Ch 23 Homework 4z4n6p

In Karnes Company it costs $30 per unit ($20 variable and $10 fixed) to make a product that normally sells for $45. A foreign wholesaler offers to buy 4,000 units at $23 each. Karnes will incur special shipping costs of $1 per unit. Assuming that Karnes has excess operating capacity, indicate the net income (loss) Karnes would realize by accepting the special order. (If a box should be blank enter a 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.)

Reject Order Revenues Costs-Variable manufacturing Shipping Net Income

$0 0 0 $0

Accept Order $ 92000 80000 4000 $ 8000

Net Income Increase(Decrease) $ 92000 (80000) (4000) $ 8000

The special order should be accepted.

Bartley Manufacturing incurs unit costs of $8 ($5 variable and $3 fixed) in making a sub-assembly part for its finished product. A supplier offers to make 10,000 of the assembly part at $5.30 per unit. If the offer is accepted, Bartley will save all variable costs but no fixed costs. Complete the analysis showing the total cost saving, if any, Bartley will realize by buying the part. (If a box should be blank enter a 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).)

Make Variable manufacturing costs Fixed manufacturing costs Purchase price Total annual cost

Buy $ 50000 30000 0 $ 80000

$0 30000 53000 $ 83000

Net Income Increase (Decrease) $ 50000 0 (53000) $ (3000)

The decision should be to make the part. Stanton Inc. makes unfinished bookcases that it sells for $60. Production costs are $30 variable and $10 fixed. Because it has unused capacity, Stanton is considering finishing the bookcases and selling them for $72. Variable finishing costs are expected to increase by $8 per unit with no increase in fixed costs. Complete the analysis on a per unit basis showing whether Stanton should sell unfinished or finished bookcases. (Round your answers to 2 decimal places, e.g. 5.25. If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. 45 or parenthesis, e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.) Net Income Process Increase Sell Further (Decrease) $ 60 $ 72 $ 12 Sales per unit Cost per unit Variable 30 38 (8) 10 10 0 Fixed 40 48 (8) Total $ 20 $ 24 $4 Net income per unit

The bookcases should be processed further. Felton Company has a factory machine with a book value of $90,000 and a remaining useful life of 4 years. A new machine is available at a cost of $200,000. This machine will have a 4-year useful life with no salvage value. The new machine will lower annual variable manufacturing costs from $600,000 to $440,000. Complete the analysis showing whether the old machine should be retained or replaced. (If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45).) Net 4-Year Income Increase Retain Equipment Replace Equipment (Decrease) Variable manufacturing costs $ 2400000 $ 1760000 $ 640000 New machine cost 0 200000 (200000) $ 2400000 $ 1960000 $ 440000 Total

The old factory machine should be replaced.

Derby, Inc. manufactures golf clubs in three models. For the year, the Eagle line has a net loss of $20,000 from sales $200,000, variable expenses $180,000, and fixed expenses $40,000. If the Eagle line is eliminated, $34,000 of fixed costs will remain. Complete the analysis showing whether the Eagle line should be eliminated. (If an amount is blank enter 0, all boxes must be filled to be correct. If the impact on net income is a decrease use either a negative sign preceding the number, e.g. -45 or parenthesis, e.g. (45). Enter all other amounts as positive amounts and subtract where necessary.) Net Income Increase Continue Eliminate (Decrease) Sales $ 200000 $0 $ (200000) 180000 0 180000 Variable expense Contribution margin 20000 0 (20000) 40000 34000 6000 Fixed expenses $ (20000) $ (34000) $ (14000) Net Income

The Eagle product line should be continued.

In Nevitt Company, data concerning two products are: Contribution margin per unit - Product A $11, Product B $12; machine hours required for one unit - Product A 2, Product B 2.5. Compute the contribution margin per unit of limited resource for each product. (Round your answer to 2 decimal places, e.g. 5.25.)

Product A Contribution margin

Product B $ 5.5

Contribution margin per unit (a) Machine hours required (b) Contribution margin per unit of limited resource

$ 4.8

$11 2 $5.50

$12 2.5 $4.80

[(a) ÷ (b)]

Adler Company is considering purchasing new equipment for $300,000. It is expected that the equipment will produce annual net income of $10,000 over its 10-year useful life. Annual depreciation will be $30,000.

Compute the cash payback period. (Round your answer to 1 decimal place, e.g. 5.1.)

7.5 years $300,000 ÷ ($10,000 + $30,000) = 7.5 years

Correct. Horak Company accumulates the following data concerning a proposed capital investment: cash cost $225,000, net annual cash flow $34,000, present value factor of cash inflows for 10 years 6.71 (rounded).

