academy Award nominees their Tiffany 1837® narrow bracelet in sterling silver. The bracelet retails for $355. The Company will not charge the Academy for these bracelets. Assume the following for this question only: (1) 25% of Cost of Sales relate to warehousing costs; (2) the Company made too many bracelets for the Academy and is having trouble selling the bracelets to their customers. As a result, the Company will discount the bracelets. What is the minimum can price they charge so they do not lose money? Show work. 2 points _______________ Put answer here 5 7. The Pet Adoption Center of New York City approached Tiffany Co. and requested they donate a piece of jewelry to auction at their annual fundraising gala. Tiffany Co. is considering whether to donate a piece of jewelry that retails for $4,400 or to donate $2,000 cash. Assume that (1) the piece of jewelry is already in inventory and (2) the Company can sell the piece of jewelry. a. How much is the difference in cash flow from giving away the jewelry versus donating cash? Show work. 2 points __________________________ Put answer here b. As it relates to Tiffany’s cash flow, is it better from them to give away the jewelry or to donate cash? Ignore tax implications. Circle jewelry or cash. 1 point Jewelry Cash 8. Tiffany’s LOVE necklace, which retails for $3,400, is a slow-moving product. Thus, management will discount the price. What is the maximum discount they can give without losing money? Circle one answer. 2 points $0 $3,400 $1,249 $2,151 $605 9. Assume for this question only that 15% of SG&A costs relate to the wages of retail sales personnel who are paid strictly on commission. In an effort to retain quality employees, Tiffany Co. is considering making retail sales personnel salaries fixed and paying these employees an average of $46,000 a year. The Company currently has 7,000 retail sales employees. At what sales dollar level would Tiffany Co. have preferred to pay its retail sales employees a fixed salary instead of on commission? Use fiscal year 2019 data to determine your answer. Assume the Company wants to maximize profits. Show work. 4 points 6 10. Tiffany’s cost of sales includes costs to internally manufacture merchandise – primarily metals, gemstones, labor, and overhead. Assume for this question only that the Company has two ring product lines – engagement rings and other rings. All engagement rings are made in Tiffany’s New York manufacturing facility and other rings are made in Tiffany’s Rhode Island manufacturing facility. Both ring product lines use diamonds. Which of the following are overhead items are likely included in cost of sales AND allocated to the engagement ring product line? Circle YES or NO. Make sure to refer the information in the background section to answer these questions. 5 points a. Cost related to diamonds. YES NO b. Costs related to the manufacturing plant in New York. YES NO c. Royalty fees paid to outsider designers who design both engagement and other rings. YES NO d. Wages related to retail sales personnel. YES NO e. Costs related to