Accounting Managerial Accounting (9.32) Amy Kim-bell, CPA, CMA, and a member of the Institute of...
uestion
Answered step-by-step
(9.32) Amy Kim-bell, CPA, CMA, and a member of the Institute of...
(9.32) Amy Kim-bell, CPA, CMA, and a member of the Institute of Management Accountants,
recently joined Magee Metals and Moldings as a senior financial analyst. One of her major
responsibili
...[Show More]
Accounting Managerial Accounting (9.32) Amy Kim-bell, CPA, CMA, and a member of the Institute of...
uestion
Answered step-by-step
(9.32) Amy Kim-bell, CPA, CMA, and a member of the Institute of...
(9.32) Amy Kim-bell, CPA, CMA, and a member of the Institute of Management Accountants,
recently joined Magee Metals and Moldings as a senior financial analyst. One of her major
responsibilities is to prepare data to support capital equipment purchases.Magee is trying to
expand its international operations. The company is currently spending $275,000 each year on
international travel, an amount that is expected to increase by 20% each year for the next four
years and then level off. Since none of Magee's current fleet of corporate jets has the range to fly
internationally, Magee's CFO, Tony Smith, recently asked Amy to run some numbers on the
purchase of a new corporate jet with an international range.Amy determined that the jet upper
managers want to buy has a purchase price of $15 million and a useful life of 15 years. Variable
operating costs are an estimated $220,000 per year, based on a projected usage of 400 hours per
year. Fixed operating costs are estimated at $375,000 per year, not including depreciation. When
Magee employees aren't using the company's jets, they are rented to other parties at a rate of
$3,500 per hour. Based on existing rental requests, Amy estimated that the new jet would be
rented for 500 hours each year. Using Magee's 12% discount rate, Amy calculated the net present
value of the new jet purchase to be at most ($6,000,000). She knew there was no way the capital
budget committee would approve a purchase with such a large negative net present value. When
she presented her analysis to Tony, he responded. "Go back and check your work. When I ran
the preliminary numbers, I found a positive net present value. You must have made a mistake."
Tony suggested that she increase the useful life of the jet to 25 years, raise the salvage value by
25%, and increase the rental usage by 50%.Amy did some additional research and determined
through discussions with the jet's manufac-turer that her original salvage value and estimated life
were aggressive, but realistic. In fact, if the jet were used for 25 years, it would require a
multimillion-dollar overhaul in year 15 to remain flight-worthy. Beginning in year 11, operating
costs would increase by 30%. With this new information, Amy reworked her analysis and
obtained an even larger negative net present value.When Tony saw the revised numbers, he blew
up. "I told you what to do with the numbers and you did something else. Now go back and do
what I said. And have the correct analysis back to me by the end of the day."Amy returned to her
office slowly, thinking about what Tony was telling her to do. She had been at Magee for only a
month and really liked her job. In fact, she was looking forward to a long career at Magee.
Required a. Should Amy make the changes Tony has requested, noting in her analysis that the
CFO provided the estimates? Why or why not? b. If Amy makes the changes Tony has
requested, but doesn't want to list him as the source of the estimates, should she send an unsigned
note to the chair of the capital budget committee, inform-ing him of the problems with the
analysis? Why or why not? c. What actions should Amy take in response to Tony's final request?
Support your answer by refer-ring to the IMA's Statement of Ethical Professional Practice. d.
Tony Smith is a licensed CPA and a member of the IMA. Should Amy report his behavior to the
state accounting board and the IMA? Why or why not?
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