All Problems are worth 20 points 4.

Problem 12-1 20 points

Metswon Company makes two different products, M and N. The company’s two
departments are named after the products; for example, Product M is made in Department M
and Product N is made in Department N.

Metswon's accountant has identified the following annual costs associated with these two
products.

Financial Data
Salary of Executive Director of production division 104,000
Salary of supervisor Department M 36,000
Salary of supervisor Department N 26,800
Direct materials cost Department M 100,000
Direct materials cost Department N 200,000
Direct labor cost Department M 320,000
Direct labor cost Department N 640,000
Direct utilities cost Department M 600,000
Direct utilities cost Department N 460,000
General factorywide utilities 160,000
Production supplies 200,000
Fringe benefits 40,000
Depreciation 360,000
Nonfinancial data
Machine hours Department M 18,000
Machine hours Department N 6,000

REQUIRED
1. Identify the costs that are (1) direct costs of Department M, (2) direct costs of Department N,
and (3) indirect costs.

2. Select the appropriate cost drivers for the first two indirect costs listed from the data above and allocate these costs to
Departments M and N based on the above breakdown of the resource usage.

Problem 12-2 20 points

YBerra is considering expanding her business. She plans to hire a salesperson to cover
trade shows. Because of compensation, travel expenses, and booth rental, fixed costs for a
trade show are expected to be $ 800,000 .The booth will be open 120 hours during the trade show
YBerra also plans to add a new product line, Basehits, which will have a variable cost of $720 per package
She will continue to sell the existing product, Noerrors, which will have a variable cost of $400 per package
YBerra believes that the salesperson will spend approximately : 30 hours selling Noerrors and
90 hours selling Basehits

Assume that the fixed costs will be allocated based on selling hours for each product.
Hint : Calculate fixed cost rate per hour so you can spread fixed costs to each product

Required
1. Determine the estimated total cost (including fixed and variable costs) and cost per unit of each product, assuming that the
salesperson is able to sell 320 units of Noerrors
salesperson is able to sell 200 units of Basehits

2. Determine the estimated total cost (including fixed and variable costs) and cost per unit of each product, assuming that the
salesperson is able to sell 800 units of Noerrors
salesperson is able to sell 400 units of Basehits

3. Explain why the cost per unit figures calculated in Requirement a are different from the
amounts calculated in Requirement b. Also explain how the differences in estimated cost per
unit will affect pricing decisions.

Problem 16-1 20 points

Livingston Delivery is a small company that transports business packages between Denver and
Miami. It operates a fleet of small vans that moves packages to and from a central distribution center within
each city and uses a service to deliver the packages between the distribution centers in the two cities.
Livingston recently acquired substantial new capital from its owners, and its President
is trying to identify the most profitable way to invest these funds.

The company’s Chief Operating Officer, believes that the money should be used to
expand the fleet of city vans at a cost of $2,880,000 He argues that more vans would enable the
company to expand its services into new markets, thereby increasing the revenue base. More
specifically, he expects cash inflows to increase by $1,120,000 per year. The additional vans are
expected to have an average useful life of four years and a combined salvage value of $0

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Operating the vans will require additional working capital of $160,000
which will be recovered at the end of the fourth year.

In contrast, the company’s Chief Accountant, believes that the funds should be
used to purchase large trucks to deliver the packages between the distribution centers in the two cities. The
conversion process would produce continuing improvement in operating savings with reductions
in cash outflows as the following.

Year 1 Year 2 Year 3 Year 4

$704,000 $1,408,000 $1,760,000 $1,936,000

The large trucks are expected to cost $3,200,000 and have a 4

year useful life and a $0 salvage value. In addition to the purchase price
of the trucks, up-front training costs are expected to be $400,000

Livingston Delivery’s management has established a 11% desired rate of return.

REQUIRED
Ignore Depreciation and Tax as they are imbedded in the cash inflow and cash outflow data

1. Determine the net present value of the two investment alternatives.

2. Calculate the present value index for each alternative.

3. Indicate which investment alternative you would recommend. Explain your choice.

Set up a mini table of present value factors to make your calculations easier.

Problem 16-2 20 points

Mr Pelegrino, the President of Pike Enterprises, has assembled his top advisers
to evaluate an investment opportunity. The advisers expect the company to pay $1,600,000
cash at the beginning of the investment and the cash inflow for each of the following four years to be the following.

Year 1 Year 2 Year 3 Year 4

$320,000 $400,000 $500,000 $800,000

Mr Pelegrino agrees with his advisers that the company should use the discount rate (required rate
of return) of 10% to compute net present value to evaluate the viability of the proposed project.

REQUIRED
1. Compute the net present value of the proposed project. Should the company approve the project ?

One of the advisers, Vice President Mr Beast, is wary of the cash flow forecast and she points out that the
advisers failed to consider that the depreciation on equipment used in this project will be tax
deductible. The depreciation is expected to be $320,000 per year for the four-year period. The
company’s income tax rate is 21% per year. Use this information to revise the company’s
expected cash flow from this project.

2. Compute the net present value of the project based on the revised cash flow forecast
which should include the depreciation tax benefit discovered.

Should the company approve the project?

Set up a mini table of present value factors to make your calculations easier.

Problem 16-3 20 points

West Point Inc is reviewing the company’s investment in a cement plant. The company paid
$ 60,000,000 five years ago to acquire the plant. Now top management is considering an opportunity
to sell it. The president wants to know whether the plant has met original expectations before he
decides its fate. The company’s discount rate for present value computations is 9%

Expected and actual cash flows follow.

Year 1 Year 2 Year 3 Year 4 Year 5

Expected $ 13,200,000 $ 19,680,000 $ 18,240,000 $ 19,920,000 $ 16,800,000
Actual $ 10,800,000 $ 12,240,000 $ 19,680,000 $ 15,600,000 $ 14,400,000

REQUIRED
1. Compute the net present value of the expected cash flows as of the beginning of the investment

2. Compute the net present value of the actual cash flows as of the beginning of the investment.

3. What do you conclude from this postaudit?

Set up a mini table of present value factors to make your calculations easier.

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