Exam 25: Short-Run Decision Analysis and Capital Budgeting

The minimum rate of return is also known as the hurdle rate.

Contribution margin information is not relevant for

Memphis Co.is considering purchasing a machine for $83,200 that will increase cash flows by $40,000 in the first year,$30,000 the second year,and $25,000 the third year.The machine will have no residual value.The minimum rate of return is 10 percent.The present value factors,at 10 percent,for the three years are 0.909,0.826,and 0.751,respectively. -Using the above information for Memphis,the machine's actual rate of return is

Why is the residual value of equipment relevant when considering the replacement of equipment?

On November 15,2014,The Cooper Co.received a special order for 6,000 three-wood golf club sets.These golf clubs will be marketed in Asia.Seto Imports Inc.the purchasing company,wants the clubs bulk packaged and is willing to pay $72 per set for the clubs.The president of The Cooper Co.has gathered the following product costing information about the set of woods being discussed: · Direct materials (wood),$900 per 100 sets · Direct materials (metal shafts),$1,200 per 100 sets · Direct materials (grips),$200 per 100 sets · Direct labor is $27 per set · Variable manufacturing costs are $19 per set · Fixed manufacturing costs are 20 percent of direct labor dollars · Variable selling expenses are $14 per set · Variable shipping costs are $9 per set · Fixed general and administrative costs are 30 percent of direct labor dollars Bulk shipping costs will total $10,000,thus eliminating both variable selling and variable shipping costs from consideration.The company did not expect this order and will reach planned production capacity for the year.However,there is enough plant capacity for the special order.Round answers to two decimal places. a.Prepare an analysis for the president to use in deciding whether to accept or reject the offer by Seto Imports,Inc.What decision should be made? b.What is the lowest possible price The Cooper Co.could charge per set of woods and still make a $12,000 profit on this order? Round your answers to two decimal places.

Annual net cash flows are defined as

Managers must be careful while making capital budgeting decisions so that the selected alternative will contribute the most to future profits.

Estimated future costs that differ between alternative courses of action are termed as __________ costs in management decision analysis.

The first step in the incremental analysis is to eliminate all relevant revenues and costs.

Peter Co.makes and uses 5,000 components each year in its manufacturing operations.An outside supplier has offered to supply the components to Peter at $66 per unit.Peter's production costs are as follows: If Peter accepts the order,$8 of fixed overhead per unit will be eliminated. What is the per unit relevant cost of producing the product in this decision?

The three techniques used to evaluate capital investment alternatives use the project's expected net income.

Which of the following is an irrelevant cost in deciding whether or not to eliminate a producing department?

The proposals with the highest rank are funded first in the capital investment decisions.

The Dropinsky Company's management wants to determine if Segment B should be eliminated.The following data are available (in thousands). a.Assuming all direct fixed costs of Segment B are avoidable,what would be the change in operating income if Segment B were eliminated? b.Assuming one-half of the direct fixed costs of Segment B are avoidable,what would be the change in operating income if Segment B were eliminated?

Boston Corp.is evaluating three projects.Each project will return a total of $600,000 to the company in cash flows over a three-year period.The cash flows for the three projects are as follows: Using the payback period method,which project represents the best investment for Boston?

Relevant costs in a sell or process-further decision include

Lopez Co.is interested in purchasing equipment that would improve its operational efficiency.The cost of the equipment is $400,000 with an estimated residual value of $30,000 and a useful life of ten years.The equipment is expected to fetch cash inflows of $60,000 a year.The company's minimum rate of return is 8 percent.The present value of $1 for ten years at 8 percent is 0.463,and the present value of an annuity of $1 at 8 percent and ten years is 6.710. -Using the above information for Lopez,the actual rate of return that the project earns is

Employees from every part of an organization participate in capital investment analysis.

Any proposal that fails to produce the hurdle rate will be accepted.

Capital budgeting involves the evaluation of alternative proposals for large capital investments,including considerations for financing the projects.