Question 1

Fields Company currently manufactures one of its parts at a cost of $3.25 per unit.This cost is based on a normal production rate of 50,000 units.Variable costs are $2.10 per unit,fixed costs related to making this part are $40,000 per year,and allocated fixed costs are $45,000 per year.Allocated fixed costs are unavoidable whether the company makes or buys the part.Fields is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period.Should the company continue to manufacture the part,or should it buy the part from the outside supplier?
 Support your answer with analyses.

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Question 2

A company purchases a machine for $1,000,000.The machine has an expected life of 9 years and no salvage value.The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year.What is the accounting rate of return?

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Question 3

A company is considering purchasing a machine for $75,000.The machine is expected to generate a net after-tax income of $11,250 per year.Depreciation expense would be $7,500.What is the payback period for this machine?

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Question 4

Jorgensen Department Store has three departments:
 Clothing,Toys,and Jewelry.The most recent income statement,showing the total operating profit and departmental results is shown below:
  Based on this income statement,management is planning on eliminating the hardware department,as it is generating a net loss.If the hardware department is eliminated,the toy department will expand to fill the space,but sales will not change in total,nor will direct expenses.None of the allocated expenses will be avoided,but they will be reallocated.Clothing will be allocated $200,000 of these expenses,and Toys will be allocated $150,000 of these expenses.Prepare a new income statement for Jorgensen Department Store,showing the results if the Hardware Department is eliminated.Should the Hardware Department be eliminated?

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 Clothing,Toys,and...

Question 5

Braybar Company is deciding between two projects.Each project requires an initial investment of $350,000.The projected net cash flows for the two projects are listed below.The revenue is to be received at the end of each year.Braybar requires a 10% return on its investments.The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below.Use net present value to determine which project should be pursued and explain why.

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Question 6

A company has just received a special,one-time order for 1,000 units.Producing the order will have no effect on the production and sales of other units.The buyer's name will be stamped on each unit,at a total cost of $2,000.Normal cost data,excluding stamping,follows:
Direct materials…………………………… $ 10 per unit
Direct labor……………………………….. 16 per unit
Variable overhead………………………… 4 per unit
Allocated fixed overhead…………………. 12 per unit
Allocated fixed selling expense…………… 8 per unit
What selling price per unit will this company require to earn $3,000 on the order?

Accepted Answer

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Question 7

Peters,Inc.sells a single product and reports the following results from sales of 100,000 units:
Sales ($45 unit)…………..…………….… $4,500,000
Less costs and expenses:
Direct materials ($16/unit)………….… $1,600,000
Direct labor ($9/unit)…………….….… 900,000
Variable overhead ($3/unit)…….…….. 300,000
Fixed overhead ($8.10/unit)…….......... 810,000
Variable administrative ($4.50/unit)…. 450,000
Fixed administrative ($4/unit)………... 400,000
Total costs and expenses……………... $(4,460,000)
Operating income………………………… $ 40,000
A foreign company wants to purchase 15,000 units.However,they are willing to pay only $36 per unit for this one-time order.They also agree to pay all freight costs.To fill the order,Peters will incur normal production costs.Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance.No additional administrative costs (variable or fixed)will be incurred in association with this special order.
Required:
(1)Should Peters accept the order if it does not affect regular sales?
 Explain.
(2)Assume that Peters can accept the special order only by giving up 5,000 units of its normal sales.Should Peters accept the special order under these circumstances?

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Question 8

A company is evaluating the purchase of a machine for $900,000 with a six-year useful life and no salvage value.The company uses straight-line depreciation and it assumes that the annual net cash flow from using the machine will be received uniformly throughout each year.In calculating the accounting rate of return,what is the company's average investment?

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Question 9

A company must decide between scrapping or rebuilding units that do not pass inspection.The company has 15,000 such units that cost $6 per unit to manufacture.The units were built to satisfy a special order,which must still be satisfied if the defective units are scrapped.The units can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full price of $9.00 each.If the units are sold as scrap,the company will have to build 15,000 replacement units and sell them at the full price.
Required:
(1)What is the net return from selling the units as scrap?
(2)What is the net return from reworking and selling the units?
(3)Should the company sell the units as scrap or rework them?

