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Exercise 11-7 Accounting rate of return LO P2
A machine costs $200,000 and is expected to yield an after-tax net income of $5,000 each year.
Management predicts this machine has a 8-year service life and a $40,000 salvage value, and it uses straight-line
depreciation. Compute this machine’s accounting rate of return.
 

   
Exercise 11-14 Computation and interpretation of net present value and internal rate of return LO P3, P4
Phoenix Company can invest in each of three cheese-making projects: C1, C2, and C3. Each project requires an initial
investment of $306,000 and would yield the following annual cash flows.
(PV of $1, FV of $1, PVA of $1, and FVA of $1)
(Use appropriate factor(s) from the tables provided.)
 

	C1				C2					C3
Year 1		$	38,000			$	122,000				$	206,000
Year 2			134,000				122,000					86,000
Year 3			194,000				122,000					74,000
Totals		$	366,000			$	366,000				$	366,000

 
(1) Assume that the company requires a 9% return from its investments. Using net present value, determine which projects, if any, should be acquired. (Negative net present values should be indicated with a minus sign. Round your answers to the nearest whole dollar.)
 

 

 


 
Exercise 11-5 Payback period computation; even cash flows LO P1
Compute the payback period for each of these two separate investments:
 
A new operating system for an existing machine is expected to cost $260,000 and have a useful life of six years.
The system yields an incremental after-tax income of $75,000 each year after deducting its straight-line depreciation.
The predicted salvage value of the system is $10,000.
A machine costs $180,000, has a $14,000 salvage value, is expected to last eleven years, and will generate an after-tax
income of $41,000 per year after straight-line depreciation.

   
Exercise 11-12 Net present value, profitability index LO P3
Following is information on two alternative investments being considered by Tiger Co.
The company requires a 6% return from its investments.
(PV of $1, FV of $1, PVA of $1, and FVA of $1)
(Use appropriate factor(s) from the tables provided.)
 

	Project X1					Project X2
Initial investment		$	(94,000	)			$	(148,000	)
Expected net cash flows in year:
1			32,000					70,500
2			42,500					60,500
3			67,500					50,500

 
a. Compute each project’s net present value. 
b. Compute each project’s profitability index. If the company can choose only one project, which should it choose?

 
Compute each project’s profitability index. If the company can choose only one project, which should it choose?
 

  Exercise 11-1 Payback period computation; uneven cash flows LO P1
Beyer Company is considering the purchase of an asset for $220,000. It is expected to produce the following net cash flows.
The cash flows occur evenly within each year.
 

	Year 1				Year 2				Year 3				Year 4				Year 5				Total
Net cash flows		$	63,000			$	34,000			$	63,000			$	150,000			$	27,000			$	337,000

 
Compute the payback period for this investment.
(Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)
 
 
Exercise 11-6 Net present value LO P3
A new operating system for an existing machine is expected to cost $720,000 and have a useful life of six years.
The system yields an incremental after-tax income of $155,000 each year after deducting its straight-line depreciation.
The predicted salvage value of the system is $21,800.
A machine costs $410,000, has a $37,100 salvage value, is expected to last eight years, and will generate an after-tax income of
$82,000 per year after straight-line depreciation.
Assume the company requires a 10% rate of return on its investments. Compute the net present value of each potential investment.
(PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
A new operating system for an existing machine is expected to cost $720,000 and have a useful life of six years.
The system yields an incremental after-tax income of $155,000 each year after deducting its straight-line depreciation.
The predicted salvage value of the system is $21,800. (Round your answers to the nearest whole dollar.)
Required A
 

 
Required B
A machine costs $410,000, has a $37,100 salvage value, is expected to last eight years, and will generate an after-tax income of
$82,000 per year after straight-line depreciation. (Round your answers to the nearest whole dollar.)
 

   
Exercise 11-4 Payback period; accelerated depreciation LO P1
A machine can be purchased for $239,000 and used for five years, yielding the following net incomes.
In projecting net incomes, double-declining depreciation is applied, using a five-year life and a zero salvage value.
 

	Year 1				Year 2				Year 3				Year 4				Year 5
Net income		$	10,500			$	50,000			$	73,000			$	40,000			$	120,000

 
Compute the machine’s payback period (ignore taxes). (Round payback period answer to 3 decimal places.)
 

