You are on page 1of 10

PolyU Hong Kong Community College

CCN3134 Engineering Economic Semester Two 2016/17


Individual Assignment 01

Student
Full For Lecturer’s Use
Name
Student 1 A
ID No.
Q1 /20 Q2 /25
D1 D2 D3 D4 D5 D6 D7 D8

(By S C CHAN) Q3 /25 Q4 /30


201A, Wednesday, 12:30 – 13:25
201B, Wednesday, 13:30 – 14:25
201C, Wednesday, 14:30 – 15:25
201D, Wednesday, 15:30 – 16:25 Total /100
Tutorial (By H K CHEUNG)
Group 202A, Thursday, 09:30 – 10:25
202B, Thursday, 10:30 – 11:25
202C, Thursday, 11:30 – 12:25

(By H K CHEUNG)
203A, Wednesday, 14:30 – 15:25
203B, Wednesday, 15:30 – 16:25

Due Date and Time: 6:30pm on 17 March 2017 (Friday)

Instructions
1. Answer ALL the FOUR questions provided. This assignment should be completed
individually and neatly using A4 papers by hand.
2. Show all your workings clearly and neatly. Reasonable steps should be shown.
3. Plagiarism will be penalized severely. Marks will be deducted for assignments that are
plagiarized in whole or in part, regardless of the sources.
4. Submit a hard copy of your completed assignment to your lecturer in person or via the pigeon
hole on or before the due date together with this cover page.
5. Simply staple the assignment at the top left hand corner and do NOT enclose assignments in
folders.
6. Late submission of the assignment is NOT accepted.
7. E-mail submission will NOT be accepted.

Expected Learning Outcomes


1. Appreciate the factors that shape the economics environment of an engineering company.
2. Evaluate the financial condition of a company based on the financial statements.
3. Apply the basic cost accounting techniques in the planning and control of engineering and
production activities.
Page 1
Important Note: Answer all the FOUR questions in the empty space provided.

Question 1 (20 marks)


(a) Study the following scenario carefully and answer the associated questions correctly.

Both Mary and her husband, Tom, work at the same bank. On the other hand, she also takes up
a director position of a startup cookware company that is owned by her secret ex-boyfriend,
Martin. Martin is one of her clients, but she has never disclosed the directorship to her bank,
arguing that her cookware business does not conflict with her work in the bank and she is rarely
involved in the day-to-day operations of the cookware company. More importantly, she wants to
keep her current business relationship with her ex-boyfriend away from her husband for privacy
reason.

However, Martin's company unfortunately runs into financial crisis and, hence, he applies for a
credit loan with Mary's bank to import a large quantity of luxury wine that seems irrelevant to
his major business. Mary processes and approves the application without declaring their
relationship to her boss. After a month, the bank's internal auditor discovers that all the
supporting documents submitted by Martin are faked and the transaction is bogus. As a result,
Mary is queried and investigated by the management.

Identify THREE types of legal and ethical issues happened in the above scenario. Justify your
answers with supporting reasons. (10 marks)

Conflict of interest – Moonlighting: (2 marks)


By taking up a directorship outside the bank without her employer's prior permission, Mary
directorship in Martin's company gives rise to a conflict of interest with her official duties in
the bank. (2 marks)

Fraud: (1 mark)
Mary may commit an offence of conspiracy to defraud if she is aware of the fraud committed
by Martin and assists him in the approval process. (2 marks)

Professional Proficiency: (1 mark)


There may be unreasonable exercise of discretion or misuse of authority by Mary to approve
Martin’s application without careful validation on the submitted supporting documents by
Martin. (2 marks)

Page 2
(Question 1 continued…)
(b) Given that ocean water contains 0.9 ounce of gold per ton. Two extraction methods are available
for consideration. Method A costs $(220 – D8) per ton of water processed and will recover 85%
of the metal (gold), while method B costs $(160 + D8) per ton of water processed and will
recover 65% of the metal. Knowing both methods A and B require the same investment and are
capable of producing the same amount of gold each day. If the extracted gold can be sold for
$350 per ounce, which method of extraction should be adopted and used? (Assume that the
supply of ocean water is unlimited.) Work on this problem on the basis profit per ounce of gold
extracted.
(10 marks)

Given: 0.9 ounce gold / ton of sea water;


Same fixed cost (FC) for both methods
Ignore FC in cost calculation (N.B. Focus on the difference when doing comparison!)
(1 mark)
(Assume D8 = 0 in the following calculations)
Method A:
Profit per ton of sea water processed = Profit per (0.9)(85%) ounce of gold
= ($350/ounce)(0.9ounce)(0.85) – ($220) (2 marks)

So profit per ounce of gold extracted


= $350 – $220/(0.9x0.85) = $62.4183 ≈ $62.42 (2 marks)

Method B:
Profit per ton of sea water processed = Profit per (0.9)(65%) ounce of gold
= ($350/ounce)(0.9ounce)(65%) – ($160) (2 marks)

So profit per ounce of gold extracted


= $350 – $160/(0.9x0.65) = $76.4957 ≈ $76.50 (2 marks)

