Exercise 25-13 (20 minutes)
Using Excel, Project X1 (X2) has an internal rate of return of 20.34% (12.99%).
Project X1 Project X2
A B C D
1 Initial investment -80000 -120000
2Annual cash flows,
end of period
Both of these IRR’s are above the company’s required rate of return of 4%,
thus both projects should be accepted.
Exercise 25-14 (35 minutes)
1.
PROJECT C1
Net Cash
Flows
Present
Value of
1 at 12%
Present
Value of Net
Cash Flows
Year 1………………………………………………………….$ 12,000 0.8929 $ 10,715
Exercise 25-14 (continued)
PROJECT C2
Net Cash
Flows
Present
Value of
1 at 12%
Present
Value of Net
Cash Flows
Year 1………………………………………………………….$ 96,000 0.8929 $ 85,718
PROJECT C3
Net Cash
Flows
Present
Value of
1 at 12%
Present
Value of
Net Cash
Flows
Year 1………………………………………………………….$180,000 0.8929 $160,722
Analysis and Interpretation: Both Project C2 and C3 yield a positive net present value. Accordingly, both
C2 and C3 are acceptable investments. Project C1 has a negative net present value, so it should be
rejected.
2. INTERNAL RATE OF RETURN VS. NET PRESENT VALUE FOR C2
Project C2 will have an internal rate of return higher than 12%.
Exercise 25-15A (20 minutes)
Using Excel, Project A (B) has an internal rate of return of 26.96 (35.00%).
Project A Project B
A B C D
1 Initial investment -160000 -105000
2Annual cash flows,
end of period
Exercise 25-16 (10 minutes)
1. Sunk cost
Exercise 25-17 (25 minutes)
Normal Additional Combined
Volume Volume* Total
Sales…………………………………………. $2,250,000 $180,000 $2,430,000
Costs and expenses
Direct materials………………………… 300,000 30,0001330,000
The company should accept the offer as it increases income by $3,000.
* ADDITIONAL VOLUME COMPUTATIONS
Additional sales revenue = 15,000 units @ $12 = $180,000
Exercise 25-18 (20 minutes)
Part 1
Normal Additional Combined
Volume Volume Total
Sales…………………………………………. $8,000,000 $1,500,000 $9,500,000
Costs and expenses
Variable overhead…………………….. 800,000 200,000 1,000,000
Calculations:
Normal volume sales: 80,000 units x $100 per unit = $8,000,000
Additional revenue from new order: 20,000 units x $75 per unit = $1,500,000
Based on this analysis, Goshford should accept the new business.
Part 2
Other factors that Goshford should consider before deciding whether to
accept the new business are:
Will regular customers demand a reduction in their selling price if they
hear of the sale to the new customer?
Exercise 25-19 (20 minutes)
Make Buy
Variable costs (65,000 @ $1.95)……………………. $126,750 —-
RECOMMENDATION : Note that the allocated fixed costs of $62,000 are not
relevant to this managerial decision because they will continue whether the
Note: We should recognize that this decision depends on the alternative uses for the
Exercise 25-20 (20 minutes)
Make Buy
Variable costs (40,000 @ $1.95)……………………. $78,000 —-
RECOMMENDATION : Note that the allocated fixed costs of $58,500 are not
relevant to this managerial decision because they will continue whether the
Exercise 25-21 (15 minutes)
Scrap Rework
Sale of scrapped/reworked units………………….. $55,000 $187,000
Exercise 25-22 (15 minutes)
INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING
Revenue if processed further (7,000 x $25)……………………………………….$175,000
RECOMMENDATION : Varto should not process these units further, as they will
be $6,000 worse off if they do so. (Note that the $22 per unit manufacturing
cost is not relevant because it is a sunk cost.)
Exercise 25-23 (25 minutes)
Sell as is
Process
further
*Revenue from processed products
Units Price Total
ALTERNATE SOLUTION FORMAT
Net income (loss) from processed products
Revenue if processed further…………………………………………. $1,372,000
RECOMMENDATION : This analysis shows that the company will be better off
Exercise 25-24 (30 minutes)
Preliminary computations
Contribution margin per hour Product TLX Product MTV
Selling price per unit…………………………………………. $15.00 $ 9.50
Exercise 25-24 (continued)
1. FOR PRODUCT TLX
Maximum sales……………………………………………………………..4,700 units
FOR PRODUCT MTV
SALES MIX RECOMMENDATION : These results suggest the company
should manufacture as many units of Product TLX as it can produce
2. CONTRIBUTION MARGIN FROM THE RECOMMENDED SALES MIX
Un
its
Contribution
per Unit Total
Exercise 25-25 (30 minutes)
Instructor note: In all cases, the total unavoidable expenses of $107,800 remain the same
because they cannot be avoided by eliminating departments.
1. DEPARTMENTS WITH EXPECTED NET LOSSES ELIMINATED
Total M N O P T
Sales………………………………………………$119,000 $63,000 $ 0 $56,000 $ 0 $ 0
Expenses
Avoidable……………………………………..32,200 9,800 0 22,400 0 0