Chapter 25 – Capital Budgeting and Managerial Decisions
Problem 25-5A (Continued)
Part 4
Sales Mix Recommendation. By incurring additional marketing cost, the
company can relax the market constraint for sales of Product G up to the
point where 700 units can be sold. This means the company can produce
700 units of Product G, and commit the remainder of its productive
capacity, if any, to Product B. These computations are
The output of Product B with 72 production hours is
Contribution Margin at This Sales Mix
Units Contr./unit Total
From G……………………………………………………….… 700 $80 $56,000
From B…………………………………………………….…... 72 70 5,040
warrant the marketing efforts.
Problem 25-6A (60 minutes)
Part 1
ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
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Chapter 25 – Capital Budgeting and Managerial Decisions
Total Eliminated Continuing
Expenses Expenses Expenses
Cost of goods sold………………………………..….…..$469,000 $207,000 $262,000
Direct expenses
Advertising…………………………………………….…...29,000 12,000 17,000
*Computation notes. Closing Department 200 will eliminate 70% of its insurance
expense and 25% of its miscellaneous office expense. Sales salaries will be
reduced by the amounts paid to the two clerks who will not be replaced. The
office salary will not be eliminated, but it will be reclassified so that one-half will
be reported as sales salary and one-half as office salary.
Problem 25-6A (Continued)
Part 2
ELEGANT DECOR COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department 200
Sales…………………………………………………………………………………….….….$436,000
Cost of goods sold………………………………………………………………………. 262,000
Education.
Chapter 25 – Capital Budgeting and Managerial Decisions
Store supplies used……………………………………………………………….….. 4,000
Depreciation of store equipment………………………………………………… 8,300
Sales salaries……………………………………………………………….….…..…... 67,600*
* Administrative salary reassignment
Total Sales Office
Salaries Salaries Salary
Salesclerks……………………………………………………….….…..$52,000 $52,000
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Chapter 25 – Capital Budgeting and Managerial Decisions
Problem 25-6A (Continued)
Part 3
ELEGANT DECOR COMPANY
Reconciliation of Combined Income With Forecasted Income
Combined net income ………………………………………………..….….…..….$ 37,440
Less Dept. 200’s lost sales……………………………………..….…..….….…..(290,000)
ANALYSIS
Department 200’s avoidable expenses of $284,070 are $5,930 less than its
revenues of $290,000. This means the company’s annual net income would
be $5,930 less from eliminating Department 200. This analysis suggests
the department should probably not be eliminated.
PROBLEM SET B
Problem 25-1B (50 minutes)
Part 1
Annual straight-line depreciation = = $70,000
Part 2
Net Net Cash
Income Flow
Expected annual sales of new product………..….….…..$1,150,000 $1,150,000
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$300,000 – $20,000
4 years
Chapter 25 – Capital Budgeting and Managerial Decisions
Expected annual costs of new product
Direct materials………………………..….…..….….…..….…. 300,000 300,000
Direct labor……………………………..….…..….….….…..….. 420,000 420,000
Overhead excluding depr. on new asset…………….... 210,000 210,000
Depreciation on new asset………………………….….…... 70,000
*Alternatively, annual net cash flow can be computed as:
Part 4
Part 5
Present Value of Net Cash Flows
Present
Present Value of
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$105,000
Chapter 25 – Capital Budgeting and Managerial Decisions
Net Cash
Flows
Value of
1 at 7%
Net Cash
Flows
Year 1……………………………………………………… $105,000 0.9346 $ 98,133
Year 2……………………………………………………… 105,000 0.8734 91,707
Year 3……………………………………………………… 105,000 0.8163 85,712
Part 1
PROJECT A
Net income………………………………………………………………………………..…$39,900
Depreciation expense*…………………………………………………………………. 60,000
Net cash flow………………………………………………………………….…..….…...$99,900
*Annual depreciation = = $60,000
PROJECT B
Part 2
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$240,000 – $0
4 years
3 years
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Chapter 25 – Capital Budgeting and Managerial Decisions
Problem 25-2B (Continued)
Part 3
PROJECT A
Accounting rate of return = = 33.3%
PROJECT B
Accounting rate of return = = 21.6%
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$39,900
$120,000*
$25,900
$120,000*