   
Exercise 11-8 Payback period and accounting rate of return on investment LO P1, P2
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line.
The equipment is expected to cost $192,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis.
The company expects to sell 76,800 units of the equipment’s product each year.
The expected annual income related to this equipment follows.
 

Sales	$	120,000
Costs
Materials, labor, and overhead (except depreciation on new equipment)		64,000
Depreciation on new equipment		16,000
Selling and administrative expenses		12,000
Total costs and expenses		92,000
Pretax income		28,000
Income taxes (20%)		5,600
Net income	$	22,400

1. Compute the payback period.
 


2. Compute the accounting rate of return for this equipment.
 

   
Exercise 11-11 Net present value, profitability index LO P3
Following is information on two alternative investments being considered by Tiger Co.
The company requires a 7% return from its investments.
(PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
 

	Project X1					Project X2
Initial investment		$	(106,000	)			$	(172,000	)
Expected net cash flows in year:
1			38,000					79,500
2			48,500					69,500
3			73,500					59,500

 
a. Compute each project’s net present value.
b. Compute each project’s profitability index. If the company can choose only one project, which should it choose
Required A
Compute each project’s net present value. (Round your final answers to the nearest dollar.)
 

 
Required B
Compute each project’s profitability index. If the company can choose only one project, which should it choose?
 

   
Exercise 11-9 Computing net present value LO P3
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line.
The equipment is expected to cost $372,800 with a 6-year life and no salvage value. It will be depreciated on a straight-line basis.
The company expects to sell 149,120 units of the equipment’s product each year.
The expected annual income related to this equipment follows.
 

Sales	$	233,000
Costs
Materials, labor, and overhead (except depreciation on new equipment)		82,000
Depreciation on new equipment		62,133
Selling and administrative expenses		23,300
Total costs and expenses		167,433
Pretax income		65,567
Income taxes (30%)		19,670
Net income	$	45,897

 
If at least an 9% return on this investment must be earned, compute the net present value of this investment.
(PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
 

   
Exercise 11-16 Comparison of payback and BET LO P1, A1
Heels, a shoe manufacturer, is evaluating the costs and benefits of new equipment that would custom fit
each pair of athletic shoes.
The customer would have his or her foot scanned by digital computer equipment; this information would
be used to cut the raw materials to provide the customer a perfect fit. The new equipment costs $116,000
and is expected to generate an additional $44,000 in cash flows for 5 years. A bank will make a $116,000 loan
to the company at a 10% interest rate for this equipment’s purchase and compute the recovery
time for both the payback period and break-even time. (PV of $1, FV of $1, PVA of $1, and FVA of $1)
(Use appropriate factor(s) from the tables provided.)
 
Payback Period
 
Compute the recovery time for the break-even time. (Cumulative net cash outflows must be entered with a
minus sign. Round your Break-even time answer to 1 decimal place.)
 

 
Break even time
Compute the recovery time for the break-even time. (Cumulative net cash outflows must be entered with a minus sign.
Round your Break-even time answer to 1 decimal place.)
 

   
Required information
Problem 11-2A Analysis and computation of payback period, accounting rate of return, and net present value LO P1, P2, P3
[The following information applies to the questions displayed below.]
  
Most Company has an opportunity to invest in one of two new projects. Project Y requires a $320,000 investment for new
machinery with a four-year life and no salvage value. Project Z requires a $320,000 investment for new machinery with a
three-year life and no salvage value. The two projects yield the following predicted annual results. The company uses
straight-line depreciation, and cash flows occur evenly throughout each year. (PV of $1, FV of $1, PVA of $1, and FVA of $1) 
(Use appropriate factor(s) from the tables provided.)
 

	Project Y				Project Z
Sales		$	360,000			$	288,000
Expenses
Direct materials			50,400				36,000
Direct labor			72,000				43,200
Overhead including depreciation			129,600				129,600
Selling and administrative expenses			26,000				26,000
Total expenses			278,000				234,800
Pretax income			82,000				53,200
Income taxes (26%)			21,320				13,832
Net income		$	60,680			$	39,368

Problem 11-2A Part 1
Required:
1. Compute each project’s annual expected net cash flows.

