ProblemSetC

PROBLEM251C
FoxCorporationisplanningtoaddanewproducttoitsline.Tomanufacturethisproduct,the
companyneedstobuyanewmachineatacostof$800,000.Thismachineisexpectedtohavea
threeyearlifeanda$50,000salvagevalue.Allsalesareforcash,andallcostsareoutofpocket
exceptfordepreciationonthenewmachine.Additionalinformationincludesthefollowing:
Expectedannualsalesofnewproduct
$1,400,000
Expectedannualcostsofnewproduct
Directmaterials
500,000
Directlabor
250,000
Overheadexcludingdepreciationonnewmachine 180,000
Sellingandadministrativeexpenses
55,000
Incometaxes
40%
Required
1.Computestraightlinedepreciationforeachyearofthisnewmachineslife.
2.Determineexpectednetincomeandnetcashflowforeachyearofthismachineslife.
3.Computethismachinespaybackperiod,assumingthatcashflowsoccurevenlythroughout
eachyear.
4.Computethismachines accountingrateofreturn,assumingthatincomeisearnedevenly
throughouteachyear.
5.Computethenetpresentvalueforthismachineusingadiscountrateof8%andassumingthat
cashflowsoccurateachyearend.(Hint:Salvagevalueisacashinflowattheendoftheassets
life.)
PROBLEM252C
StevensCompanyhasanopportunitytoinvestinoneoftwonewprojects.ProjectXrequiresan
investmentof$300,000fornewequipmenthavingafouryearlifeandnosalvagevalue.Project
Yrequiresaninvestmentof$300,000fornewmachineryhavingafiveyearlifeandnosalvage
value.Thetwoprojectsyieldthefollowingpredictedannualresults.Thecompanyusesstraight
linedepreciation,andcashflowsoccurevenlythroughouteachyear.
ProjectXProjectY
Sales
$350,000 $320,000
Expenses
Directmaterials
40,000 30,000
Directlabor
64,000 66,000
Overheadincludingdepr.
195,000 180,000
Sellingandadmin.expenses
18,000

18,000

Totalexpenses
Pretaxincome
Incometaxes(40%)
Netincome

$317,000$294,000
$33,000 $26,000
13,200

10,400
$

19,800

$
15,600

Required
1.Computeeachprojectsannualexpectednetcashflows.
2.Determineeachprojectspaybackperiod.
3.Computeeachprojectsaccountingrateofreturn.
4.Determineeachprojectsnetpresentvalueusing6%asthediscountrate.Forpart(4)only,
assumethatcashflowsoccurateachyearend.
AnalysisComponent
5.Identifytheprojectyouwouldrecommendtomanagementandexplainyourchoice.
PROBLEM253C
OTWInc.isconsideringanewprojectrequiringa$50,000investmentinspecialequipmentwith
nosalvagevalue.Theprojectwouldproduce$18,000ofpretaxincomebeforedepreciationatthe
endofeachofthenextsixyears.Thecompanysincometaxrateis35%.Incompilingitstax
return and computing its income tax payments, the company can choose between the two
alternativedepreciationschedulesshowninthetable.
StraightLine
MACRS
Depreciation
Depreciation*
Year1
$5,000

$10,000
Year2
10,000
16,000
Year3
10,000
9,600
Year4
10,000
5,760
Year5
10,000

5,760
Year6
5,000

2,880
Totals
$50,000
$50,000
*The modified accelerated cost recovery system (MACRS) for depreciation is discussed in
Chapter10.
Required
1.Prepareafivecolumntablethatreportsamounts(assuminguseofstraightlinedepreciation)
foreachofthefollowingitemsforeachofthesixyears:(a)pretaxincomebeforedepreciation,

(b)straightlinedepreciationexpense,(c)taxableincome,(d)incometaxes,and(e)netcash
flow.Netcashflowequalstheamountofincomebeforedepreciationminustheincometaxes.
2.Prepareafivecolumntablethatreportsamounts(assuminguseofMACRSdepreciation)for
eachofthefollowingitemsforeachofthesixyears:(a)pretaxincomebeforedepreciation,(b)
MACRSdepreciationexpense,(c)taxableincome,(d)incometaxes,and(e)netcashflow.Net
cashflowequalstheamountofincomebeforedepreciationminustheincometaxes.
3.Computethenetpresentvalueoftheinvestmentifstraightlinedepreciationisused.Use15%
asthediscountrate.
4.ComputethenetpresentvalueoftheinvestmentifMACRSdepreciationisused.Use15%as
thediscountrate.
AnalysisComponent
5.ExplainwhytheMACRSdepreciationmethodincreasesthisprojectsnetpresentvalue.
PROBLEM254C
WalkandTalkCompanymanufacturesplasticcellphonebeltclipsthatwholesalefor$5per
package.Thecompanymanufacturesandsellsapproximately80,000clipseachyear.Annual
costsfortheproductionandsaleofthisquantityareshowninthetable.
Directmaterials
$40,000
Directlabor
80,000
Overhead
51,000
Sellingexpenses
64,000
Admin.expenses
75,000

Totalcosts
$310,000

NerdsRUscomputersupplyhousehasofferedtobuy15,000phoneclipsfor$3.00each.
Theseclipswouldbestampedwiththecompanylogoandpassedouttoemployeesandwould
not affect Walk and Talks sales through its normal channels. A study of the costs of this
additionalbusinessrevealsthefollowing:
Directmaterialscostsare100%variable.
Perunitdirectlaborcostsfortheadditionalunitswouldrequireanextra$.40perunittostamp
thecompanylogo.
Variableoverheadis$16,000atthe80,000unitlevelandfixedoverheadwouldincreaseby
$5,000forthelogostampingmachine.
Acceptingthenewbusinesswouldinvolvenoadditionalsellingexpenses.
Additionaladministrativecostsareexpectedtobe$10,000.
Required
Prepareathreecolumncomparativeincomestatementthatshowsthefollowing:
1.Annualoperatingincomewithoutthespecialorder(column1).
2.Annualoperatingincomereceivedfromthenewbusinessonly(column2).
3.Combinedannualoperatingincomefromnormalbusinessandthenewbusiness(column3).

