Exam 3 - Practice Problems.pdf

# As a result the quantity of faulty products is

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As a result, the quantity of faulty products is expected to increase to 3.5%, but operating costs are not expected to change. Will Ch. Dolo sell the machine? Yes No (Circle the correct answer above and provide necessary computations below)

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Exam 3 – Practice Problems Page 65 SOLUTION: 1. (6 points) For 2012, Ch. Dolo expects Division 96 to earn an AI of \$5,200,000, to achieve an ROI of 10% and to limit the level of faulty products at 2.8%. Calculate Ch. Dolo’s expected total compensation for 2012. Ch. Dolo’s expected total compensation for 2012 \$ 109,050 Base Salary: 100,000 AI: 40% x {[0.1 + (5.2 - 5.0)/(6.0 - 5.0) × (0.15 - 0.10) ]× 100,000 = .11 × 100,000} = 4,400 ROI: 30% x 10,000 = 3,000 Faulty products: 30% x {5,000 + 0.2 × 5,000} = 1,800 109,200
Exam 3 – Practice Problems Page 66 2. (6 points) Before the products of Division 96 are packaged, an automated process quickly checks the quality of the products (using “goal-line technology”). At the beginning of 2012, Ch. Dolo is trying to decide whether to sell the machine at it’s current book-value of \$2,000,000. If the machine is sold, it will not be replaced. As a result, the quantity of faulty products is expected to increase to 3.5%, but operating costs are not expected to change. Should Ch. Dolo sell the machine? Yes (Circle the correct answer above and provide necessary computations below) Asset-base with the machine: ROI ' AI/Asset-base Asset-base ' AI/ROI ' \$5,200,000/0.1 ' \$52,000,000 Asset-base after the machine is sold = \$52,000,000 - 2,000,000 ' \$50,000,000 New ROI = 5,200,000/50,000,000 ' 10.4% New Bonus: AI: 40% x {[0.1 + (5.2 - 5.0)/(6.0 - 5.0) × (0.15 - 0.10) ]× 100,000 = .11 × 100,000} = 4,400 ROI: 30% x {10,000 + (0.104 -0.1)/(0.11-0.1) × 5,000} = 3,600 Faulty products: 30% x {2,000 + 0.5 × 3,000} = 1,050 9,050 SINCE 9,050 > 9,050 CH. DOLO SHOULD NOT SELL THE MACHINE No

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Exam 3 – Practice Problems Page 67 PROBLEM: Sunbeam Products is bringing out a new product. The product requires a component not used by the current line of products. The purchasing manager has gotten a bid of \$30 per unit for the new component from Tiger Electronics for any number of components that the firm would need. Sunbeam Products’ production manager believes the firm could make the component internally. However, additional space and machinery would be required if the firm were to make the components. The firm currently leases, for \$28,000 per year, space that could be used to make the components. Unfortunately, the space is now being used to store vital materials, and thus the firm would have to lease additional space in an adjacent building to store the materials. That space, which is suitable for storage but not for making the components, could be rented for \$42,000 per year. The equipment needed to produce the components could be rented for \$35,000 per year. In addition to the space and equipment costs discussed above, the treasurer of the firm has also determined that the following unit costs will be incurred to produce the expected demand of 14,000 units per year: Materials \$15.00 Direct Labor 10.00 Other Overhead 7.00 As noted, the figures above relate to the production of 14,000 units per year. In addition, the treasurer has conducted sensitivity analysis and determined that Other Overhead costs will be: \$86,000 at a volume level of 10,000 units, \$101,000 at a volume level of 15,000 units, and \$116,000 at a volume level of 20,000 units.
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