Question 1 -
Ibrahim Asafi, the general manager of the Coronado Company, is contemplating replacing the existing assembly-line equipment in the Assembly Department with automated assembly equipment. Production output and revenues will be unaffected by the replacement decision. Transactions related to the capital investment are cash transactions that would occur today.
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Existing Assembly Equipment
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New Automated Assembly Equipment
|
|
Original cost
|
$1,100,000
|
$1,200,000
|
|
Useful life
|
11 years
|
5 years
|
|
Current age
|
6 years
|
0 years
|
|
Useful life remaining
|
5 years
|
5 years
|
|
Accumulated amortization
|
$600,000
|
$0
|
|
Book value
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$500,000
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Not acquired yet
|
|
Current disposal price (in cash)
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$200,000
|
Not acquired yet
|
|
Terminal disposal price (in cash, in 5 years)
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$0
|
$0
|
|
Average working capital needed
|
$120,000
|
$70,000
|
|
Current annual Assembly Department costs are as follow:
|
|
Direct materials
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$600,000
|
|
Direct manufacturing labour
|
400,000
|
|
Amortization
|
100,000
|
|
Maintenance and repairs
|
150,000
|
|
Other operating costs
|
50,000
|
|
Supervision (allocated as 10% of direct manufacturing labour costs)
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40,000
|
|
Allocated rent (based on space used)
|
40,000
|
|
Allocate corporate overhead (based on direct manufacturing labour costs)
|
120,000
|
|
Total
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$1,500,000
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Additional Information
a. Coronado uses straight-line amortization calculated on the difference between the initial equipment investment and the terminal disposal price of the equipment.
b. The new equipment will produce output more swiftly. Therefore, the average working capital investment, if the new equipment is purchased, will decrease.
c. Of the total direct materials costs, $120,000 is waste and scrap. The new equipment is expected to reduce scrap costs to $20,000
d. The new equipment is expected to reduce direct manufacturing labour costs by $150,000 each year.
e. Maintenance and repairs on the old equipment have been excessive. If the new equipment is acquired, maintenance and repair costs are expected to decrease to $100,000.
f. Coronado collects all supervision costs for all manufacturing departments in the plant into one cost pool. These costs are then allocated to departments on the basis of direct manufacturing labour costs. The Assembly Department has only one supervisor currently. The supervisor will continue in her current position if the new equipment is purchased.
g. The new equipment will reduce the space required for assembly operation by 20%, reducing allocated rent by $8,000. The Coronado Company has no alternative uses for this extra space.
h. Corporate overhead costs are allocated to each department at 30% of direct manufacturing labour costs of each department.
Coronado estimates a required rate of return of 12% for this project.
Required:
1. On the basis of the net present value method, should Asafi replace the existing assembly equipment?
2. Suppose that next year is the last year Coronado will offer the attractive bonus plan currently in place. Asafi's bonus hinges on short-run accrual accounting income for that year. Will Asafi be inclined to replace the Assembly Department equipment? Provide quantitative support for our answer.
Question 2 -
NSC is considering purchasing a new computer network for $72,000. It will require additional working capital of 8,000. Its anticipated seven-year life will generate additional client revenue of $31,000 annually with operating costs, excluding amortization, of $14,000. The straight-line amortization method would be used. At the end of seven years it will have a salvage value of $9,000 and return $8,000 in working capital. NSC's income tax rate is 40%.
Required:
A. If NSC has a required rate of return of 12%, what is the net present value of the proposed investment?
B. What is the point of indifference in terms of the incremental cash flow?
C. What is the payback period?
D. What is the accrual accounting rate of return?
E. Assume NSC will raise 50% of the proposed investment from the First Canadian Bank at 6%, 30% from retained earnings at 12%, and the rest of the funds from new shareholders at 14%. What is NSC's EVA for this investment?
F. Assume NSC's net income and the total assets are $60,000 and $320,000 respectively. What is NSC's residual income before the new investment and after the new investment?
