Please read the following Scenario: Elisa McRay was recently hired as cost analy

Question

Please read the following Scenario:

Elisa McRay was recently hired as cost analyst by Medlab Medical Supplies Inc. One of Elisa's first assignments was to perform a Net Present Value analysis for a new warehouse. Elisa performed the analysis and calculated a Present Value Index of 0.75 the plant manager, Mark, is very intent in purchasing the warehouse because he believes that more storage space is needed. Mark asks Elisa into his office and the following conversation takes place:

Mark: Elisa, you are new here aren't you?

Elisa: Yes, sir.

Mark: Well, Elisa, let me tell you something. I'm not at all pleased with the capital investment analysis that you performed in these new warehouse. I need that warehouse for my production. If I don't get it, where are am I going to place our output?

Elisa: Hopefully with the customer, sir.

Mark: Now don't get smart with me.

Elisa: No, really, I was being serious. My analysis does not support constructing a new warehouse. The numbers don't lie, the warehouse does not meet our investment return targets. In fact, it seems to me that purchasing a warehouse does not add much value to the business. We need to be producing product to satisfy customer orders, not to fill a warehouse.

Mark: Listen, you need to understand something. The headquarters people will not allow me to build the warehouse if the numbers don't add up. You know as well as I that many assumptions go into your Net Present Value Analysis. Why don't you relax some of your assumptions so that the financial savings will offset the cost?

Elisa: I'm willing to discus my assumptions with you. Maybe I overlooked something.

Mark: Good. Here is what I want you to do. I see in your analysis that you don't project greater sales as a result of the warehouse. It seems to me, if we can store more goods, then we will be able to manufacture more goods, which will mean we will have more to sell. Thus, logically a larger warehouse translate into more sales. If you incorporate this into your analysis, I think you will see that the numbers will workout. Why don't you work it through and come back with a new analysis. I am really counting on you on this one. Let's get off to a good start together and see if we can get this project accepted.

Please make sure that within your text you mention in detail:

1. What is your advise to Elisa? Why? (Please elaborate)

2. Is Mark correct on his assumption that a large warehouse will bring more sales? Why or Why not?

3. What will happen for each accounting period when production is increased but stored not sold? Describe the effect in the balance sheet and the income statement for the excess production period and the sales period. Hint, the accounts you want to look at are: Inventory, Cost of Goods Sold, Depreciation Expense.

Explanation / Answer

Ø Defining the target population - It is the aggregate of all the elements defined prior to selection of the sample. It is necessary to define population in terms of elements, sampling units, extent and time.

Ø Specifying the sampling frame - Once the definition of the population is clear a researcher should decide on the sampling frame. A sampling frame is the list of elements from which the sample may be drawn.

Ø Specifying the sampling unit - A decision has to be taken concerning a sampling unit before selecting sample. Sampling unit may be a geographical one such as state, district, village, etc., or a construction unit such as house, flat, etc., or it may be a social unit such as family, club, school, etc., or it may be an individual. The researcher will have to decide one or more of such units that he has to select for his study.

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