Determine the net present value

$ 3140

Should the investment be made?

yes Net annual cash flows - $34,000 × 6.71 Capital investment $225,000 × 1.00 Positive net present value

$228,140 225,000 $3,140

Yes, the investment should be made because net present value is positive Correct. Rondello Company is considering a capital investment of $150,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $18,000 and $48,000, respectively. Rondello has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment. (Round answers to 0 decimals places, e.g. 2,510 except round payback to 2 decimal places, e.g. 5.25.)

Compute the following:

Annual rate of return 24 %

Cash payback period on the proposed capital expenditure 3.13 years

Using the discounted cash flow technique, compute the net present value $ 23029 Annual rate of return: $18,000 ÷ [($150,000 + $0) ÷ 2] = 24%.

Cash payback: $150,000 ÷ $48,000 = 3.13 years.

Item Net annual cash flows Capital investment

Amount $48,000 $150,000

Years 1-5 Now

PV Factor 3.60478 1.00000

Present Value $173,029 150,000

$23,029

Positive net present value Correct.

Timmons Corporation is considering three long-term capital investment proposals. Relevant data on each project are as follows. Project Brown Red Yellow $190,000 $220,000 $250,000 Capital investment Annual net income: Year 1 25,000 20,000 26,000 2 16,000 20,000 24,000 3 13,000 20,000 23,000 4 10,000 20,000 17,000 8,000 20,000 20,000 5 $72,000 $100,000 $110,000 Total

Salvage value is expected to be zero at the end of each project. Depreciation is computed by the straight-line method. The company's minimum rate of return is the company's cost of capital which is 12%.

Compute the following and rank the projects for each category:

Compute the average annual rate of return for each project. (Round your answers to 1 decimal place, e.g. 5.2.)

Brown 15.2 % rank 3 Red 18.2 % rank 1 Yellow 17.6 % rank 2

Compute the cash payback period for each project. (Round your answers to 2 decimal places, e.g. 5.25.)

Brown 3.46 years rank 3 Red 3.44 years rank 2 Yellow 3.40 years rank 1

Compute the net present value for each project. (Round your answers to 0 decimal places, e.g. 5,210.) Brown $ 2206 rank 3 Red $ 10706 rank 2 Yellow $ 11109 rank 1

Which project do you recommend? Yellow

Click here if you would like to Show Work for this question

Project Brown = $14,400 ÷ [($190,000 + $0) ÷ 2] = 15.2%. Project Red = $20,000 ÷ [($220,000 + $0) ÷ 2] = 18.2%. Project Yellow = $22,000 ÷ [($250,000 + $0) ÷ 2] = 17.6%. Project Brown Year Net Annual Cash Flow Cumulative Net Cash Flow 1 $63,000 ($25,000 + $38,000) $ 63,000 2 $54,000 ($16,000 + $38,000) $117,000 3 $51,000 ($13,000 + $38,000) $168,000 4 $48,000 ($10,000 + $38,000) $216,000 5 $46,000 ($ 8,000 + $38,000) $262,000

Cash Payback 3.46 years $190,000 - $168,000 = $22,000 $22,000 ÷ $48,000 = .46

Project Red = $220,000 ÷ [($20,000 + $44,000)] = 3.44 years

Year 1 2 3 4 5

Project Yellow Net Annual Cash Flow $76,000 ($26,000 + $50,000) $74,000 ($24,000 + $50,000) $73,000 ($23,000 + $50,000) $67,000 ($17,000 + $50,000) $70,000 ($20,000 + $50,000)

Cumulative Net Cash Flow $ 76,000 $150,000 $223,000 $290,000 $360,000

Cash Payback 3.40 years $250,000 - $223,000 = $27,000 $27,000 ÷ $67,000 = .40

Item Net Annual cash flows Capital investment

Project Red Amount Years $64,000 1-5

PV Factor 3.60478

Present Value $230,706 220,000

$ 10,706

Positive net present value Project Brown Year Discount Factor Net Annual Cash Flow 1 .89286 $ 63,000 2 .79719 54,000 3 .71178 51,000 4 .63552 48,000 46,000 5 .56743 $262,000 Total Capital investment Net present value Annual Rate of Project Return Cash Payback Brown 3 3 Red 1 2 Yellow 2 1

Yellow PV Net Annual Cash Flow $ 56,250 $ 76,000 43,048 74,000 36,301 73,000 30,505 67,000 26,102 70,000 $360,000 192,206 190,000 $2,206 Net Present Value 3 2 1

The best project is Yellow.

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PV $ 67,857 58,992 51,960 42,580 39,720 261,109 250,000 $11,109