Question 3 -
1. A firm produces and sells two products, Alpha and Zeta. The following information is available relating to setup costs (a part of factory overhead):
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Product Alpha
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Product Zeta
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|
Units produced
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250
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20,000
|
|
Batch size (units)
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10
|
500
|
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Number of setups
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25
|
40
|
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Direct labour hours per unit
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3
|
3
|
|
Total direct labour hours
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750
|
60,000
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Cost per setup - $ 1,000
Total setup cost - 65,000
Use of activity-based costing would allocate the following amounts of setup cost to each unit (rounded to nearest cent):
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Product Alpha
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Product Zeta
|
|
(A)
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$3.21
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$3.21
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|
(B)
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$100.00
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$2.00
|
|
(C)
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$130.00
|
$2.00
|
|
(D)
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$9.63
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$9.63
|
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(E)
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$40.00
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$2.50
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2. Baker Corporation operates two departments (G and H) and an office. All office expenses are allocated to the departments. The following information is available for August:
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Home Office Expenses
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Total
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Allocation Basis
|
|
Salaries
|
$30,000
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Number of employees
|
|
Amortization
|
20,000
|
Cost of goods sold
|
|
Advertising
|
40,000
|
Net sales
|
|
Item
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Dept. G
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Dept. H
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Total
|
|
Number of employees
|
1,000
|
1,500
|
2,500
|
|
Net sales
|
$325,000
|
$475,000
|
$800,000
|
|
Cost of goods sold
|
$ 75,000
|
$125,000
|
$200,000
|
The amount of home office expenses that should be allocated to Department H for August is:
(A) $35,750, (B) $42,375, (C) $54,250, (D) $90,000, (E) $600,000
Question 4 -
The following data apply to questions 1 and 2.
Zeta Company budgets on an annual basis. The following beginning and ending inventory levels (in units) are planned for the fiscal year of July 1, 2017, through June 30, 2018.
|
|
July 1, 2017
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June 30, 2018
|
|
Raw material
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40,000
|
10,000
|
|
Work in process
|
8,000
|
8,000
|
|
Finished goods
|
30,000
|
5,000
|
Three (3) units of raw material are needed to produce each unit of finished product.
If Zeta Company plans to sell 500,000 units during the 2017-2018 fiscal year, the number of units it would have to manufacture (production budget) during the year would be:
(A) 475,000 b. (B) 480,000 (C) 500,000 (D) 505,000
If 450,000 finished units were to be manufactured during the 2017-2018 fiscal year by Zeta Company, the units of raw material needed (purchase budget) would be:
(A) 1,320,000 (B) 1,330,000 (C) 1,350,000 (D) 1.360,000
The following data apply to questions.
Information pertaining to Omega Company's sales revenue forecast is presented in the following table:
|
February
|
March
|
April
|
|
Cash sales
|
$160,000
|
$150,000
|
$120,000
|
|
Credit sales
|
300,000
|
400,000
|
280,000
|
|
Total sales
|
$460,000
|
$550,000
|
$400,000
|
Omega's Management estimates that five percent of credit sales are not collectible. Of the credit sales that are collectible, 60 percent are collected in the month of sale and the remainder in the month following the sale. Cost of purchases of inventory each month are 70 percent of the next month's projected total sales. All purchases of inventory are on account; 25 percent are paid in the month of purchase, and the remainder is paid in the month following the purchase.
Omega's budgeted total cash receipts in April would be:
(A) $328,000. (B) $431,600. (C) $437,000. (D) $448,000.
Omega's budgeted total cash payments in March for inventory purchases would be:
(A) $280,000. (B) $306,250. (C) $358,750. (D) $385,000.
Question 5 -
Omega Industries uses ten units of Z each month in the production of scientific equipment. The unit cost to manufacturing one unit of Z is presented below.
Direct materials - $ 4,000
Materials handling (10% of direct materials cost) - 400
Direct manufacturing labour - 6,000
Indirect manufacturing (200% of direct labour) - 12,000
Total manufacturing cost - $22,400
Materials handling represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. This is a separate charge in addition to indirect manufacturing cost. Omega's annual indirect manufacturing cost budget is one-fourth variable and three-fourths fixed. Alpha Manufacturing, one of Omega's reliable vendors, has offered to supply Zs at a unit price of $17,000.
If Omega purchases units of Z from Alpha the capacity Omega would have used to manufacture these parts would be idle. Should Omega purchase the units of Z from Alpha, the unit cost of Z would
(A) increase by $3,600.
