Project 1 requires an original investment of $55,000. The project will yield cash flows of $15,000 per year for seven years

Project 1 requires an original investment of $55,000. The project will yield cash flows of $15,000 per year for seven years. Project 2 has a calculated net present value of $5,000 over a four-year life. Project 1 could be sold at the end of four years for a price of $38,000. (a) Determine the net present value of Project 1 over a four-year life, with residual value, assuming a minimum rate of return of 20%. (b) Which project provides the greatest net present value?

Answer:

a. Present value of $15,000 per year at 20% for 4 years*…………………………  $38,835 

Present value of $38,000 at 20% at the end of 4 years**………………………    18,316 

Total present value of Project 1…………………………………………………… $57,151 

Less total cost of Project 1……………………………………………………………   55,000 

Net present value of Project 1……………………………………………………… $  2,151 

* [$15,000 × 2.589 (Exhibit 2, 20%, 4 years)] 

** [$38,000 × 0.482 (Exhibit 1, 20%, 4 years)] 

b. Project 2. Project 1’s net present value of $2,151 is less than the net present 

value of Project 2, $5,000. 

Project A requires an original investment of $22,500. The project will yield cash flows of $5,000 per year for nine years

Project A requires an original investment of $22,500. The project will yield cash flows of $5,000 per year for nine years. Project B has a calculated net present value of $3,500 over a six-year life. Project A could be sold at the end of six years for a price of $12,000. (a) Determine the net present value of Project A over a six-year life, with residual value, assuming a minimum rate of return of 12%. (b) Which project provides the greatest net present value?

Answer:


a. Present value of $5,000 per year at 12% for 6 years*…………………………… $20,555 
Present value of $12,000 at 12% at the end of 6 years**………………………      6,084 
Total present value of Project A…………………………………………………… $26,639 
Less total cost of Project A…………………………………………………………   22,500 
Net present value of Project A……………………………………………………… $  4,139 
* [$5,000 × 4.111 (Exhibit 2, 12%, 6 years)] 
** [$12,000 × 0.507 (Exhibit 1, 12%, 6 years)] 
b. Project A. Project A’s net present value of $4,139 is more than the net present 
value of Project B, $3,500. 

A project is estimated to cost $74,035 and provide annual net cash flows of $17,000 for six years.

A project is estimated to cost $74,035 and provide annual net cash flows of $17,000 for six years. Determine the internal rate of return for this project, using Exhibit 2.

Answer:
10%
[($74,035 ÷ $17,000) = 4.355, the present value of an annuity factor for six periods at 10%, from Exhibit 2]

A project is estimated to cost $362,672 and provide annual net cash flows of $76,000 for nine years.

A project is estimated to cost $362,672 and provide annual net cash flows of $76,000 for nine years. Determine the internal rate of return for this project, using Exhibit 2.

Answer:

15% 

[($362,672 ÷ $76,000) = 4.772, the present value of an annuity factor for nine periods at 15%, from Exhibit 2] 

A project has estimated annual net cash flows of $12,200 for five years and is estimated to cost $39,800.

A project has estimated annual net cash flows of $12,200 for five years and is estimated to cost $39,800. Assume a minimum acceptable rate of return of 12%. Using Exhibit 2, determine (1) the net present value of the project and (2) the present value index, rounded to two decimal places.

Answer:
a. $4,181 [($12,200 × 3.605) – $39,800]
b. 1.11 ($43,981 ÷ $39,800)

A project has estimated annual net cash flows of $96,200 for four years and is estimated to cost $315,500.

A project has estimated annual net cash flows of $96,200 for four years and is estimated to cost $315,500. Assume a minimum acceptable rate of return of 10%. Using Exhibit 2, determine (1) the net present value of the project and (2) the present value index, rounded to two decimal places.

Answer:
a. ($10,546) [($96,200 × 3.170) – $315,500]
b. 0.97 ($304,954 ÷ $315,500)

Determine the average rate of return for a project that is estimated to yield total income of $36,000 over three years

Determine the average rate of return for a project that is estimated to yield total income of $36,000 over three years, has a cost of $70,000, and has a $10,000 residual value.

Answer:
Estimate average annual income $12,000
($36,000 ÷ 3 years)

Average investment $40,000
[($70,000 + $10,000) ÷ 2]

Average rate of return 30%
($12,000 ÷ $40,000)

A project has estimated annual net cash flows of $135,800. It is estimated to cost $787,640

A project has estimated annual net cash flows of $135,800. It is estimated to cost $787,640. Determine the cash payback period. Round to one decimal place.

Answer:
5.8 years ($787,640 ÷ $135,800)

A project has estimated annual net cash flows of $9,300. It is estimated to cost $41,850

A project has estimated annual net cash flows of $9,300. It is estimated to cost $41,850. Determine the cash payback period. Round to one decimal place.

