Exam 26: Incremental Analysis and Capital Budgeting

Spencer Company is contemplating the replacement of an old machine with a new one. The following information has been gathered: Old Machine New Machine Price \ 390,000 \ 530,000 Accumulated Depreciation 170,000 -0 - Remaining useful life 6 years -0 - Useful life -0- 10 years Annual operating costs \ 167,000 \ 151.500 If the old machine is replaced it can be sold for $120000. Which of the following amounts is a sunk cost?

Knowledge of the ______________________ is necessary when discounting future cash flows under the net present value approach.

Winston Company manufactured 5000 units of a component part that is used in its product and incurred the following costs: Direct materials \ 35,000 Direct labor 25,000 Variable manufacturing overhead 20,000 Fixed manufacturing overhead 18,000 Another company has offered to sell the same component part to the company for $17.50 per unit. The fixed manufacturing overhead consists mainly of depreciation on the equipment used to manufacture the part and would not be reduced if the component part was purchased from the outside firm. If the component part is purchased from the outside firm Winston Company has the opportunity to use the factory equipment to produce another product which is estimated to have a contribution margin of $19000. Instructions Prepare an incremental analysis report for Winston Company which can serve as informational input into this make or buy decision.

The following are all quantitative capital budgeting techniques except

Capital budgeting is the process

In using the internal rate of return method the internal rate of return factor was 5.0 and the equal annual cash inflows were $40000. The initial investment in the project must have been

Brown Bear Merchandising Inc. has three product lines in its retail stores: books videos and music. Results of the fourth quarter are presented below: $\begin{array}{lcccc}&\text { Books }& \text { Music } & \text { Videos }& \text { Total }\\ \text { Revenue } & \$ 25,000 & \$ 40,000 & \$ 28,000 & \$ 93,000 \\\text { Variable departmental costs } & 17,000 & 21,000 & 12,000 & 50,000 \\ \text { Direct fixed costs } & 4,000 & 6,000 & 3,000 & 13,000 \\ \text { Allocated fixed costs } & 5,000 & 5.000 & 5.000 & 15.000 \\ \text { Net income (loss) } & \$(1,000) & \$ 8,000 & \$ 8,000 & \$ 15,000 \\\end{array}$ The allocated fixed costs are unavoidable. Demand for individual products is not affected by changes in other product lines. Instructions What will happen to profits if Brown Bear discontinues the Books product line?

Lawson Co. is considering purchasing a new machine which will cost $350000 but which will decrease costs each year by $100000. The useful life of the machine is 10 years. The machine would be depreciated straight-line with no residual value over its useful life at the rate of $35000/year. The cash payback period is

R&R Inc. produces several models of clocks. An outside supplier has offered to produce the commercial clocks for R&R for $270 each. R&R needs 1500 clocks annually. R&R has provided the following unit costs for its commercial clocks: Direct materials \ 100 Direct labor 110 Variable overhead 30 Fixed overhead (70\% avoidable) 150 Instructions Prepare an incremental analysis which shows the effect of the make-or-buy decision.

JP Company is considering two capital investment proposals. Estimates regarding each project are provided below: Project Echo Project Charlie Initial investment \ 400,000 \6 00,000 Annual net income 20,000 42,000 Net annual cash inflow 100,000 142,000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires an 11% rate of return on all new investments. Periods 9\% 10\% 11\% 12\% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111 - The internal rate of return for Project Charlie is approximately

How is annual cash inflow determined?

Which of the following is a true statement about cost behaviors in incremental analysis? 1) Fixed costs will not change between alternatives. 2) Fixed costs may change between alternatives. 3) Variable costs will always change between alternatives.

Using the net present value method the total present value of cash inflows for Project A is $30000 and the total present value of cash inflows of Project B is $35000. If Project A and Project B both require an initial investment of $30000 and have the same economic life the project that should be accepted is

Management is often faced with the alternative of continuing to make a product or component internally or going to an external source and purchasing the product or component. In gathering relevant information for these two alternatives briefly identify the quantitative factors that should be considered. Are there any qualitative factors that should also be considered?

In a decision on whether an order should be accepted at a special price when there is plant capacity available a major consideration is whether the special price exceeds __________________.

A company is considering the following alternatives: Option 1 Option 2 Revenues \ 330,000 \ 330,000 Variable costs 120,000 98,000 Fixed costs 165,000 165,000 Which of the following are relevant in choosing between the alternatives?

Nelson Manufacturing Company can make 100 units of a necessary component part with the following costs: Direct Materials \ 120,000 Direct Labor 25,000 Variable Overhead 45,000 Fixed Overhead 70,000 If Nelson Manufacturing Company purchases the component externally $30000 of the fixed costs can be avoided. At what external price for the 100 units is the company indifferent between making or buying?

It costs Galiente Company $46 per unit ($27 variable and $19 fixed) to produce its product which normally sells for $58 per unit. A Brazilian wholesaler offers to purchase 5000 units at $36 each. Galiente would incur special shipping costs of $5 per unit if the order were accepted. Galiente has sufficient unused capacity to produce the 5000 units. If the special order is accepted what will be the effect on net income?

Which of the following is not a common method of capital budgeting?

Greenwond Inc. can make 1000 units of a necessary component with the following costs: T Direct Materials \ 72,000 Direct Labor 18,000 Variable Overhead 9,000 Fixed Overhead ? he company can purchase the 1000 units externally for $117000. The avoidable fixed costs are $6000 if the units are purchased externally. An analysis shows that at this external price the company is indifferent between making or buying the part. What are the fixed overhead costs of making the component?