Problem 11-2A Part 2
2. Determine each project’s payback period.
 

 
Problem 11-2A Part 3
3. Compute each project’s accounting rate of return.
 


   
Exercise 25-12 Scrap or rework LO A1

A company must decide between scrapping or reworking units that do not pass inspection. The company has 11,000 defective units that cost $5.60 per unit to manufacture. The units can be sold as is for $2.50 each, or they can be reworked for $3.50 each and then sold for the full price of $9.10 each. If the units are sold as is, the company will be able to build 11,000 units at a cost of $5.60 each, and sell them at the full price of $9.10 each.

   
 

	(1)	What is the incremental income from selling the units as scrap and reworking and selling the units?
	Sell as scrap	Rework
Sales of scrap units			$27,500
Sales of reworked units				$100,100
Cost to rework units				(38,500)
				(38,500)
Incremental income (loss)			$27,500	$23,100
The company should:			Sell as scrap

10.
value:
4.00 points
 
Exercise 25-13 Decision to accept additional business or not LO A1

Farrow Co. expects to sell 400,000 units of its product in the next period with the following results.

  

Sales (400,000 units)		$	6,000,000
Costs and expenses
Direct materials			800,000
Direct labor			1,600,000
Overhead			400,000
Selling expenses			600,000
Administrative expenses			1,028,000
Total costs and expenses			4,428,000
Net income		$	1,572,000

  

The company has an opportunity to sell 40,000 additional units at $13 per unit. The additional sales would not affect its current expected sales. Direct materials and labor costs per unit would be the same for the additional units as they are for the regular units. However, the additional volume would create the following incremental costs: (1) total overhead would increase by 16% and (2) administrative expenses would increase by $172,000.

  

Calculate the combined total net income if the company accepts the offer to sell additional units at the reduced price of $13 per unit.
	Normal Volume Additional Volume Combined Total Sales $6,000,000 $520,000 $6,520,000 Costs and expenses: Direct materials 800,000 80,000 880,000 Direct labor 1,600,000 160,000 1,760,000 Overhead 400,000 64,000 464,000 Selling expenses 600,000 600,000 Administrative expenses 1,028,000 172,000 1,200,000 Total costs and expenses 4,428,000 476,000 4,904,000 Incremental income (loss) from new business $1,572,000 $44,000 $1,616,000
Should the company accept or reject the offer?
The company should accept the offer The company should reject the offer

   
Exercise 25-14 Make or buy decision LO A1

Gilberto Company currently manufactures one of its crucial parts at a cost of $3.80 per unit. This cost is based on a normal production rate of 50,000 units per year. Variable costs are $2.00 per unit, fixed costs related to making this part are $50,000 per year, and allocated fixed costs are $40,000 per year. Allocated fixed costs are unavoidable whether the company makes or buys the part. Gilberto is considering buying the part from a supplier for a quoted price of $3.20 per unit guaranteed for a three-year period.

  

Calculate the total incremental cost of making 50,000 units
	Incremental costs to make Relevant Amount per Unit Relevant fixed costs Total relevant costs Variable cost per unit $100,000.00 $100,000 Allocated fixed costs $50,000 $50,000 Total incremental cost to make $150,000

Calculate the total incremental cost of buying 50,000 units.

	Incremental costs to buy Relevant Amount per Unit Relevant fixed costs Total relevant costs Purchase price per unit $160,000.00 $160,000 Total incremental cost to buy $160,000
Should the company continue to manufacture the part, or should it buy the part from the outside supplier?
Make Buy

   
Exercise 25-15 Sell or process decision LO A1

Cobe Company has already manufactured 24,000 units of Product A at a cost of $15 per unit. The 24,000 units can be sold at this stage for $490,000. Alternatively, the units can be further processed at a $240,000 total additional cost and be converted into 5,000 units of Product B and 11,600 units of Product C. Per unit selling price for Product B is $100 and for Product C is $58.

  
 

1.		Prepare an analysis that shows whether the 24,000 units of Product A should be processed further or not.
	Sell as is Process further Sales $490,000 $1,172,800 Relevant costs: Costs to process further (240,000) Total relevant costs Income (loss) $490,000 $932,800 Incremental net income (or loss) if processed further $442,800 The company should process further
Suresh Co. expects its five departments to yield the following income for next year.