Answer:
4.5 years ($41,850 ÷ $9,300)

Determine the average rate of return for a project that is estimated to yield total income of $148,500 over

Determine the average rate of return for a project that is estimated to yield total income of $148,500 over five years, has a cost of $300,000, and has a $30,000 residual value.

Answer:

Estimate average annual income $29,700 

($148,500 ÷ 5 years) 

Average investment $165,000 

[($300,000 + $30,000) ÷ 2] 

Average rate of return 18% 

($29,700 ÷ $165,000) 

Casual Cuts Inc. has total estimated factory overhead for the year of $225,000, divided into four activities:

Casual Cuts Inc. has total estimated factory overhead for the year of $225,000, divided into four activities: cutting, $90,000; sewing, $22,500; setup, $80,000; and inspection, $32,500. Casual Cuts manufactures two types of men’s pants: jeans and khakis. The activity-base usage quantities for each product by each activity are as follows:

  Cutting Sewing Setup Inspection

Jeans   500 dlh 1,000 dlh   250 setups 100 inspections

Khakis 1,000   500   750 400

1,500 dlh 1,500 dlh 1,000 setups 500 inspections

Each product is budgeted for 10,000 units of production for the year.  Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.

Answer:

a. Cutting: $90,000 ÷ 1,500 direct labor hours = $60 per dlh 

Sewing: $22,500 ÷ 1,500 direct labor hours = $15 per dlh 

Setup: $80,000 ÷ 1,000 setups = $80 per setup 

Inspection: $32,500 ÷ 500 inspections = $65 per inspection 

b. Jeans Khakis 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Cutting 500  dlh $60  /dlh $30,000 1,000  dlh $60  /dlh $ 60,000 

Sewing 1,000  dlh $15  /dlh 15,000 500  dlh $15  /dlh 7,500 

Setup 250  setups $80  /setup 20,000 750  setups $80  /setup 60,000 

Inspection 100  insp. $65  /insp. 6,500 400  insp. $65  /insp. 26,000 

Total $71,500  $153,500 

÷ Budgeted units to be produced ÷  10,000  ÷  10,000 

Factory overhead per unit $ 7.15  $ 15.35 

Wave Wake Marine Company has total estimated factory overhead for the year of $1,200,000,

Wave Wake Marine Company has total estimated factory overhead for the year of $1,200,000, divided into four activities: fabrication, $450,000; assembly, $210,000; setup, $240,000; and inspection, $300,000. Wave Wake manufactures two types of boats: a speedboat and a bass boat. The activity-base usage quantities for each product by each activity are as follows:

Fabrication Assembly      Setup      Inspection

Speedboat   800 dlh 1,200 dlh  60 setups 600 inspections

Bass boat 1,200   800 100 200

2,000 dlh 2,000 dlh 160 setups 800 inspections

Each product is budgeted for 200 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.

Answer:

a. Fabrication: $450,000 ÷ 2,000 direct labor hours = $225 per dlh 

Assembly: $210,000 ÷ 2,000 direct labor hours = $105 per dlh 

Setup: $240,000 ÷ 160 setups = $1,500 per setup 

Inspection: $300,000 ÷ 800 inspections = $375 per inspection 

b. Speedboat Bass Boat 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Fabrication 800  dlh $225  /dlh $180,000 1,200  dlh $225  /dlh $270,000 

Assembly 1,200  dlh $105  /dlh 126,000 800  dlh $105  /dlh 84,000 

Setup 60  setups $1,500  /setup 90,000 100  setups $1,500  /setup 150,000 

Inspection 600  insp. $375  /insp. 225,000 200  insp. $375  /insp. 75,000 

Total $621,000  $579,000 

÷ Budgeted units to be produced ÷ 200  ÷ 200 

Factory overhead per unit $ 3,105  $ 2,895 

Product K has a unit contribution margin of $120. Product L has a unit contribution margin of $100

Product K has a unit contribution margin of $120. Product L has a unit contribution margin of $100. Product K requires five furnace hours, while Product L requires four furnace hours. Determine the most profitable product, assuming the furnace is a constraint.

Answer:

Product K Product L 

Unit contribution margin……………………………………………… $120 $100 

÷ Furnace hours per unit………………………………………………   5   4 

Unit contribution margin per production bottleneck hour……… $  24 $  25 

Product L is the most profitable in using bottleneck resources. 

Product A has a unit contribution margin of $24. Product B has a unit contribution margin of $30

Product A has a unit contribution margin of $24. Product B has a unit contribution margin of $30. Product A requires four testing hours, while Product B requires six testing hours. Determine the most profitable product, assuming the testing is a constraint.

Answer:


Product A Product B 
Unit contribution margin……………………………………………… $24 $30 
÷ Testing hours per unit………………………………………………     4     6 
Unit contribution margin per production bottleneck hour……… $  6 $  5 
Product A is the most profitable in using bottleneck resources. 

