1523
Problem 25-3A (60 minutes)
Part 1
RESULTS USING STRAIGHT-LINE DEPRECIATION
(a)
Income
Before
Deprec.
(b)
Straight–
Line
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$66,000
$ 9,000
$57,000
$22,800
Year 3 ……………………….
Year 4 ……………………….
Year 6 ……………………….
Part 2
RESULTS USING MACRS DEPRECIATION
(a)
Income
Before
Deprec.
(b)
MACRS
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$66,000
$18,000
$48,000
$19,200
Year 2 ……………………….
Year 3 ……………………….
Year 5 ……………………….
Year 6 ……………………….
1524
Problem 25-3A (Continued)
Part 3
NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION
Present
Net Cash
Flows
Value of
1 at 10%
Year 1 ………………………………………………….
$ 43,200
0.9091
Year 2 ………………………………………………….
46,800
0.8264
Year 3 ………………………………………………….
46,800
0.7513
Year 4 ………………………………………………….
46,800
0.6830
Year 5 ………………………………………………….
46,800
0.6209
Year 6 ………………………………………………….
0.5645
$273,600
Part 4
NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION
Present
Net Cash
Flows
Value of
1 at 10%
Year 1 ………………………………………………….
$ 46,800
0.9091
$ 42,546
Year 2 ………………………………………………….
51,120
0.8264
Year 3 ………………………………………………….
46,512
0.7513
Year 4 ………………………………………………….
43,747
0.6830
Year 5 ………………………………………………….
43,747
0.6209
Year 6 ………………………………………………….
0.5645
$273,600
Part 5
Analysis: The net present value using MACRS depreciation is greater than the
1525
Problem 25-4A (45 minutes)
JONES PRODUCTS
COMPARATIVE INCOME STATEMENTS
(1)
(2)
(3)
Normal
New
Volume
Business
Combined
Sales ……………………………………………………
$2,400,000
$260,000
$2,660,000
Costs and expenses
Supporting computations
Normal direct materials cost ………………………………….
$576,000
1526
Problem 25-5A (55 minutes)
Part 1
Product G
Selling price per unit ……………………………………………..
$120
Part 2
Sales Mix Recommendation. To the extent allowed by production and
market constraints, the company should produce as much of Product G as
possible. With a single shift yielding 176 hours per month (8 x 22), the
company can produce these units of Product G:
1527
Problem 25-5A (Continued)
Part 3
Sales Mix Recommendation with Second Shift. If the second shift is added,
the maximum possible output of G will double:
However, this level of output exceeds the company’s market constraint of
600 units of G per month. This means the company should produce 600
units of Product G, and commit the remainder of the productive capacity to
Product B. This is computed as follows
Hours per unit ……………………………………………………….
Hours used for Product G …………………………………………..
Contribution Margin at This Sales Mix
Units
Contr./unit
Total
Less extra shift costs ……………………………………
Total contribution margin …………………………..
1528
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:
Hours per unit ……………………………………………………….
Hours used for Product G …………………………………………..
Contribution Margin at This Sales Mix
Units
Contr./unit
Total
Less extra shift costs …………………………………….
Less extra marketing costs …………………………..
Total contribution margin ………………………………
1529
Problem 25-6A (60 minutes)
Part 1
ELEGANT DECOR COMPANY
Analysis of Expenses under Elimination of Department 200
Total
Eliminated
Continuing
Expenses
Expenses
Expenses
Cost of goods sold ……………………………………….
$469,000
$207,000
$262,000
1530
Problem 25-6A (Continued)
Part 2
ELEGANT DECOR COMPANY
Forecasted Annual Income Statement
Under Plan to Eliminate Department 200
Sales ……………………………………………………………………………………………
$436,000
* Administrative salary reassignment
Total
Sales
Office
Salaries
Salaries
Salary
$52,000
$52,000
1531
Problem 25-6A (Continued)
Part 3
ELEGANT DECOR COMPANY
Reconciliation of Combined Income With Forecasted Income
ANALYSIS
1532
Problem 25-1B (50 minutes)
Part 2
Net
Income
Expected annual sales of new product …………………..
$1,150,000
Expected annual costs of new product
Net income + Depreciation = $35,000 + $70,000 = $105,000
1533
Problem 25-1B (Continued)
Part 3
Part 4
Part 5
Present Value of Net Cash Flows
Present
Present
Value of
Net Cash
Flows
Value of
1 at 7%
Net Cash
Flows
1534
Problem 25-2B (55 minutes)
Part 1
PROJECT A
PROJECT B
Part 2
PROJECT A
PROJECT B
1535
Problem 25-2B (Continued)
Part 3
PROJECT A
PROJECT B
1536
Problem 25-2B (Continued)
Part 4
PROJECT A
Present Value of Net Cash Flows
Present
Value of
Net Cash
Flows
1 at 8%
Annuity
PROJECT B
Present Value of Net Cash Flows
Present
Value of
Flows
Annuity
Net Cash
1 at 8%
Part 5
Recommendation to management is to pursue Project A. This is because
1537
Problem 25-3B (60 minutes)
Part 1
RESULTS USING STRAIGHT-LINE DEPRECIATION
(a)
Income
Before
Deprec.
(b)
Straight–
Line
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$12,000
$3,000
$ 9,000
$3,600
Year 3 ……………………….
Year 4 ……………………….
Year 5 ……………………….
Part 2
RESULTS USING MACRS DEPRECIATION
(a)
Income
Before
Deprec.
(b)
MACRS
Deprec.
(c)
Taxable
Income
(a) – (b)
(d)
40%
Income
Taxes
(e)
Net Cash
Flows
(a) – (d)
Year 1 ……………………….
$12,000
$6,000
$ 6,000
$2,400
Year 3 ……………………….
Year 4 ……………………….
Year 5 ……………………….
Year 6 ……………………….
10,272