Question 2: Problem solving (11 Marks) Kenneth Brown is the principal owner of Brown Oil, Inc. After quitting his university teaching job, Ken has been able to increase his annual salary by a factor of over 100. At the present time, Ken is forced to consider purchasing some more equipment for Brown Oil because of competition. His alternatives are shown in the following table:

Outcomes
Alternative Decisions O1: Favorable Market O2:
Moderate Market O3: Unfavorable Market
Sub 100 $ 300000 $ 150000 $ -200000
Sub 200 $ 350000 $ 200000 $ 200000
Oil J $ 250000 $ 100000 $ -100000
Texan $ 75000 $ 50000 $ 0
Probabilities 0.2 0.5 0.3

For example, if Ken purchases a Sub 100 and if there is a favorable market, he will realize a profit of $300,000. On the other hand, if the market is unfavorable, Ken will suffer a loss of $200,000. But Ken has always been a very pessimistic decision maker.

Questions:

1. What type of decision environment is Ken facing? (1 Mark)
2. What decision criterion should he use? (1 Mark)
3. What alternative is best? (2 Mark)

If information about the probability of each outcome becomes available to Ken then:

Questions:

4. Find the best decision using the adequate technique. (3 Marks)
5. How much Ken should pay to know the perfect information about the market condition? (3 Marks)
6. Is it reasonable for Ken to purchase the perfect information about the market outcomes for $20,000? Explain why. (1 Mark)

For each of the following situations, indicate whether you agree or disagree with the financial reporting practice employed and state the basic assumption, component, or accounting principle that is applied (if you agree) or violated (if you disagree).wagner corporation adjusted the valuation of all assets and liabilities to reflect changes in the purchasing power of the dollar.spooner oil company changed its method of accounting for oil and gas exploration costs from successful efforts to full cost. no mention of the change was included in the financial statements. the change had a material effect on spooner's financial statements.cypress manufacturing company purchased machinery having a five-year life. the cost of the machinery is being expensed over the life of the machinery.rudeen corporation purchased equipment for $180,000 at a liquidation sale of a competitor. because the equipment was worth $230,000, rudeen valued the equipment in its subsequent balance sheet at $230,000.davis bicycle company received a large order for the sale of 1,000 bicycles at $100 each. the customer paid davis the entire amount of $100,000 on march 15. however, davis did not record any revenue until april 17, the date the bicycles were delivered to the customer.gigantic corporation purchased two small calculators at a cost of $32.00. the cost of the calculators was expensed even though they had a three-year estimated useful life.esquire company provides financial statements to external users every three years.