Therefore, Method B should be adopted on the basis of profit per ounce of gold extracted.
(1 mark)

Page 3
Question 2 (25 marks)
When average household income is $31,000, 380 containers of hazelnut chocolate spread are sold
and 220 jars of wild flower honey are sold; when average household income is $34,000, 485
containers of hazelnut chocolate spread are sold and 330 jars of wild flower honey are sold. When
wild flower honey costs $4 a jar, 280 jars of wild flower honey are sold and 320 containers of
hazelnut chocolate spread are sold; when wild flower honey costs $3 a jar, 360 jars of wild flower
honey are sold and 470 containers of hazelnut chocolate spread are sold. For the organic almond
milk with calcium (2L), suppose that its quantity demanded (QD) is represented by the equation,
QD = (1,960 + D8) – 34P; and its quantity supplied (QS) is represented by the equation, QS = P,
where P is the unit price for 2L organic almond milk with calcium.

(a) Briefly explain whether the Price-elasticity of demand can be calculated for wild flower honey,
hazelnut chocolate spread, and (2L) organic almond milk with calcium respectively? (3 marks)

In order to calculate price-elasticity of demand we need two (quantity, price) pairs for one
good (i.e. two points along a certain good’s demand curve). We are given this information for
wild flower honey. We are never given this information for hazelnut chocolate spread and
organic almond milk with calcium.

(b) If so, calculate the price-elasticity of demand using mid-point method. (6 marks)

We need to use the following formula:

We have two (quantity, price) pairs for wild flower honey. Specifically, (QDInitial, PInitial) =
(280, $4) and (QDNew, PNew) = (360, $3). Then, plugging these numbers into the above
formula, we obtain:
360 − 280 80
(360 + 280) ÷ 2 320
Price elasticity of demand, PEd = = = −0.875 or | PEd | < 1
3− 4 −1
(3 + 4) ÷ 2 3.5

Page 4
(Question 2 continued…)
(c) From the result obtained in part (b), describe if this demand for good is elastic or inelastic.
(2 marks)

The answer in part (b) tells that given two points, this demand curve for wild flower honey is
inelastic. We know this because the price elasticity of demand is between 0 and -1.

(d) From the result obtained in part (b), describe with supporting reason(s) if this good is normal or
inferior. (3 marks)
We know that hazelnut chocolate spread and wild flower honey are both normal goods
(since income and quantity demanded are positively related).

(e) Find the equilibrium price and quantity of the organic almond milk with calcium. (5 marks)
(Assume D8 = 0 in the following calculations)
At equilibrium, we have QD = QS 1,960 – 34P = P
Solving for P, we have 1,960 = 35P, or P = 56.
Checking for answer of P:
Substitute P = 56 back into either one of the original equations,
i.e. QD = 1,960 – 34P or QS = P.
Starting with QD, we get 1,960 – 34 (56) = 1,960 – 1,904 = 56; or we can plug it into QS = P,
so QS = 56. Since we get a quantity of 56 for both QD and QS, we know that the price of $56
is correct.
(f) Determine the values of QD and QS when the new unit price of organic almond milk with
calcium is $38. (2 marks)

Substitute P = $38 into QD equation, we get QD = 1,960 – 34(38) = 1,960 – 1,292 = 668.
Then, put P = $38 into QS equation, this yields QS = 38.

(g) Is there a surplus or a shortage in the market when the unit price of organic almond milk with
calcium is fixed at $38. (2 marks)

Since QD = 668 and QS = 38, there is a shortage of 630 jars.

(h) From the result obtained in part (g), determine if the unit price P will rise or fall in order to find
the equilibrium point? (2 marks)

Whenever there is a shortage of a good, the price will rise in order to find the equilibrium
point.
Page 5
Question 3 (25 marks)
Best House Cleaning is estimating their fixed and variable costs in operation. The following costs
were incurred during the month of January in 2013 by Best House Cleaning when (250 + D8) homes
were cleaned:

Cost item Amount ($)


(1) Cleaning supplies $1,700
(2) Hourly wages 5,430
(3) Depreciation - cleaning equipment 780
(4) Supervisor’s salary 3,100
(5) Travelling expenses 3,400
(6) Office rent 1,010
Total costs: $ 15,420

Assume the cost-capacity factor (X) is 0.34 and an average of 12% increase in the cost index per
year over the past few years.

