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1503
Exercise 25-11 (25 minutes)
a.
Project X1
Net Cash
Flows
Present
Value of
1 at 4%
Present
Value of
Net Cash
Flows
Year 1 ................................................................
$ 25,000
0.9615
$ 24,038
Net present value .................................................
$ 30,646
Project X2
Net Cash
Flows
Present
Value of
1 at 4%
Present
Value of
Net Cash
Flows
Year 1 ................................................................
$ 60,000
0.9615
$ 57,690
b.
1504
Exercise 25-12 (25 minutes)
a.
Project X1
Net Cash
Flows
Present
Value of
1 at 12%
Present
Value of
Net Cash
Flows
Year 1 ................................................................
$ 25,000
0.8929
$ 22,323
Project X2
Net Cash
Flows
Present
Value of
1 at 4%
Present
Value of
Net Cash
Flows
Year 1 ................................................................
$ 60,000
0.8929
$ 53,574
b.
1505
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
2
Annual cash flows,
end of period
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
1506
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
2. INTERNAL RATE OF RETURN VS. NET PRESENT VALUE FOR C2
Project C2 will have an internal rate of return higher than 12%.
1507
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
2
Annual cash flows,
end of period
Exercise 25-16 (10 minutes)
1. c
1508
Exercise 25-17 (25 minutes)
Normal
Additional
Combined
Volume
Volume*
Total
Sales ..................................................
$2,250,000
$180,000
$2,430,000
Costs and expenses
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
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?
• Will the new customer expect to receive the special price for future sales?
• If Goshford accepts the new business, it will be operating at full capacity.
Can they maintain that full capacity without any defects?
• What will happen to regular sales if they cannot meet current customers’
expectations because of this order?
1510
Exercise 25-19 (20 minutes)
Make
Buy
Variable costs (65,000 x $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
Exercise 25-20 (20 minutes)
Make
Buy
Variable costs (40,000 x $1.95) ...........................
$ 78,000
----
1511
Exercise 25-21 (15 minutes)
Scrap
Rework
Sale of scrapped/reworked units .......................
$44,000
$187,000
(1) The incremental income from selling as scrap is $44,000 (22,000 x $2.00).
Exercise 25-22 (15 minutes)
INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING
Revenue if processed further (7,000 x $25) ...............................................
$175,000
1512
Exercise 25-23 (25 minutes)
Sell as is
Process
further
Incremental revenue ............................................
$700,000
$1,372,000*
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 by
Exercise 25-24 (30 minutes)
Preliminary computations
Contribution margin per hour
Product TLX
Product MTV
Selling price per unit .................................................
$15.00
$ 9.50
1513
Exercise 25-24 (continued)
1. FOR PRODUCT TLX
Maximum sales ................................................................
4,700
units
Hours needed per unit ............................................................
0.50
2. CONTRIBUTION MARGIN FROM THE RECOMMENDED SALES MIX
Units
Contribution
per Unit
Total
1514
Exercise 25-25 (30 minutes)
1. DEPARTMENTS WITH EXPECTED NET LOSSES ELIMINATED
Total
M
N
O
P
T
Sales................................
$119,000
$63,000
$ 0
$56,000
$ 0
$ 0
Expenses
2. DEPARTMENTS WITH LESS SALES THAN AVOIDABLE EXPENSES ELIMINATED
Total
M
N
O
P
T
Sales................................
$161,000
$63,000
$ 0
$56,000
$42,000
$ 0
Expenses
1515
Exercise 25-26 (20 minutes)
ALTERNATIVE A: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine ................................................................
$(115,000)
ALTERNATIVE B: INCREASE OR (DECREASE) IN NET INCOME
Cost to buy new machine ................................................................
$(125,000)
Exercise 25-27 (15 minutes)
1. Recovery time computation
2. The advantage of break-even time is that it considers the time value of
3. When (1) the interest rate is very low, 1% for example, and (2) the
Exercise 25-28 (20 minutes)
1516
(1)
Total
Costs
Direct materials ($100 x 10,000) .........................
$ 1,000,000
(2) Markup percentage = Target profit/Total cost
(3)
Per Unit
Exercise 25-29 (20 minutes)
(1) Variable cost per unit
Variable Cost
Per Unit
Direct materials ....................................................
$ 70
(3) Selling price using variable cost method
Per Unit
Wild, Shaw, Chiappetta, FAP 23e Solutions Manual: Chapter 25
1518
PROBLEM SET A
Problem 25-1A (50 minutes)
Part 1
Part 2
Net
Net Cash
Income
Flow
Expected annual sales of new product ..................
$1,840,000
$1,840,000
Expected costs of new product
Part 3
1519
Problem 25-1A (Continued)
Part 4
Part 5
Present Value of Net Cash Flows
Present
Present
Net Cash
Value of
Value of Net
Flows
1 at 7%
Cash Flows
Year 1 ..........................................................
$168,900
0.9346
$ 157,853.94
1520
Problem 25-2A (55 minutes)
Part 1
PROJECT Y
Net income ..........................................................................................
$ 56,000
PROJECT Z
Part 2
PROJECT Y
1521
Problem 25-2A (Continued)
Part 3
PROJECT Y
PROJECT Z
1522
Problem 25-2A (Continued)
Part 4
PROJECT Y
Present Value of Net Cash Flows
Present
Present
Value of
Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
PROJECT Z
Present Value of Net Cash Flows
Present
Present
Value of
Value of
Net Cash
Flows
1 at 8%
Annuity
Net Cash
Flows
Part 5
Recommendation to management is to pursue Project Y. This is because
