Professional Documents
Culture Documents
$300,000 - $20,000
4 years
Part 2
Net
Income
Net Cash
Flow
300,000
420,000
210,000
70,000
50,000
15,000
Net income......................................................................$
35,000
100,000
15,000
$ 105,000
$300,000
$105,000
= 2.86 years
Part 4
Accounting rate of return =
$35,000
$160,000*
= 21.88%
*Average investment
Asset cost.............................................................$300,000
Final years book value........................................ 20,000
Sum........................................................................$320,000
Average (Sum /2)..................................................$160,000
Part 5
Present Value of Net Cash Flows
Year 1...............................................................
Year 2...............................................................
Year 3...............................................................
Year 4*.............................................................
Present
Net Cash Value of
Flows
1 at 7%
$105,000
0.9346
105,000
0.8734
105,000
0.8163
125,000
0.7629
Totals............................................................... $440,000
Present
Value of
Net Cash
Flows
$ 98,133
91,707
85,712
95,363
$ 370,915
Amount invested............................................
(300,000)
$ 70,915
$240,000 - $0
4 years
= $60,000
PROJECT B
Net income...............................................................................................
$ 25,900
Depreciation expense*............................................................................ 80,000
Net cash flow...........................................................................................
$105,900
*Annual depreciation =
$240,000 - $0
3 years
= $80,000
Part 2
PROJECT A
Payback Period =
$240,000
$ 99,900
= 2.4 years
$240,000
$105,900
= 2.3 years
PROJECT B
Payback Period =
PROJECT A
$39,900
$120,000*
= 33.3%
*Average investment
Asset cost.................................................. $240,000
Average (Cost/2)........................................ $120,000
PROJECT B
$25,900
$120,000*
= 21.6%
*Average investment
Asset cost.................................................. $240,000
Average (Cost/2)........................................ $120,000
Net Cash
Flows
Present
Value of
1 at 8%
Annuity
Present
Value of
Net Cash
Flows
3.3121
$330,879
Amount invested..........................................
(240,000)
$ 90,879
PROJECT B
Present Value of Net Cash Flows
Net Cash
Flows
Present
Value of
1 at 8%
Annuity
Present
Value of
Net Cash
Flows
2.5771
$272,915
Amount invested..........................................
(240,000)
$ 32,915
Part 5
Recommendation to management is to pursue Project A. This is
because although both projects have a positive net present value,
Project A has a higher positive net present value. We might also
note that the accounting rate of return is also higher for Project A
compared with Project B. Project B has a slightly lower payback
period, thereby reducing the risk of that project slightly, but the lower
risk is insufficient to make up for the extra years income from
Project A.
(b)
StraightLine
Deprec.
(c)
Taxable
Income
(a) - (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) - (d)
Year 1.............................
$12,000
$3,000
$ 9,000
$3,600
$8,400
Year 2.............................
12,000
6,000
6,000
2,400
9,600
Year 3.............................
12,000
6,000
6,000
2,400
9,600
Year 4.............................
12,000
6,000
6,000
2,400
9,600
Year 5.............................
12,000
6,000
6,000
2,400
9,600
Year 6.............................
12,000
3,000
9,000
3,600
8,400
Part 2
RESULTS USING MACRS DEPRECIATION
(a)
Income
Before
Deprec.
(b)
MACRS
Deprec.
(c)
Taxable
Income
(a) - (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) - (d)
Year 1.............................
$12,000
$6,000
$ 6,000
$2,400
$ 9,600
Year 2.............................
12,000
9,600
2,400
960
11,040
Year 3.............................
12,000
5,760
6,240
2,496
9,504
Year 4.............................
12,000
3,456
8,544
3,418
8,582
Year 5.............................
12,000
3,456
8,544
3,418
8,582
Year 6.............................