Accepted Answer

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Question 10

A company is considering the purchase of new equipment for $45,000.The projected after-tax net income is $3,000 after deducting $15,000 of depreciation.The machine has a useful life of 3 years and no salvage value.Management of the company requires a 12% return on investment.The present value of an annuity of 1 for various periods follows:
 $$\begin{array} { c c } 
\text { Period } & \text { Present value of and annuity of } 1 \text { at } 12 \% \
1 \ldots \ldots & 0.8929 \
2 \ldots \ldots & 1.6901 \
3 \ldots \ldots &2.4018
\end{array}$$ What is the net present value of this machine assuming all cash flows occur at year-end?

Accepted Answer

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Question 11

Casco Company is considering the purchase of equipment that would allow the company to add a new product to its line.The equipment is expected to cost $280,000 with a 7-year life,no salvage value,and will be depreciated using straight-line depreciation.The expected annual income related to this equipment follows.Compute the (a)payback period and (b)accounting rate of return for this equipment.

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Question 12

A company puts four products through a common production process.This process costs $100,000 each year.The four products can be sold when they emerge from this process at the "split-off point",or processed further and then sold.Data about the four products for the coming period are:
  Determine which products should be sold at the split-off point and which should be processed further.

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Question 13

A company inadvertently produced 3,000 defective products.The product cost $15 each to be manufactured and normally sells for $35 each.A salvage company will purchase the defective units as they are for $12 each.The production manager reports that the defects can be corrected for $5 per unit,enabling the company to sell them at a discounted price of $22.00.The repair operations would not affect other production operations.Prepare an analysis that shows which action should be taken.

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Question 14

The minimum acceptable rate of return on an investment is called the _________________.

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Question 15

Sherman Company can sell all of product A that it produces but only 160,000 units of Z and it has limited production capacity.It can produce 6 units of A per hour or 10 units of Z per hour,and it has 30,000 production hours available.Contribution margin per unit is $12 for A and $10 for Z.What is the most profitable sales mix for this company?

Accepted Answer

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Question 16

A company is trying to decide which of two new product lines to introduce in the coming year.The predicted revenue and cost data for each product line follows:
  The company has a 30% tax rate,it uses the straight-line depreciation method,and it predicts that cash flows will be spread evenly throughout each year.Calculate each product's payback period.If the company requires a payback period of three years or less,which,if either,product should be chosen?

Accepted Answer

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Question 17

A company is considering a proposal to invest $30,000 in a project that would provide the following net cash flows:
Year 1 $ 6,500
Year 2 10,700
Year 3 15,000
Year 4 12,800
Compute the project's payback period.

Accepted Answer

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Question 18

A company is trying to decide which of two new product lines to introduce in the coming year.The company requires a 12% return on investment.The predicted revenue and cost data for each product line follows:
  The company has a 30% tax rate and it uses the straight-line depreciation method.The present value of an annuity of 1 for 5 years at 12% is 3.6048.Compute the net present value for each piece of equipment under each of the two product lines.Which,if either of these two investments is acceptable?

Accepted Answer

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Question 19

A capital budgeting method that considers how quickly a project recovers costs is known as ______________. An enhancement to this method that considers the time value of money is called ____________.

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Question 20

An _____________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.

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Quiz 25: Capital Budgeting and Managerial Decisions

A company purchases a machine for $1,000,000.The machine has an expected life of 9 years and no salvage value.The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year.What is the accounting rate of return?

A company is considering purchasing a machine for $75,000.The machine is expected to generate a net after-tax income of $11,250 per year.Depreciation expense would be $7,500.What is the payback period for this machine?

The minimum acceptable rate of return on an investment is called the _________________.

A company is considering a proposal to invest $30,000 in a project that would provide the following net cash flows: Year 1 $ 6,500 Year 2 10,700 Year 3 15,000 Year 4 12,800 Compute the project's payback period.

A capital budgeting method that considers how quickly a project recovers costs is known as __. An enhancement to this method that considers the time value of money is called .

An _____________________ is the potential benefit lost by taking a specific action when two or more alternative choices are available.