 
                                                Dept. M                                               Dept. N                                Dept. O                                                Dept. P                             Dept. T
  Sales                  $              42,500                                  $16,100                                 $             34,500                                  $                35,500   $             14,200  
  Expenses                                                                                                                                                                                                                                                                                                                                                           
  Avoidable                         4,500                                    13,100                                                  13,700                                                 7,000                                19,900 
  Unavoidable                   19,000                                  6,600                                                    2,800                                                    16,000                   4,600   
                                ________________________________________                ________________________________________                             
 Total expenses                23,500                                   19,700                                                  16,500                                                  23,000                   24,500 
                                ________________________________________                ________________________________________                             
  Net income (loss)          $              19,000   $              (3,600    )              $             18,000                                  $              12,500   $                                (10,300 )

Recompute and prepare the departmental income statements (including a combined total column) for the company under each of the following separate scenarios.

 
 
Exercise 25-16 Part 1

(1)		Management does not eliminate any department.
	NO DEPARTMENTS ELIMINATED Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $142,800 $42,500 $16,100 $34,500 $35,500 $14,200 Expenses: Avoidable 58,200 4,500 13,100 13,700 7,000 19,900 Unavoidable 49,000 19,000 6,600 2,800 16,000 4,600 Total expenses 107,200 23,500 19,700 16,500 23,000 24,500 Net income (loss) $35,600 $19,000 $(3,600) $18,000 $12,500 $(10,300)

 
 
 
Exercise 25-16 Part 2

(2)		Management eliminates departments with expected net losses.
	DEPARTMENTS WITH EXPECTED NET LOSSES ELIMINATED Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $112,500 $42,500 $34,500 $35,500 Expenses: Avoidable 25,200 4,500 13,700 7,000 Unavoidable 49,000 19,000 6,600 2,800 16,000 4,600 Total expenses 74,200 23,500 6,600 16,500 23,000 4,600 Net income (loss) $38,300 $19,000 $(6,600) $18,000 $12,500 $(4,600)

 
   
Exercise 25-16 Part 3

(3)		Management eliminates departments with sales dollars that are less than avoidable expenses.
	DEPARTMENTS WITH LESS SALES THAN AVOIDABLE EXPENSES ELIMINATED Total Dept. M Dept. N Dept. O Dept. P Dept. T Sales $128,600 $42,500 $16,100 $34,500 $35,500 Expenses: Avoidable 38,300 4,500 13,100 13,700 7,000 Unavoidable 49,000 19,000 6,600 2,800 16,000 4,600 Total expenses 87,300 23,500 19,700 16,500 23,000 4,600 Net income (loss) $41,300 $19,000 $(3,600) $18,000 $12,500 $(4,600)

 16.
value:
3.00 points
 
Exercise 25-17 Sales mix determination and analysis LO A1

Colt Company owns a machine that can produce two specialized products. Production time for Product TLX is two units per hour and for Product MTV is five units per hour. The machine’s capacity is 2,500 hours per year. Both products are sold to a single customer who has agreed to buy all of the company’s output up to a maximum of 4,250 units of Product TLX and 2,365 units of Product MTV. Selling prices and variable costs per unit to produce the products follow.

  

	Product TLX					Product MTV
Selling price per unit		$	13.50				$	8.10
Variable costs per unit			4.05					4.86

  

Determine the company's most profitable sales mix and the contribution margin that results from that sales mix. (Round cost per unit answers to 2 decimal places.)
	Product TLX Product MTV Contribution margin per unit $9.45 $3.24 Units produced per hour 2 5 Contribution margin per production hour $18.90 $16.20 Product TLX Product MTV Total Maximum number of units to be sold 4,250 2,365 Hours required to produce maximum units 2,125 375 2,500 For most profitable sales mix Product TLX Product MTV Total Hours dedicated to the production of each product 2,125 375 2,500 Produce most profitable units until the market demand has been satisfied. Units produced for most profitable sales mix 4,250 1,875 Contribution margin per unit $9.45 $3.24 Total contribution margin $40,163 $6,075 $46,238

 

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