Second Chance Exam 2

Second Chance Exam 2 (Summer Session) X Company produces and sells 66,700 units of its regular product each year for $13.00 each. The following cost information relates to this production: Direct materials Direct labor [all variabie] Variable overhead Fixed overhead Variable selling Fixed selling Total Per-Unit $128,064 $1.92 89,378 1.34 196,765 2.95 152,743 2.29 77,372 1.16 87,377 1.31 1. A company has offered to buy 4,840 units for $11.79 each. Because the special order product is slightly different than the regular product, X Company will have to rent some equipment at a cost of $15,000. Profit on the special order is $6,393 WORK Special Order sales: 4840 * 11.79 = 57063.6 four per-unit costs) DH +D4-VOH+VS=128064+89378+196765+77372=491579 4840 X 17 = 35, 670.8 35670.8 + 15000 =50670.80(NEVT) 57063.6 - 50670.8 = 6392.8 2. Assume that X Company accepts the special order, it will have to lower the selling price on each of its regular units by $0.57. Independent of #1, the effect of lowering the selling. price will be to decrease company profits by $38,019 WORK Revenue: 56700 * 13 =\$67100 Find new selling price: 13.00-57-12.43 3. The following information is for X Company's two products A and B: Product A Product B Sales $89,000 $93,000 Total contribution margin 37,380 37.200 Fixed casts: Avoidable 24,000 23,500 Unavoidable 7,000 26,000 Profit $6,380 $ 12,300 The company is considering dropping Product B because of the $12,300 loss. If X Company drops Product B, it will use the freed up resources to increase sales of Product A by $18,000. If X Company drops Product B and increases sales of A. firm profits will change by $-6,140 WORK Avoidable FC-TCM of Product B: 23500-37200--13700 TCM/Sales of Product A: 37380/89000-.42 42 x 18000 7560 7560+(-13700)--6140 4. X Company is considering replacing one of its machines in order to save operating costs. Operating costs with the current machine are $65,000 per year; operating costs with the new machine are expected to be $41,000 per year. The new machine will cost $75,000 and will last for 6 years, at which time it can be sold for $2,500. The current machine will also last for 6 more years but will have zero salvage value. Its current disposal value is $8,000. Assuming a discount rate of 7%, what is the difference between the net present value if X Company replaces the current machine and the net present value if it keeps the current machine? 549,073 WORK Current costs: 65000; 6 yrs, 7% Multiply CC by PVA (2 table) value: 65000 x 4.767 - 309855 New costs: 41000, 6 yrs, 7% Multiply NC by PVA (2nd table) value: 41000 x 4.767 - 195447 Multiply disposal value of new machine by PV (table 1) rate: 2500x.666=1665 195447-1665-193782 193782-8000-185782 185782+75000 - 260782 309855 260/82-49073 5. X Company is considering producing and selling a new product with a useful life of 8 years. Production of the product will require the purchase of new equipment costing. $90,000. At the end of 8 years, the equipment can be sold for $11,000, Annual cash inflows from this product will be $90,000; annual cash outflows will be $60,000. What is the payback period for this investment (in years)? 3 WORK (-90000)+(90000-60000)×0 30000x 90000 Solve for x: x=3 yrs. 5. X Company is considering buying a new machine that will cost $150,000 and generate annual cash inflows of $35,610 for 5 years. The internal rate of return for this machine is approximately 6% WORK 150000/35610-4.212 2 ACC Exam 2 Study Guide Drop Product or Department Example: A company has three products: Product A, Product B and Product C. Income statements of the three product lines for the latest month are given below: Product Line A B C Sales $-467,000 $314,000 $598,000 Variable Costs 241,000 169,000 321,000 Contribution Margin $225,000 $145.000 $277,000 Direct Fixed Costs 91,000 86,000 112,000 Allocated Fixed Costs 93,000 62,000 120,000 Net Income $42,000 - $3,000 $45.000 Use the incremental approach to determine if Product B should be dropped. Solution By dropping Product B, the company will loose the sale revenue from the product line. The company will also obtain gains in the form of avoided costs. But it can avoid only the variable costs and direct fixed costs of product B and not the allocated fixed costs. Hence: If Product B is Dropped Gains: Variable Costs Avoided $169,000 Direct Fixed Costs Avoided $86,000 $255,000 Less: Sales Revenue Lost $314,000 Decrease in Net Income of the $59,000 Company Capital Budgeting Explained and Examples: The major component of (Net Present Value) NPV is the present value of net cash inflows which may be even (i.e. equal cash inflows in different periods) or uneven (Le different cash flows in different periods). Where net cash inflows are even, present value can be easily calculated by using the present value formula of annuity. However if net cash inflows are uneven we need to calculate the