(a) Classify each cost item listed in the table as fixed or variable based on common practice.
(6 marks)

Cost Item Reason


(3) Depreciation - cleaning The total cost of depreciation is $780 regardless of
equipment the number of homes cleaned.
The supervisor's salary is the same regardless of
Fixed Cost (4) Supervisor’s salary the number of hours worked or the number of
homes cleaned.
The monthly office rent is the same regardless of
(6) Office rent
the number of homes cleaned.
The total cost of cleaning supplies increases when
(1) Cleaning supplies
more homes are cleaned.
The total cost of hourly wages increases when
(2) Hourly wages
Variable Cost more homes are cleaned.
The total cost of travelling expenses such as
(5) Travelling expenses gasoline and maintenance increases when more
homes are cleaned.
(1 mark for each correct classified item)

Page 6
(Question 3 continued…)
(b) Determine the total cost equation for Best House Cleaning. (6 marks)

(Assume D8 = 0 in the following calculations)


Total fixed cost, CF = $780 + $3,100 + $1,010 = $4,890 (1 mark)

Total variable cost = $1,700 + $5,430 + $3,400 = $10,530 (1 mark)

Variable cost per unit, Cv = $10,530 / 250 = $42.12 (2 marks)

Total cost CT = CF + (Cv)(D) = 4,890 + 42.12D (2 marks)

The cost equation indicates that the total cost of cleaning homes is a monthly cost of $4,890
plus $42.12 per home.

(c) Determine the average cost equation for Best House Cleaning. (2 marks)

Given: Total cost CT = CF + (Cv)(D) = 4,890 + 42.12D


Average cost CA= CT /D = (4,890/D) + 42.12 (2 marks)

The above cost equation indicates that the average cost of cleaning homes is a monthly
average fixed cost (4,890/D) plus $42.12 per home.

(d) Estimate what would be the total cost for operating the same capacity in year 2017. (6 marks)

Assume the same number (250) of homes would be cleaned per month, so we have:
C2013(250 homes/month × 12) = $ 15,420/month × 12 (2 marks)
C2013(3,000 homes) = $185,040 (1 marks)

C2017 = C2013(1 + 12%)4 = $185,040 (1.12)4 = $291,164 (3 marks)

(e) Determine the total cost of operating a larger business scale with annual capacity of cleaning
4,200 homes in year 2017 along with the integration of additional cleaning equipment at an
estimated cost $80,000. (5 marks)

C2017(4,200 homes) = $291,164 × (4,200 / 3,000)0.34 = $326,453.4 ≈ $326,453 (3 marks)


The final total cost is: $326,453 + $80,000 = $406,453 (2 marks)

Page 7
Question 4 (30 marks)

(a) Suppose you make an annual contribution of $5,000 to your savings account at the end of each
year (i.e. end-of-year deposit) for five years. If your savings account earns 6% interest annually,
how much can be withdrawn at the end of five years? Also draw the corresponding cash flow
diagram. (5 marks)

Given A = $5,000; N = 5 years; i = 6% per year;


Find F = ?

(2 marks)

Using the equal-payment-series (annuity) compound-amount factor, we obtain:


F = $5,000(F/A, 6%, 5) (1 mark)

= $5,000(5.6371) (1 mark)

= $28,185.46 (1 mark)

(b) With reference to part (a), suppose you now make an annual contribution of $5,000 to your
savings account at the beginning of each year (i.e. beginning-of-year deposit) for five years.
The same 6% annual interest rate applies; determine how much can be withdrawn at the end of
five years? Also draw the new corresponding cash flow diagram. (9 marks)

(3 marks)

Page 8
(Question 4 continued…)
We can see each payment in the new cash flow diagram has been shifted one year earlier;
thus, each payment is compounded for one extra year.

Note that with the end-of-year deposit as in part (a), the ending balance F was $28,185.46.
With the beginning-of-year deposit, the same balance accumulates by the end of period 4.

This balance by the end of period 4 can earn interests for one additional year at the end of
year 5. (2 marks)

Using the Present-to-Future compound-amount factor, we obtain:


F = $28,185.46(F/P, 6%, 1) (2 marks)
= $28,185.46 (1.06) (1 mark)

= $29,876.59 (1 mark)

(c) Consider the following cash flows series as shown in the figure below.

$100 $100 $100 $100

$50

3 7
End of Year
0 1 2 4 5 6 8

$(50 + D8) $(50 + D8)

(i) Redraw the given cash flow diagram as the superposition of an annuity series plus several
single cash flows. (4 marks)

$100 $100 $100 $100 $100 $100 $100

End of Year
0 1 2 3 4 5 6 7 8

(2 marks)
Page 9
(Question 4 continued…)

3 5 7
End of Year
0 1 2 4 6 8

$50

$(150 + D8) $(150 + D8)

(2 marks)

(ii) From the result in part (c)(i), find the equivalent value of all the cash flows at time zero (i.e.
Present Value). Assume 12% nominal interest rate compounded annually. (12 marks)

For annuity portion (inflow):

P1 = A(P/A, 12%, 7) (2 marks)

P0 = P1(P/F, 12%, 1) (2 marks)


= A(P/A, 12%, 7)(P/F, 12%, 1)

= $100(4.56376)(0.8929) = $407.4981 (1 mark)

(Assume D8 = 0 in the following calculations)


For the three single cash flows portion (outflow):

P0 = $150(P/F, 12%, 3) + $50(P/F, 12%, 5) + $150(P/F, 12%, 7) (3 marks)


= $150(0.7118) + $50(0.5674) + $150(0.4523) = $202.985 (2 marks)

Finally, time-zero value = $407.4981 – $202.985 (1 mark)


= $204.5131 = $204.51 (1 mark)

− End of Assignment 01 −
Page 10

You might also like