(B) increase by $5,300.
(C) decrease by $3,700.
(D) decrease by $5,600.
Assume that Omega Manufacturing does not wish to commit to a rental agreement to rent all idle capacity but could use idle capacity to manufacture another product that would contribute $60,000 per month. If Omega elects to manufacture units of Z in order to maintain quality control, Omega's opportunity cost is
(A) $(53,000).
(B) $(24,000).
(C) $36,000.
(D) $60,000.
Question 6 -
If income tax considerations are ignored, how is amortization expense used in the following capital budgeting techniques?
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IRR
|
NPV
|
Payback Period
|
AARR
|
|
(A) Excluded
|
Included
|
Included
|
Excluded
|
|
(B) Included
|
Excluded
|
Excluded
|
Included
|
|
(C) Excluded
|
Excluded
|
Excluded
|
Included
|
|
(D) Included
|
Included
|
Included
|
Excluded
|
Sasson, Inc. is considering a project that would have a ten-year life and would require a $2,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net income each year as follows:
|
Sales
|
$2,000,000
|
|
Less: Variable Expenses
|
$1,400,000
|
|
Contribution Margin
|
$ 600,000
|
|
Less: Fixed Expenses
|
$ 400,000
|
|
Net Income
|
$ 200,000
|
All of the above items, except for depreciation of $200,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company's required rate of return is 12%. (Ignore income taxes in this problem.)
Required:
(A) What is the project's net present value?
(B) What is the project's internal rate of return?
(C) What is the project's payback period?
(D) What is the project's simple rate of return?
Question 7 -
The Delta Manufacturing Company has two divisions in Ontario, Canada, Division One and Division Two. Currently, Division Two buys a part (10,000 units) from Division One for $16 per unit. Division One has purchased new equipment and wants to increase the price to Division Two to $18 per unit. The controller of Division Two claims that she cannot afford to go that high, as it will decrease the Division Two's profit to near zero. Division Two can buy the part from an outside supplier for $16 per unit. The incremental costs per unit that Delta incurs to produce each unit are Division One's variable costs of $12. Fixed costs per unit for Division One with the recent purchase of equipment are $5.
Division One has no alternative uses for its facilities. Should Division Two continue to buy from Division One or buy from the external supplier?
Company as a whole Division Two only
(A) Buy from Division One Buy from external supplier
(B) Buy from external supplier Buy from Division One
(C) Buy from Division One Buy from Division One
(D) Buy from external supplier Buy from external supplier
If Delta would prefer to negotiate a transfer price between the divisions, what range of transfer prices would be used?
(A) $12 - $18 (B) $12 - $17 (C) $12 - $16 (D) $16 - $18
If Division One could use its facilities for other manufacturing operations that would result in monthly cash operating savings of $45,000, what would be the advantage (disadvantage) to Delta?
(A) $20,000 (B) $(25,000) (C) $25,000 (D) $5,000
If Division One has no alternative uses for its facilities and the external supplier drops the price to $11 per unit, what should be done from the point of view of
Company as a whole Division Two only
(A) Buy from Division One Buy from external supplier
(B) Buy from external supplier Buy from Division One
(C) Buy from Division One Buy from Division One
(D) Buy from external supplier Buy from external supplier
Assume the Division Two is located in England rather than Ontario, Canada. The income tax rate used in England is 45%, whereas the effective income tax rate is 30% in Ontario. Which cost would be the best transfer price for the company as a whole (based upon original data)?
(A) Variable cost of $12
(B) Market price of $16
(C) Full cost of $17
(D) The price that best promotes goal congruence.
Wyn Co. has an investment of $3,000,000, an income-to-revenue ratio of 4%, and an ROI of 12%. Its revenues are:
(A) $360,000 (B) $9,000,000 (C) $1,440,000 (D) $12,000,000
Fusion Inc. has an RI of $180,000 and operating income of $500,000. If the required rate of return is 16%, the amount of investment is:
(A) $320,000 (B) $3,125,000 (C) 8,000,000 (D) $2,000,000
What is Fusion's ROI?
(A) 5% (B) 10% (C) 20% (D) None of the above.