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E16.17.
Product A
Product B
Contribution margin per unit…………………………..
$ 300
$ 400
E16.18.
Product X
Product Y
Product Z
Selling price………………………………...
$100
$ 80
$ 25
Variable costs………………………………
70
40
20
Contribution margin per unit……………….
$ 30
$ 40
$ 5
To assign the 1,200 available machine hours to achieve the most profitable mix of
products, start by producing the product with the highest contribution per machine
hour, then the next highest, and so on.
E16.19.
a.
0 1 2 3 4 5
$65,000
0.5674 (Table 6-4, 5 period row,
12% column)
$36,881
E16.20.
a.
0 8
Dividend = $10 per year Market price = $92
5.3349 (Table 6-5, 0.4665 (Table 6-4,
8 period row, 8 period row,
42.92
$96.27
b.
0 5
Interest = $ 70 per year Maturity value = $1,000
$ 390.77 6% column) 6% column)
c.
0 6
$106.38
???
E16.21.
a.
If the investment is too high, the net present value will be too low.
E16.22.
a.
ROI of 9%, because that rate of return reflects the composite expectation of all
E16.23.
a.
0 1 2 3 4 5 6 7 8
5.3349 (Table 6-5 0.4665 (Table 6-4
$(85,000) 8 period row, 8 period row,
E16.24.
a.
Investment in machinery and equipment………………………………
$(6,700,000)
Investment in working capital …………………………………………
(1,200,000)
Annual cash inflows, by year: …………………………………………
2016 = $2,000,000 * 0.9259 …………………………………………
1,851,800
b.
Because the net present value is positive, the internal rate of return will be higher than
E16.24.
(continued)
c.
Estimate:
Effect if estimate is less than actual:
E16.25.
a.
The net present value is positive $2,220 (present value of inflows of $26,220 less the
E16.26.
a.
The present value of an annuity = (Annuity amount * present value factor). If the
present value of the annuity equals the investment, the IRR will equal the discount rate.
b.
Annual net cash flow required…………………………………………
$600,000
Annual direct cash costs (50%) ……………………………………..…
300,000
Annual total revenues required…………………………………………
$900,000
P16.27.
a.
Relevant costs for the special sales order include the following:
Per Gallon
Raw materials.………………………….……………
$3.00
Direct labor ……………………………….…………
1.50
b.
Per Gallon
Sales price ……………………………………………
$8.00
Less: relevant costs ………………..…………………
7.00
P16.27.
(continued)
c.
Since Delmar is now operating at full capacity, relevant costs for the special sales order
would include any forgone contribution margin (opportunity cost) on regular sales
given up by Delmar to fulfill the special sales order:
Per Gallon
Current sales …………………………………………
$10.00
Less variable costs……………………………………
Raw materials ………………………………………
3.00
d.
When Delmar is operating under conditions of idle capacity, the only relevant costs
incurred in producing the gallons of root beer needed to fulfill the special order are the
incremental variable costs - Delmar would not be giving up any of their current sales.
P16.28.
a.
Step 1: Calculate total amount of fixed costs before the addition of plant capacity:
Current total cost per unit ……………………………………
$ 76
Less: Variable cost per unit ……………………….…………
60
Fixed cost per unit……………………………………………
$ 16
P16.28.
(continued)
a.
Step 3: Calculate cost per unit after the addition of plant capacity:
Variable cost per unit ……………………………..…………
$ 60
b.
Relevant costs associated with the special order from LawnPro.com would include
variable manufacturing costs per motor ($60) and the costs associated with storing
the motors in the PMI warehouse to await shipment. Fixed costs are not relevant
c.
Yes, assuming no other option currently exists to provide more than $15 contribution
margin per motor or that the costs associated with storing each motor in the PMI
warehouse will not exceed $15 per motor.
d.
No, because the full absorption cost per unit will indicate a loss on the sale.
Selling price per unit…………………………………………
$ 75
e.
Key qualitative factors to consider would include whether PMI's current customers
would expect the same $60 price if they became aware of the sale, whether PMI's
current customers would stop doing business with them if they became aware of the
P16.28.
(continued)
f.
PMI will no longer have enough idle capacity to produce the motors needed to fulfill
the LawnPro.com special order without sacrificing sales to existing customers at the
normal selling price. Therefore, relevant costs, in addition to the relevant costs
described in part b, will now include an opportunity cost equal to the amount of
contribution foregone if PMI were to accept the special order:
Current sales in units…………………………………………
75,000
Expected increase in sales (75,000 * 20%) ………….………
15,000
Sales to LawnPro.com in units ………………………………
20,000
Idle capacity in units…………………………………………
10,000
Lost sales to existing customers in units ….…………………
10,000
Contribution margin per unit…………………………………
$ 30
Opportunity cost of lost sales …………......…………………
$ 300,000
g.
Calculation of operating income without the special order:
Sales (90,000 * $100) ……………………………………
$9,000,000
Less variable costs:
P16.28.
(continued)
g.
Calculation of operating income with the special order:
Sales (80,000 * $100)…………………………………….
$8,000,000
(20,000 * $75)……………………………………...
1,500,000
$9,500,000
Less variable costs:
Manufacturing costs (100,000 * $60)…………………..
$6,000,000
P16.29.
a.
Sales……………………………………………………...
$ 120,000
Variable operating expenses:
Cost of sales (food, beverages, and snack items @ 40%)
48,000
Food service items (spoons, napkins, etc.).……………..
1,800
Wages for part time employees..………………………..
24,000
73,800
Contribution Margin.……………………………………..
$ 46,200
P16.29.
(continued)
b.
Note – relevant revenues and costs are those items that would be eliminated if the
segment is discontinued:
Relevant
Amount
Sales……………………………………………………...
120,000
Cost of sales (food, beverages, and snack items @ 40%)..
48,000
Food service items (spoons, napkins, etc.)……………….
1,800
Wages for part time employees…………………………..
24,000
c.
Loss of contribution margin……………………………...
$ (46,200)
Less direct fixed costs:
Utilities (50% of total)…………………………………
1,800
d.
MMV should continue the convenience operation. The quantitative results of the
relevant cost analysis indicate that if MMV discontinued the convenience operation he
would see overall profits for this location decrease by $7,200 because he would lose
P16.30.
a.
Loss of contribution margin……………………………...
$ (600,000)
Less direct fixed expenses………………………………..
296,000
P16.30.
(continued)
b.
XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2016
Total
Company
Product A
Product B
Product C
Sales………………….….
$1,200,000
$ -
$480,000
$720,000
Variable expenses…….…
504,000
-
216,000
288,000
Contribution margin….…
$ 696,000
$ -
$264,000
$432,000
c.
XYZ COMPANY
Segmented Income Statement
For the Year Ended December 31, 2016
Total
Company
Product A
Product B
Product C
Sales…………………….
$2,400,000
$1,200,000
$480,000
$720,000
Variable expenses………
1,104,000
600,000
216,000
288,000
d.
As explained in Chapter 15, a key feature of this more appropriately designed
segmented income statement is that common fixed expenses have not been arbitrarily
allocated to the segments. This approach more clearly illustrates that when a segment
is covering its direct expenses, it should not be discontinued. By comparing the results
