Exam 25: Short-Run Decision Analysis and Capital Budgeting

Costs that vary among alternatives are irrelevant for decision making.

Sunk costs arise when the choice of one course of action eliminates the possibility of another course of action.

The Logan Company specializes in decorative fruit baskets.Currently,the company is analyzing purchase alternatives for a fruit-polishing machine.Data relevant to the decision are as follows: a.Compute the payback period for each of the alternatives.Round answers to two decimal places. b.Using the net present value method,prepare an analysis to determine which machine the company should purchase.(The company uses a 10 percent minimum desired rate of return. )

Total costs and savings are examples of qualitative factors.

The idea behind incremental analysis is to review decision data that differ between alternatives.

Qualitative factors that are considered by decision makers include all of the following except

Rodriguez Inc.is considering a project that costs $200,000.The company expects the annual cash revenues to be $75,000 and annual expenses (including depreciation)to be $30,000.The project has a ten-year useful life and a residual value of $25,000.Assume Rodriguez Inc.uses straight line method of depreciation. -Using the above information for Rodriguez,the accounting rate of return for the project is (Round your answer to a whole percent)

Avoidable costs are important for

To analyze a capital investment using the accounting rate-of-return method,one can use an estimated amount for the annual net income.

Outsourcing can reduce operating costs of a company.

Qualitative factors are also considered in the evaluation of capital investment proposals.

"Variable costs are relevant and fixed costs are irrelevant." Explain why you agree or disagree with this statement.

Assume revenues are received in cash and expenses,except for depreciation,are paid in cash.Based on this assumption,which of the following statements is true?

You are given the following present value factors at 8 percent,the Tehachapi Glass Company's minimum desired rate of return: The Tehachapi Glass Company is considering the replacement of a piece of equipment.The old machine has a carrying value of $800 and a remaining estimated life of five years,with no residual value at that time.Present residual value is $200.The new equipment will cost $1,200,including transportation and installation.It has an estimated life of five years,with no residual value then.Annual cash operating costs are $405 for the old machine and $165 for the new machine.Round answers to two decimal places. a.Compute the present value of the operating cash outflows for the old machine. b.Compute the present value of the operating cash outflows for the new machine. c.Compute the present value of the cash operating savings if the new machine is purchased. d.What is the net present value of the replacement alternative?

The company's minimum rate of return is also referred to as its profit margin.

The normal selling price of Daniel Company's product is $35 per unit.The costs of production are: direct materials,$6;direct labor,$5;variable overhead,$5;and fixed overhead,$6 (based on normal capacity).The company has received a special order for 12,800 units at a unit sales price of $19.There is ample unused capacity to fill the order and $2 per unit will be incurred for additional packaging.If the order is accepted,operating income will

Which of the following is the first step while carrying out a short-run decision analysis?

Discounting calculates the __________ value of an amount to be received.

The acceptable proposals are ranked in order of net present value,payback period,or rate of return in capital investment decisions.

The accounting rate-of-return method is widely used to measure the estimated performance of a capital investment,primarily because it uses time value of money concepts.