PROBLEM255C
SVCCompanyisabletoproducetwoproducts,XandZwiththesamemachineinitsfactory.
Thefollowinginformationisknown:
XZ
Sellingpriceperunit
$60
$80
Variablecostsperunit
20
45
Contributionmargin
$40$35
Machinehourstoproduce1unit.8hour2hours
Maximumunitsalespermonth400units350units
Thecompanypresentlyoperatesthemachineforasingleeighthourshiftfor22workingdays
per month. Management is thinking about operating the machine for two shifts which will
increaseitsproductivityanothereighthoursperdayfor22dayspermonth.Thischangewould
require$3,250additionalfixedcostspermonth.
Required
1.Determinethecontributionmarginpermachinehourthateachproductgenerates.
2.HowmanyunitsofProductXandProductZshouldthecompanyproduceifitcontinuesto
operatewithonlyoneshift?Howmuchtotalcontributionmargindoesthismixproduceeach
month?
3.Ifthecompanyaddsanothershift,howmanyunitsofProductXandProductZshouldit
produce?Howmuchtotalcontributionmarginwouldthismixproduceeachmonth?Shouldthe
companyaddthenewshift?Explain.
4.SupposethatthecompanydeterminesthatitcanincreaseProductXsmaximumsalesto440
permonthbyspending$1,000permonthinmarketingefforts.Shouldthecompanypursuethis
strategyanddoubleshift?
PROBLEM256C
UrbanSalesCompanysmanagementistryingtodecidewhethertoeliminateDepartment180,
whichhasproducedlossesorlowprofitsforseveralyears.Thecompanys2008departmental
incomestatementshowsthefollowing:

Sales
Costofgoodssold
Grossprofit
Operatingexpenses
Directexpenses

URBANSALESCOMPANY
DepartmentalIncomeStatement
ForYearEndedDecember31,2008
Dept.170 Dept.180 Combined
$420,000 $250,000 $670,000
232,000

158,000

390,000
$188,000 $92,000 $280,000

Advertising
Storesuppliesused
DepreciationStoreequip.
Totaldirectexpenses
Allocatedexpenses
Salessalaries
Rentexpense
Baddebtsexpense
Officesalary
Insuranceexpense
Misc.officeexpenses
Totalallocatedexpenses
Totalexpenses
Netincome(loss)

22,000
10,000
32,000
7,500
2,400
9,900
6,000

4,400

10,400
$35,500 $16,800 $52,300
$66,000 $33,000 $99,000
8,000
14,000
22,000
2,000
7,000
9,000
17,100
17,100
34,200
2,000
3,000
5,000
1,500

3,800

5,300
$96,600

$77,900

$174,500

$132,100
$94,700

$226,800

$55,900
$(2,700

)
$53,200

InanalyzingwhethertoeliminateDepartment180,managementconsidersthefollowingitems:
a. Thecompanyhasoneofficeworkerwhoearns$34,200peryear,andthreesalesclerkswho
eachearn$33,000peryear.
b. ThefullsalariesoftwosalesclerksarechargedtoDepartment170.Thefullsalaryofone
salesclerkischargedtoDepartment180.
c. EliminatingDepartment180wouldavoidthesalessalariesandtheofficesalarycurrently
allocatedtoit.Theofficeworkerhasindicatedadesiretoswitchtohalftimewhichmanagement
iswillingtodoifDepartment180iseliminated.
d. The store building is rented under a longterm lease that cannot be changed. Therefore,
Department170willusethespaceandequipmentcurrentlyusedbyDepartment180.
e. ClosingDepartment 180willeliminate: its expenses foradvertising, baddebts,andstore
supplies;50%oftheinsuranceexpenseallocatedtoittocoveritsmerchandiseinventory;and
30%ofthemiscellaneousofficeexpensespresentlyallocatedtoit.
Required
1.Prepare a threecolumn report that lists items and amounts for (a) the companys total
expenses(includingcostofgoodssold)column1,(b)theexpensesthatwouldbeeliminatedby
closingDepartment180column2,and(c)theexpensesthatwillcontinuecolumn3.
2.Prepareaforecastedannualincomestatementforthecompanyreflectingtheeliminationof
Department180assumingthatitwillnotaffectDepartment170ssalesandgrossprofit.The
statementshouldreflectthereassignmentoftheofficeworkertoonehalftime.
AnalysisComponent
3.Reconcilethecompanyscombinednetincomewiththeforecastednetincomeassumingthat
Department 180 is eliminated (list both items and amounts). Analyze the reconciliation and
explainwhyyouthinkthedepartmentshouldorshouldnotbeeliminated.