Exam 25: Short-Run Decision Analysis and Capital Budgeting

Which of the following typically would be considered an incremental cost?

When deciding whether to keep or replace a fixed asset,the asset's carrying value could be relevant to the decision.

Cost of capital information is necessary to establish the minimum rate of return on investments.

Only quantitative data are used in the capital investment decision-making process.

On November 25,2014,Marquez Golf Co.received a special order for 5,000 three-wood golf club sets.These golf clubs will be marketed in Japan.Ito Imports Inc. ,the purchasing company,wants the clubs bulk packaged and is willing to pay $55 per set for the clubs.The president of Marquez Golf Co.has gathered the following product costing information about the set of woods being discussed: · Direct materials (wood),$600 per 100 sets · Direct materials (metal shafts),$1,000 per 100 sets · Direct materials (grips),$150 per 100 sets · Direct labor is $20 per set · Variable manufacturing costs are $12 per set · Fixed manufacturing costs are 20 percent of direct labor dollars · Variable selling expenses are $10 per set · Variable shipping costs are $7 per set · Fixed general and administrative costs are 30 percent of direct labor dollars Bulk shipping costs will total $11,000,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 Ito Imports Inc.What decision should be made? b.What is the lowest possible price Marquez Golf Co.could charge per set of woods and still make a $9,000 profit on this order?

The minimum rate of return on a capital investment is set by the management of a company.

Irrelevant costs

The alternative with the lowest payback period is the most desirable.

Depending on the mixture of sources of capital,a company's cost of capital will vary.

A project is accepted under the net present value method when

The accounting rate-of-return is calculated by dividing the cost of investment by annual net cash inflows.

Capital investment analysis ensures that the resources are used wisely.

The following data have been gathered for a capital investment decision. Minimum rate of return for this investment is 14 percent.The present value factors for 14 percent discount rate are given below. a.Compute the present value of each of the cash inflows of the investment. b.What would have been the present value of the cash flows if they were received in equal installments over the five-year period at the same discount rate? (Assume the total cash inflows remain same. ) c.If the answers to parts (a)and (b)differ,explain the reason(s)why.

When resources like direct material,labor,or time are scarce,the goal is to maximize the contribution margin per unit of scarce resource.

Capital investment analysis involves all of the following except

The Cal-Fruit 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 12 percent minimum desired rate of return. )

A special order should be accepted only if it maximizes operating income.

The Pink Thai Restaurant is considering the purchase of a second oven that would accommodate its new take-out business.The oven would cost $17,000,has an estimated residual value of $5,000,and would be useful for six years.Annual net cash inflows would increase by $3,960.Pink Thai uses the straight-line method of depreciation.Using the above facts and the present value factors given below,calculate the following. (a)Payback period (Round your answer to one decimal place. ) (b)Accounting rate of return (Round your answer to one decimal place. ) (c)Net present value of the investment based on a 15 percent minimum desired rate of return (Use parentheses to indicate a negative net present value.Round your answer to the nearest dollar,if necessary).

There are products or services that can be either sold in a basic form or be processed further.

Courtney Sinclaire is trying to rent a new bicycle.She has narrowed her choices to two lease arrangements,each with unique characteristics.Bike Superior would rent for $220 per year,and Bike Deluxe's annual rent would be $250.Bike Superior would need a new seat costing $35 and new racing tires costing $95.The old seat and tires could be sold for $30.Bike Deluxe is fully equipped but would need to be painted at a cost of $110.Maintenance and upkeep on both bikes would average $60 per year. a.Identify the relevant data in this problem. b.Prepare an incremental analysis for Courtney to aid her in this decision. c.What decision should Courtney make?