Green Thumb Garden Tools Inc. produces and sells home and garden tools and equipment.

Green Thumb Garden Tools Inc. produces and sells home and garden tools and equipment. A lawnmower has a total cost of $230 per unit, of which $160 is product cost and $70 is selling and administrative expenses. In addition, the total cost of $230 is made up of $120 variable cost and $110 fixed cost. The desired profit is $58 per unit. Determine the markup percentage on product cost.

Answer:


Markup percentage on product cost
Desired Profit + Selling and Admin. Exp. 
Total Product Cost 
Markup percentage on product cost: 
* $230 – $70 

Crystal Lighting Inc. produces and sells lighting fixtures. An entry light has a total cost of $80 per unit,

Crystal Lighting Inc. produces and sells lighting fixtures. An entry light has a total cost of $80 per unit, of which $54 is product cost and $26 is selling and administrative expenses. In addition, the total cost of $80 is made up of $40 variable cost and $40 fixed cost. The desired profit is $55 per unit. Determine the markup percentage on product cost.

Answer:

Markup percentage on product cost

Desired Profit + Selling and Admin. Exp. 

Total Product Cost 

Markup percentage on product cost: 

* $80 – $26 

Product A is normally sold for $9.60 per unit. A special price of $7.20 is offered for the export market.

Product A is normally sold for $9.60 per unit. A special price of $7.20 is offered for the export market. The variable production cost is $5.00 per unit. An additional export tariff of 15% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated March 16, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

Answer:

Differential Analysis 

Reject Order (Alt. 1) or Accept Order (Alt. 2) 

March 16, 2014 

Reject 

Order 

(Alternative 1) 

Revenues, per unit $0.00 $7.20 $7.20 

Costs:    

Variable manufacturing costs, per unit 0.00 –5.00 –5.00 

Export tariff, per unit 0.00 –1.08* –1.08 

Income (Loss), per unit $0.00 $1.12 $1.12 

    

* $7.20 × 15% 

The company should accept the special order. 

Product R is normally sold for $52 per unit. A special price of $39 is offered for the export market

Product R is normally sold for $52 per unit. A special price of $39 is offered for the export market. The variable production cost is $31 per unit. An additional export tariff of 25% of revenue must be paid for all export products. Assume there is sufficient capacity for the special order. Prepare a differential analysis dated October 23, 2014, on whether to reject (Alternative 1) or accept (Alternative 2) the special order.

Answer:

Differential Analysis 

Reject Order (Alt. 1) or Accept Order (Alt. 2) 

October 23, 2014 

Reject Order 

(Alternative 1) 

Revenues, per unit $0.00 $39.00 $39.00 

Costs:    

Variable manufacturing costs, per unit 0.00 –31.00 –31.00 

Export tariff, per unit 0.00 –9.75* –9.75 

Income (Loss), per unit $0.00 –$  1.75 –$  1.75 

    

* $39.00 × 25% 

The company should not accept the special order. 

Product D is produced for $24 per gallon. Product D can be sold without additional processing for $36 per gallon,

Product D is produced for $24 per gallon. Product D can be sold without additional processing for $36 per gallon, or processed further into Product E at an additional cost of $9 per gallon. Product E can be sold for $43 per gallon. Prepare a differential analysis dated February 26, 2014, on whether to sell Product D (Alternative 1) or process further into Product E (Alternative 2).

Answer:


Differential Analysis 
Sell Product D (Alt. 1) or Process Further into Product E (Alt. 2) 
February 26, 2014 

Sell 
Product D 
(Alternative 1) 
Process 
Further into 
Product E 
(Alternative 2) 
Revenues, per unit $36 $43 $7 
Costs, per unit –24 –33* –9 
Income (Loss), per unit $12 $10 –$2 
    
* $24 + $9 
The company should sell Product D without further processing. 

Product T is produced for $3.90 per pound. Product T can be sold without additional processing for $4.65 per pound

Product T is produced for $3.90 per pound. Product T can be sold without additional processing for $4.65 per pound, or processed further into Product U at an additional cost of $0.58 per pound. Product U can be sold for $5.30 per pound. Prepare a differential analysis dated August 2, 2014, on whether to sell Product T (Alternative 1) or process further into Product U (Alternative 2).

Answer:

Differential Analysis 

Sell Product T (Alt. 1) or Process Further into Product U (Alt. 2) 

August 2, 2014 

Sell Product T 

(Alternative 1) 

Revenues, per unit $4.65 $5.30 $0.65 

Costs, per unit –3.90 –4.48* –0.58 

Income (Loss), per unit $0.75 $0.82 $0.07 

    

* $3.90 + $0.58 

The company should process further into Product U.