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Case Questions 6.1 A statute gives the Department of the Interior the power to allow or curtail mining within the national forests "as the best interests of all users of the national forest shall dictate." Is this a valid delegation of legislative power to the agency, or is it too broad a delegation of power? 8.1 Before deciding which remedies are available under Article 2 of the UCC, one must first determine whether the transaction involved the sale of goods. Consider the following fact patterns. A. Tanzer entered into a contract with Audio Visual Artistry to install a "smart home" system in Tanzer's house, which was under construction. The contract included expert installation services for a custom home theater, lighting, music, and phone system. Was the contract for a sale of goods or services? [Audio Visual Artistry v. Tanzer, 403 S.W.3d 789 (Tenn. Ct. App. 2012).] B. Wachter, a construction company, entered into a contract to purchase an accounting and project management software package from DCI, a company that develops, markets, and supports software for construction companies. The package included "installation of the software, a full year of maintenance, and a training and consulting package." Was the contract for a sale of goods or services? [Wachter Management Co. v. Dexter & Chaney, Inc., 144 P.3d 747 (Kan. 2006).] C. A customer sued a New York restaurant for breach of warranty after a glass of water allegedly exploded in his hand during the course of a meal. Does the claim involve the sale of goods? [Gunning ex rel. Gunning v. Small Feast Caterers, Inc., 777 N.Y.S.2d 268 (N.Y. Sup. 2004).] D. Brenda Brandt underwent an operation at the Sarah Bush Lincoln Health Center to implant a ProtoGen Sling to resolve her urinary incontinence. Instead of solving the problem, the sling resulted in serious complications and was subsequently removed. After the device was recalled by its manufacturer, Brandt sued the Health Center for breach of warranty. Does the claim involve the sale of goods or services? [Brandt v. Boston Scientific Corp., 792 N.E.2d 296 (Ill. 2003).]
Jennifer S.
After spending $300,000 for research and development, chemists at Diversified Citrus Industries have developed a new breakfast drink. The drink, called Zapa, will provide the consumer with twice the amount of vitamin C currently available in breakfast drinks. Zapa will be packaged in an 8-ounce can and will be introduced to the breakfast drink market, which is estimated to be equivalent to 21 million 8-ounce cans nationally. One major management concern is the lack of funds available for marketing. Accordingly, management has decided to use newspapers (rather than television) in the introductory year to promote Zapa. They will distribute Zapa in major metropolitan areas that account for 65 percent of US breakfast drink volume. Newspaper advertising will carry a coupon that will entitle the consumer to receive $0.20 off the price of the first can purchased. The retailer will receive the regular margin and be reimbursed for redeemed coupons by Diversified Citrus Industries. Past experience indicates that for every five cans sold during the introductory year, one coupon will be returned. The cost of the newspaper advertising campaign and coupon returns will be $250,000. Other fixed overhead costs (excluding advertising) are expected to be $90,000 per year. Management has decided that the suggested retail price to the consumer for the 8-ounce can will be $0.50. The only unit variable costs for the product are $0.18 for materials and $0.06 for labor. The company margin of 20 percent off the suggested retail price tends to give retailers a wholesale margin of 10 percent of the retailer's cost of the item. At what price will Diversified Citrus Industries be selling its product to wholesalers? What is the contribution per unit for Zapa? What is the break-even unit volume in the first year? What is the first-year break-even share of the market? Video Concepts, Inc. (VCI) manufactures a line of DVD recorders (DVDs) that are distributed to large retailers. The line consists of three models of DVDs. The following data are available regarding the models: Model LX1: - Selling Price per Unit: $175 - Variable Cost per Unit: $100 - Demand: 250 units Model LX2: - Selling Price per Unit: $2000 - Variable Cost per Unit: $250 - Demand: 125 units Model LX3: - Selling Price per Unit: $1000 - Variable Cost per Unit: $300 - Demand: 100 units VCI is considering the addition of a fourth model to its line of DVDs. This model would be sold to retailers for $375. The variable cost of this unit is estimated to be $300. The demand for the Model LX4 is estimated to be 60 units in the first year.
Sri K.
New Economy Transport (A) The New Economy Transport Company (NETCO) was formed in 1959 to carry cargo and passengers between ports in the Pacific Northwest and Alaska. By 2018, its fleet had grown to four vessels, including a small dry-cargo vessel, the Vital Spark. The Vital Spark is 25 years old and badly in need of an overhaul. Peter Handy, the finance director, has just been presented with a proposal that would require the following expenditures: Overhaul engine and generators $340,000 Replace radar and other electronic equipment 75,000 Repairs to hull and superstructure 310,000 Painting and other repairs 95,000 $820,000 Mr. Handy believes that all these outlays could be written off immediately for tax purposes. NETCO's chief engineer, McPhail, estimates the postoverhaul operating costs as follows: Fuel $450,000 Labor and benefits 480,000 Maintenance 141,000 Other 110,000 $1,181,000 These costs generally increase with inflation, which is forecasted at 2.5% a year. The Vital Spark is carried on NETCO's books at a net depreciated value of only $100,000, but could probably be sold "as is," along with an extensive inventory of spare parts, for $200,000. The book value of the spare parts inventory is $40,000. Sale of the Vital Spark would generate an immediate tax liability on the difference between sale price and book value. The chief engineer also suggests installation of a brand-new engine and control system, which would cost an extra $600,000. This additional equipment would not substantially improve the Vital Spark's performance, but would result in the following reduced annual fuel, labor, and maintenance costs: Fuel $400,000 Labor and benefits 405,000 Maintenance 105,000 Other 110,000 $1,020,000 Overhaul of the Vital Spark would take it out of service for several months. The overhauled vessel would resume commercial service next year. Based on past experience, Mr. Handy believes that it would generate revenues of about $1.4 million next year, increasing with inflation thereafter. But the Vital Spark cannot continue forever. Even if overhauled, its useful life is probably no more than 10 years, 12 years at the most. Its salvage value when finally taken out of service will be trivial. NETCO is a conservatively financed firm in a mature business. It normally evaluates capital investments using an 11% cost of capital. This is a nominal, not a real, rate. NETCO's tax rate is 21%. QUESTION 1. Calculate the NPV of the proposed overhaul of the Vital Spark, with and without the new engine and control system. To do the calculation, you will have to prepare a spreadsheet table showing all costs after taxes over the vessel's remaining economic life. Take special care with your assumptions about depreciation tax shields and inflation.
Akash M.
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