Scenario 1 : Bernie’s Socialist Boat Store (BSBS) BSBS is a dealer of J/boat sailboats in Berkeley, CA. They purchase j/boats from the manufacturer, place them in inventory, mark them up and sell them to sailors. At the beginning of the year they had 10 sailboats in inventory. They paid $50k for these 10 sailboats. For 2021, the manufacturer raised the price of sailboats to $55k. BSBS bought 6 boats at the new price and added them to their inventory. During the year they sold 7 boats in total for $70k each. They started the year with no debt and $100k in cash. They pay 30% cash taxes on the profit every time they sell a boat. Bernie believes in fairness. Since all the j/boats are the same, he sees no reason why the boats should be marked at different prices in his inventory and/or anywhere else for that matter. Scenario 2: DDD Company DDD manufactures 3D-Printers. They bought a factory to make the printers 6 years ago for $100k. The factory has another 5 years worth of use before it becomes obsolete. They spent $5000 on the first day of the year to upgrade the factory’s electrical panel. This upgrade will extend the life of the factory by 6 months. It costs them $500 in labor and materials to build one 3D printer. They keep no inventory. Each printer is made to order. They sell the 3D printers for $1000 each. They offer their customers a 30-day grace period before invoiced payment is due. During the year they sold 100 3D printers and had fixed administrative expenses of $5000. They have a 25% effective tax rate, have no debt and started the year with $5k in cash and $25k in accounts receivable.
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