12,000
1,728
10,272
4,109
7,891
Present
Value of
1 at 10%
Present
Value of Net
Cash Flows
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
$ 7,636
7,933
7,212
6,557
5,961
4,742
$40,041
(30,000)
$10,041
Part 4
NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION
Net Cash
Flows
Present
Value of
1 at 10%
Present
Value of Net
Cash Flows
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
$ 8,727
9,123
7,140
5,862
5,329
4,454
$40,635
(30,000)
$10,635
Part 5
Analysis: The net present value using MACRS depreciation is greater
than the net present value using straight-line depreciation because the
cash flows are larger in the earlier years of the assets life under MACRS
depreciation. They are larger because the depreciation deductions are
larger, resulting in less income taxes paid in the earlier years.
Normal
Volume
Sales............................................................$1,200,000
(2)
New
Business
(3)
Combined
$172,000 $1,372,000
384,000
64,000
448,000
Direct labor...............................................
96,000
24,000
120,000
Overhead...................................................
288,000
36,000
324,000
Selling expenses......................................
120,000
Administrative expenses.........................
80,000
4,000
84,000
968,000
128,000
1,096,000
$ 44,000
$ 276,000
120,000
Supporting computations
Normal direct material cost......................................................
$384,000
Units of output...........................................................................
300,000
Cost per unit..............................................................................
$
1.28
New business volume...............................................................
50,000
New business direct material cost...........................................
$ 64,000
Normal direct labor cost...........................................................
$ 96,000
Units of output...........................................................................
300,000
Cost per unit..............................................................................
$
0.32
Overtime per unit (50%)............................................................ 0.16
New business direct labor cost per unit.................................
$
0.48
New business volume...............................................................
50,000
New business direct labor cost................................................
$ 24,000
Total overhead...........................................................................
$288,000
Fixed overhead (25%)................................................................
72,000
Variable overhead......................................................................
$216,000
Units of output...........................................................................
300,000
Cost per unit..............................................................................
$ 0.72
New business volume...............................................................
50,000
New business variable overhead cost.....................................
$ 36,000
Product T
$ 60
$ 80
20
45
$ 40
$ 35
0.4
1.0
$100
$ 35
Part 2
Sales Mix Recommendation To the extent allowed by production and
market constraints, the company should produce as much of Product
R as possible. With a single shift yielding 176 hours per month (8 x
22), the company can produce these units of Product R:
Maximum output of R =
= 880 units
Total
$22,000
4,620
(3,250)
$23,370
Management decision
This amount of $23,370 exceeds the
contribution margin of $17,600 generated by one shift alone (see part
2). Therefore, management should add the second shift.
Total
$27,000
2,870
(3,250)
(4,500)
$22,120
Management decision
This amount of $22,120 is less than the
contribution margin of $23,370 generated under the existing market
constraint (see part 3). Therefore, management should not undertake
this marketing strategy.
Continuing
Expenses
$125,100
$461,300
3,000
1,400
27,000
5,600
21,000
46,800
46,800
Direct expenses
Advertising..........................................................
30,000
Store supplies used...........................................
7,000
Depreciation of store equip...............................
21,000
Allocated expenses
Sales salaries*....................................................
93,600
Rent expense......................................................
27,600
Bad debts expense.............................................
25,000
27,600
4,000
Office salary*......................................................
26,000
21,000
26,000
Insurance expense*............................................
5,600
910
4,690
750
3,450
Total expenses......................................................
$826,400
$181,960
$644,440
Computation Notes
Closing Department Z will eliminate 65% of its
insurance expense and 30% of its miscellaneous office expense. Sales
salaries will be reduced by the amounts paid to the two clerks who will not
be replaced. The office salary will not be eliminated, but it will be
reclassified so that one-half will be reported as sales salary and one-half as
office salary.
27,000
5,600
21,000
Sales salaries......................................................................................
59,800*
Rent expense......................................................................................
27,600
21,000
Office salary........................................................................................
13,000*
Insurance expense.............................................................................
4,690
3,450
Office
Salary
$26,000
(13,000)
$13,000
ANALYSIS
Department Z's avoidable expenses of $181,960 are $6,960 greater
than its revenues of $175,000. This means the company's annual net
income would be $6,960 higher from eliminating Department Z. This
analysis suggests management should probably go ahead with the
elimination of the department as planned.