1. (20 points) Management of the Krausse Savings and Loan Association is in the process of evaluating the purchase of a new check sorting machine. The model under review will cost $70,000 and will require installation costs of $10,000. Similar machines have a ten-year life, and management has estimated that this sorter will have a residual value of $10,000 at the end of its life. Annual cost savings to be generated by the sorter will average $14,000 over the ten-year period. Management's minimum desired rate of return is 12 percent.
Present value multipliers:
8 Percent 12 Percent 14 Percent
Present value of $1 at end of ten years .463 .322 .270
Present value of $1 received in each of the next ten years 6.710 5.650 5.216
a. Using before-tax information and the net present value method to evaluate this capital investment, determine whether the company should purchase the check sorting machine. Support your answer.
b. If management had decided on a minimum desired before-tax rate of return of 14 percent, should the check sorting machine be purchased? Show all computations to support your answer.
2. (30 points) Lispell Co. manufactures in-line skates that sell for $128 a pair. The company is currently operating at capacity, 2,000 pairs. A special order from a foreign distributor for 400 pairs of skates at $120 a pair has just been received. In order to accept this order, Lispell Co. would have to give up 400 pairs of its regular sales. However, there would be no sales commission incurred on the order. Shown below are the current costs of operation:
Direct materials $48
Direct labor 12
Variable overhead 4
Fixed overhead 5 ($10,000 2,000 pairs)
Variable selling and administrative 8 (sales commissions)
Fixed selling and administrative 4 ($8,000 2,000 pairs)
a. What costs are relevant to this decision?
b. Provide an incremental analysis to be used in determining whether or not the order should be
c. Are there any qualitative considerations that need to be addressed? Explain.
3. (30 points)Projected cost information for a new product to be produced by Kolier Manufacturing is as follows:
Expected variable unit costs:
Direct materials $10.90
Direct labor 7.18
Selling costs 4.00
Annual fixed costs:
Taxes on property used $ 8,870
Depreciation on building and equipment 18,920
The product is to be sold for $49.
a. Compute the number of units that must be sold to earn a profit of $80,000.
b. Compute the number of units that must be sold if advertising costs rise by $12,000 and a targeted
profit of $120,000 is to be obtained.
c. Use the original information and sales of 10,000 units to compute the new selling price that the company must use to obtain a profit of $200,000.
d. The most in annual sales that could be projected is 20,000 units. Determine the added amount that
e. could be spent on fixed advertising costs if the highest possible selling price that management believes can be charged is $50 and if there is a targeted profit of $225,000.
5. ( 20 points)James International is in the construction business. In 2010, it is expected that 30 percent of a month's sales will be received in cash, with the balance being received the following month. Of the purchases, 50 percent are paid the following month, 40 percent are paid in two months, and the remaining 10 percent are paid during the month of purchase.
The sales force receives $1,500 a month base pay plus a 4 percent commission. Labor expenses are expected to be $4,000 a month. Other operating expenses are expected to run about $4,500 a month, including $500 for depreciation. The ending cash balance for 2009 was $18,000.
November $100,000 $60,000
December 150,000 70,000
January 50,000 80,000
February 80,000 60,000
March 60,000 70,000
a. Prepare a cash budget and determine the projected ending cash balances for the first three months of 2010.
b. Determine the months that the company would either borrow or invest cash.
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