Exam 26: Incremental Analysis and Capital Budgeting

Lean Inc. budgeted to produce 10000 widgets during 2016. Lean has capacity to produce 12000 units. Fixed factory overhead is allocated to production. The following estimated costs were provided: Direct material \ 7/ \ 70,000 Direct labor (\ 15/\times2 hrs./unit) 300,000 Variable manufacturing overhead (\ 3/ unit) 30,000 Fixed factory overhead costs (\ 5/ unit) 50,000 Total \ 450,000 Cost per unit =\ 45 Instructions Answer each of the following independent questions: 1. Lean received an order for 1000 units from a new customer in a country in which Lean has never done business. This customer has offered $44 per widget. Should Lean accept the order? 2. Lean received an offer from another company to manufacture the same quality widgets for $39. Should Lean let someone else manufacture all 10000 widgets and focus only on distribution?

The conceptually superior approach to capital budgeting is

A segment has the following data: Sales \ 350,000 Variable expenses 150,000 Fixed expenses 285,000 What will be the incremental effect on net income if this segment is eliminated assuming the fixed expenses will be allocated to profitable segments?

The payback method is criticized on the grounds that it

The rate that management expects to pay on borrowed or equity funds is known as

Preston Company manufactures a product with a unit variable cost of $140 and a unit sales price of $264. Fixed manufacturing costs were $720000 when 10000 units were produced and sold. The company has a one-time opportunity to sell an additional 3000 units at $210 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units acceptance of the special order would affect net income as follows:

Using the net present value method a net present value of zero indicates that the project would be acceptable.

Accounting contributes to management's decision-making process through internal reports that review the actual impact of the decision.

The elimination of an unprofitable product line may adversely affect the remaining product lines.

Use the following table $\text { Present Value of an Annuity of } 1$ Period 8\% 9\% 10\% 1 .926 .917 .909 2 1.783 1.759 1.736 3 2.577 2.531 2.487 A company has a minimum required rate of return of 9%. It is considering investing in a project that requires an investment of $210000 and is expected to generate cash inflows of $90000 at the end of each year for three years. The present value of future cash inflows for this project is

R&R Company purchased some equipment 3 years ago. The company's required rate of return is 12% and the net present value of the project was $(550). Annual cost savings were: $5000 for year 1; $4000 for year 2; and $3000 for year 3. The amount of the initial investment was Present Value PV of an Annuity Year of 1 at 12\% of 1 at 12\% 1 .893 .893 2 .797 1.690 3 .712 2.402

D'Arien Company incurred the following costs for 70000 units: Variable costs $420000 Fixed costs 392000 D'Arien has received a special order from an Armenian company for 3000 units. There is sufficient capacity to fill the order without jeopardizing regular sales. Filling the order will require spending an additional $6600 for shipping. If D'Arien wants to break even on the order what should the unit sales price be?

A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to

The process of evaluating financial data that change under alternative courses of action is called

Vineyard Company is proposing to spend $138000 to purchase a machine that will provide annual cash flows of $25000. The appropriate present value factor for 10 periods is 5.65. Instructions Compute the proposed investment's net present value and indicate whether the investment should be made by Vineyard Company.

Crea Company is considering buying a machine for $54000 with an estimated life of ten years and no salvage value. The straight-line method of depreciation will be used. The machine is expected to generate cash inflow of $6000 each year. The cash payback on this investment is

Messina Company is considering a capital investment of $300000 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 $30000 and $80000 respectively. Messina has an 11% cost of capital rate which is the minimum acceptable rate of return on the investment. Instructions (Round to two decimals.) (a) Compute (1) the annual rate of return and (2) the cash payback period on the proposed capital expenditure. (b) Using the discounted cash flow technique compute the net present value.

The cash payback capital budgeting technique is a quick way to calculate a project's net present value.

Book value of old equipment is considered to be a

Flamingo Music produces 60000 CDs on which to record music. The CDs have the following costs: Direct Materials \ 11,000 Direct Labor 15,000 Variable Overhead 3,000 Fixed Overhead 7,000 None of Flamingo's fixed overhead costs can be reduced but another product could be made that would increase profit contribution by $4000 if the CDs were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the CDs what is the maximum external price that Flamingo would be willing to accept to acquire the 60000 units externally?