117. A company has just received a special, one-time order for 1,000 units. Producing the order
will have no effect on the production and sales of other units. The buyer’s name will be stamped
on each unit, at a total cost of $2,000. Normal cost data, excluding stamping, follows:
Direct materials…………………………… $ 10 per unit
Direct labor……………………………….. 16 per unit
Variable overhead………………………… 4 per unit
Allocated fixed overhead…………………. 12 per unit
Allocated fixed selling expense…………… 8 per unit
What selling price per unit will this company require to earn $3,000 on the order?
118. Jorgensen Department Store has three departments: Clothing, Toys, and Jewelry. The most
recent income statement, showing the total operating profit and departmental results is shown
below:
Total Clothing Toys Hardware
Sales $2,100,000 $1,000,000 $600,000
$500,000
Cost of goods sold (1,260,000) (500,000)
(400,000) (360,000)
Gross profit 840,000 500,000 200,000
140,000
Direct expenses (420,000) (200,000) (100,000)
(120,000)
Allocated expenses (350,000) (100,000) (75,000)
(175,000)
Net income (loss) $ 70,000 $ 200,000 $ 25,000
$(155,000)
Based on this income statement, management is planning on eliminating the hardware
department, as it is generating a net loss. If the hardware department is eliminated, the toy
department will expand to fill the space, but sales will not change in total, nor will direct
expenses. None of the allocated expenses will be avoided, but they will be reallocated. Clothing
will be allocated $200,000 of these expenses, and Toys will be allocated $150,000 of these
expenses. Prepare a new income statement for Jorgensen Department Store, showing the results
if the Hardware Department is eliminated. Should the Hardware Department be eliminated?
119. Peters, Inc. sells a single product and reports the following results from sales of 100,000
units:
Sales ($45 unit) …………..…………….… $4,500,000
Less costs and expenses:
Direct materials ($16/unit)………….… $1,600,000
Direct labor ($9/unit)…………….….… 900,000
Variable overhead ($3/unit)…….…….. 300,000
Fixed overhead ($8.10/unit)……………. 810,000
Variable administrative ($4.50/unit)…. 450,000
Fixed administrative ($4/unit)………… 400,000
Total costs and expenses……………… $(4,460,000)
Operating income………………………… $ 40,000
A foreign company wants to purchase 15,000 units. However, they are willing to pay only $36
per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Peters
will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to
pay for equipment rentals and insurance. No additional administrative costs (variable or fixed)
will be incurred in association with this special order.
Required:
(1) Should Peters accept the order if it does not affect regular sales? Explain.
(2) Assume that Peters can accept the special order only by giving up 5,000 units of its normal
sales. Should Peters accept the special order under these circumstances?
120. A company is planning to introduce a new portable TV to its existing product line.
Management must decide whether to make the TV case or buy it from an outside supplier. The
lowest outside price is $100. If the case is produced internally, the company will have to
purchase new equipment that will yield annual depreciation of $130,000. The company will also
need to rent a new production facility at $200,000 a year. At 20,000 cases per year, a preliminary
analysis of production costs shows the following:
Per Case
Direct materials ………………………………………………… $ 40.00
Direct labor……………………………………………………… 32.00
Variable overhead ……………………………………………. 10.00
Equipment depreciation ……………………………………. 6.50
Building rental ……………………………………………….. 10.00
Allocated fixed overhead ………………………………….. 7.50
Total cost ………………………………………………………… $106.00
Required:
(1) Determine whether the company should make the cases or buy them from the outside
supplier.
(2) What decision should be made if only 15,000 cases are needed?
(3) What other factors, besides cost, should the company consider?
121. A company must decide between scrapping or rebuilding units that do not pass inspection.
The company has 15,000 such units that cost $6 per unit to manufacture. The units were built to
satisfy a special order, which must still be satisfied if the defective units are scrapped. The units
can be sold as scrap for $2.50 each or they can be reworked for $4.50 each and sold for the full
price of $9.00 each. If the units are sold as scrap, the company will have to build 15,000
replacement units and sell them at the full price.
Required:
(1) What is the net return from selling the units as scrap?
(2) What is the net return from reworking and selling the units?
(3) Should the company sell the units as scrap or rework them?
122. Bower Co. is reviewing a capital investment of $50,000. This project’s projected cash flows
over a five-year period are estimated at $20,000 each year.
Required:
(a) Calculate the payback period.
(b) Calculate the break-even time. Assume a 12% hurdle rate and use the table below:
Present Value
Periods of 1 at 12%
1…… 0.8929
2…… 0.7972
3…… 0.7118
4…… 0.6355
5…… 0.5674
(c) Using the results in (a) and (b), make a recommendation for the project.
123. A company is considering purchasing a machine for $75,000. The machine is expected to
generate a net after-tax income of $11,250 per year. Depreciation expense would be $7,500.
What is the payback period for this machine?
124. A company is trying to decide which of two new product lines to introduce in the coming
year. The predicted revenue and cost data for each product line follows:
Product A Product B
Sales $80,000 $96,000
Direct materials 3,000 6,000
Direct labor 30,000 45,000
Other cash operating expenses 7,500 9,000
New equipment costs 75,000 100,000
Estimated useful life (no salvage) 5 years 5 years
The company has a 30% tax rate, it uses the straight-line depreciation method, and it predicts that
cash flows will be spread evenly throughout each year. Calculate each product’s payback period.
If the company requires a payback period of three years or less, which, if either, product should
be chosen?
125. A company is considering a proposal to invest $30,000 in a project that would provide the
following net cash flows:
Year 1 ………………………………………… $ 6,500
Year 2 …………………………………………. 10,700
Year 3 …………………………………………. 15,000
Year 4 …………………………………………. 12,800
Compute the project’s payback period.
126. A company produces two boat models, Montauk and Orient. Both products are being
considered for major investment projects next year. Relevant data follow:
Montauk Orient
New investment ……………….. $424,000 $380,000
Expected 3-year net cash flows:
Year 1 …………………………………… 150,000 130,000
Year 2 ………………………………….. 160,000 130,000
Year 3 …………………………………… 170,000 130,000
Required:
Use the payback period to evaluate these two investment projects.
127. A company is evaluating the purchase of a machine for $900,000 with a six-year useful life
and no salvage value. The company uses straight-line depreciation and it assumes that the annual
net cash flow from using the machine will be received uniformly throughout each year. In
calculating the accounting rate of return, what is the company’s average investment?
25–72
128. A company purchases a machine for $1,000,000. The machine has an expected life of 9
years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes
of 30% to be received uniformly throughout each year. What is the accounting rate of return?
129. A company can buy a machine that is expected to have a three-year life and a $30,000
salvage value. The machine will cost $1,800,000 and is expected to produce a $200,000 after-tax
net income to be received at the end of each year. If a table of present values of 1 at 12% shows
values of 0.8929 for one year, 0.7972 for two years, and 0.7118 for three years, what is the net
present value of the cash flows from the investment, discounted at 12%?
130. A company is considering two projects, Project A and Project B. The following information
is available for each project:
Project A Project B
Investment …………………………………… $2,000,000 $500,000
Net present value of cash flows …… $800,000 $300,000