Exam 26: Incremental Analysis and Capital Budgeting

A company decided to replace an old machine with a new machine. Which of the following is considered a relevant cost?

A special one-time order should never be accepted if the unit sales price is less than the unit variable cost.

An opportunity cost

Chipper Cow Dairy Inc. produces milk at a total cost of $75000. The production generates 55000 gallons of organic milk which can be sold for $2 per gallon to a pasteurization company or the milk can be processed further into ice cream and then sold for $4.50 per gallon. It costs $92000 more to turn the annual milk supply into ice cream. Instructions If Chipper Cow processes the milk into ice cream how much is the incremental profit or loss? Should Chipper Cow process the milk into ice cream or sell it as is?

In using the net present value approach a project is acceptable if the project's net present value is ____________ or _______________.

Incremental analysis is most useful

The ______________ value of old equipment is irrelevant in a decision to replace that equipment and is often referred to as a _____________ cost.

The eliminating of an unprofitable product line may actually decrease total company net income.

Three quantitative techniques which are frequently used in capital budgeting decisions are (1) _________________ (2) _________________ and (3) ___________________.

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 8%. It is considering investing in a project that costs $231930 and is expected to generate cash inflows of $90000 each year for three years. The approximate internal rate of return on this project is

Selma Bosco is on the capital budgeting committee for her company Magnificent Tile. Bill Baumhauer is an engineer for the firm. Bill expresses his disappointment to Selma that a project that was given to him to review before submission looks extremely good on paper. "I really hoped that the cost projections wouldn't pan out" he tells his friend. "The technology used in this is pie in the sky kind of stuff. There are a hundred things that could go wrong. But the figures are very convincing. I haven't sent it on yet though I probably should." "You can keep it if it's really that bad" assures Selma. "Anyway you can probably get it shot out of the water pretty easily and not have the guy who submitted it mad at you for not turning it in. Just fix the numbers. If you figure for instance that a cost is only 50% likely to be that low then double it. We do it all the time informally. Best of all the rank and file don't get to come to those sessions. Your engineering genius need never know. He'll just think someone else's project was even better than his." Required: 1. Who are the stakeholders in this situation? 2. Is it ethical to adjust the figures to compensate for risk? Explain. 3. Is it ethical to change the proposal before submitting it? Explain.

Springfield Company produces golf discs which it normally sells to retailers for $6 each. The cost of manufacturing 25000 golf discs is: Materials \ 10,000 Labor 30,000 Variable overhead 20,000 Fixed overhead 40,000 Total \ 100,000 Springfield also incurs 5% sales commission ($0.30) on each disc sold. Lundy Corporation offers Springfield $5.25 per disc for 5000 discs. Lundy would sell the discs under its own brand name in foreign markets not yet served by Springfield. If Springfield accepts the offer its fixed overhead will increase from $40000 to $45000 due to the purchase of a new imprinting machine. No sales commission will result from the special order. Instructions (a) Prepare an incremental analysis for the special order. (b) Should Springfield accept the special order? Why or why not?

Which of the following is not a true statement?

Bordeaux Company has three product lines one of which reflects the following results: $\begin{array}{lr}\text { Sales } & \$ 215,000 \\\text { Variable expenses } & 125,000 \\\text { Contribution margin } & 90,000 \\\text { Fixed expenses } & 150,000 \\\text { Net loss } & \$(60,000)\end{array}$ If this product line is eliminated 50% of the fixed expenses can be eliminated and the other 50% will be allocated to other product lines. If management decides to eliminate this product line the company's net income will

Red Company produces 1000 units of a necessary component with the following costs: Direct Materials \ 34,000 Direct Labor 15,000 Variable Overhead 8,000 Fixed Overhead 10,000 None of Red fixed overhead costs can be reduced but another product could be made that would increase profit contribution by $12000 if the components were acquired externally. If cost minimization is the major consideration and the company would prefer to buy the components what is the maximum external price that Red Company would be willing to accept to acquire the 1000 units externally?

United Co. is considering investing in new equipment that will cost $1400000 with a 10-year useful life. The new equipment is expected to produce annual net income of $60000 over its useful life. Depreciation expense using the straight-line rate is $140000 per year. Instructions Compute the cash payback period.

In incremental analysis

Siesta Company estimates the following cash flows and depreciation on a project that will cost $200000 and will last 10 years with no salvage value: Revenues \8 0,000 Sales revenue Operating expenses Salary expense \3 2,000 Depreciation expense 20,000 Miscellaneous expenses 8,000 60,000 Net Income \2 0,000 Instructions (a) Calculate the expected annual rate of return on this project showing calculations to support your answer. (b) Calculate the cash payback on this project showing calculations to support your answer.

When using the payback method payback is expressed in terms of

The source of data to serve as inputs in incremental analysis is generated by