Exam 25: Capital Budgeting and Managerial Decisions

A company has the choice of either selling 600 defective units as scrap or rebuilding them.The company could sell the defective units as they are for $2.00 per unit.Alternatively,it could rebuild them with incremental costs of $0.60 per unit for materials,$1.00 per unit for labor,and $0.80 per unit for overhead,and then sell the rebuilt units for $5.00 each.What should the company do?

Walters manufactures a specialty food product that can currently be sold for $22 per unit and has 20,000 units on hand.Alternatively,it can be further processed at a cost of $12,000 and converted into 12,000 units of Deluxe and 6,000 units of Super.The selling price of Deluxe and Super are $30 and $20,respectively.The incremental net income of processing further would be:

Another name for relevant cost is unavoidable cost.

Marshall Company currently manufactures one of its parts at a cost of $3.25 per unit.This cost is based on a normal production rate of 50,000 units.Variable costs are $2.10 per unit,fixed costs related to making this part are $40,000 per year,and allocated fixed costs are $45,000 per year.Allocated fixed costs are unavoidable whether the company makes or buys the part.Marshall is considering buying the part from a supplier for a quoted price of $2.80 per unit guaranteed for a three-year period.Should the company continue to manufacture the part,or should it buy the part from the outside supplier? Support your answer with analyses.

Trevoline Company is deciding between two projects.Each project requires an initial investment of $350,000.The projected net cash flows for the two projects are listed below.The revenue is to be received at the end of each year.Trevoline requires a 10% return on its investments.The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below.Use net present value to determine which project should be pursued and explain why.

A company is considering the purchase of a new piece of equipment for $90,000.Predicted annual cash inflows from this investment are $36,000 (year 1),$30,000 (year 2),$18,000 (year 3),$12,000 (year 4)and $6,000 (year 5).The payback period is:

Porter Co.is analyzing two projects for the future.Assume that only one project can be selected. If the company is using the payback period method and it requires a payback of three years or less,which project should be selected?

Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

In business decision-making,managers typically examine the two fundamental factors of:

Cornish Company had the following results of operations for the past year: A foreign company (whose sales will not affect Cornish's market)offers to buy 3,000 units at $17.00 per unit.In addition to variable manufacturing costs,selling these units would increase fixed overhead by $500 and selling and administrative costs by $1,000.If Cornish accepts the offer,its profits will:

Maxim manufactures a cat food product called Green Health.Maxim currently has 10,000 bags of Green Health on hand.The variable production costs per bag are $1.80 and total fixed costs are $10,000.The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost.The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe,which can be sold for $8 and $6 per bag,respectively.If Green Health is processed further into Premium Green and Green Deluxe,the total gross profit would be:

The following present value factors are provided for use in this problem. Xavier Co.wants to purchase a machine for $37,000 with a four year life and a $1,000 salvage value.Xavier requires an 8% return on investment.The expected year-end net cash flows are $12,000 in each of the four years.What is the machine's net present value (round to the nearest whole dollar)?

The decision to accept an additional volume of business should be based on a comparison of the revenue from the additional business with the sunk costs of producing that revenue.

Identify the five steps involved in managerial decision making.

Listmann Corp.processes four different products that can either be sold as is or processed further. Listed below are sales and additional cost data: Which product(s)should not be processed further?

Soar Incorporated is considering eliminating its mountain bike division,which reported an operating loss for the recent year of $3,000.The division sales for the year were $1,050,000 and the variable costs were $860,000.The fixed costs of the division were $193,000.If the mountain bike division is dropped,30% of the fixed costs allocated to that division could be eliminated.The impact on operating income for eliminating this business segment would be:

A company is trying to decide which of two new product lines to introduce in the coming year.The predicted revenue and cost data for each product line follows: The company has a 30% tax rate,it uses the straight-line depreciation method,and it predicts that cash flows will be spread evenly throughout each year.Calculate each product's payback period.If the company requires a payback period of three years or less,which,if either,product should be chosen?

The ____________________ is computed by dividing a project's annual after-tax net income by the annual average amount invested.

Significant sunk costs are relevant to decisions about the future.

Briefly describe both the payback period method and the net present value method of comparing investment alternatives.