CHAPTER 26
SOLUTIONS TO PROBLEMS: SET B
PROBLEM 26–1B
(a)
Reject
Order
Accept
Order
Net Income
Increase
(Decrease)
Revenues (10,000 X $30)
Cost of goods sold
Selling and administrative
expenses
Net income
$0
0
0
$0
$300,000
240,000
25,000
$ 35,000
$ 300,000
( (240,000)
( (25,000)
$ 35,000
PROBLEM 26–2B
(a)
Make FIZBE
Buy FIZBE
Net Income
Increase
(Decrease)
Direct materials (5,000 X $4.75)
Direct labor (5,000 X $4.60)
Indirect labor (5,000 X $.45)
$23,750
23,000
2,250
$ 0
0
0
($ 23,750
( 23,000
( 2,250
(b) The company should continue to make FIZBE because net income
(c) The decision would be different. Because of the opportunity cost of
$6,000, net income will be $1,250 higher if FIZBE is purchased as shown
below:
Make FIZBE
Buy FIZBE
Net Income
Increase
(Decrease)
(d) Nonfinancial factors include: (1) the adverse effect on employees
if FIZBE is purchased, (2) how long the supplier will be able to satisfy
PROBLEM 26-3B
(a)
Cost
$210,000
Accumulated depreciation
(42,000*)
Book value
Sales proceeds
(58,000)
Loss on sale
$110,000
(b) (1)
Retain Old Equipment
Revenues ($360,000 X 4 yrs.)
$1,440,000
Less costs:
Variable costs
$200,000
Fixed costs
120,000
Selling & administrative
Depreciation
668,000
Net income
$ 772,000
(2)
Replace Old Equipment
Revenues
$1,440,000
Less costs:
Variable costs
$ 48,000
Fixed costs
20,000
Selling and administrative
Depreciation
Operating income
Less: Loss on old equipment
Net income
(c)
Retain Old
Equipment
Replace Old
Equipment
Net
Income
Increase
(Decrease)
Variable costs
$200,000
$ 48,000
$152,000
Fixed costs
20,000
100,000
Salvage on old
equipment
PROBLEM 26-3B (Continued)
(d) MEMO
TO: Gene Simmons
FROM: Student
SUBJECT: Relevant Data for Decision to Replace Old Equipment
When deciding whether or not to replace any old equipment, the analysis
should only include cost data relevant to the replacement decision. The
PROBLEM 26-4B
(a)
Division
III
Division
IV
Sales
$310,000
$170,000
(b)
(1)
Division III
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
Cost of goods sold
$ 76,000
81,000
$ 0
(40,500
$(76,000)
40,500
(2)
Division IV
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed expenses
Cost of goods sold
$(19,400)
(15,600)
$ 0
7,800
$19,400
7,800
PROBLEM 26-4B (Continued)
(c) PANDA COMPANY
CVP Income Statement
For the Quarter Ended March 31, 2017
Divisions
I
II
III
Total
Sales
Variable expenses
Cost of goods sold
Selling and
$510,000
210,000
$400,000
200,000
$310,000
189,000
$1,220,000
599,000
(1) Division’s fixed cost of goods sold plus 1/3 of Division IV’s unavoid-
able fixed cost of goods sold [$156,000 X (100% – 90%) X 50% =
$7,800]. Each division’s share is $2,600.
PROBLEM 26-5B
(a) Project Mary $140,000 ÷ [($10,000 + $28,000)] = 3.68 years
Project Winnie
Cash Flow
Cumulative Cash Flow
$47,500 ($12,500 + $35,000)
$47,000 ($12,000 + $35,000)
$ 47,500
$ 94,500
Project Sarah
Year
Cash Flow
Cumulative Cash Flow
1
2
$57,000 ($19,000 + $38,000)
$54,000 ($16,000 + $38,000)
$ 57,000
$111,000
PROBLEM 26-5B (Continued)
(b) Project Mary
Item
Amount
Years
PV Factor
Present
Value
Net annual cash flows
Less: Capital investment
Negative net present
value
$38,000
1–5
3.60478
$136,982
140,000
$ (3,018)
Project Winnie
Project Sarah
Year
Discount
Factor
Cash
Flow
PV
Cash
Flow
PV
Total
41,000
$224,500
Positive (negative)
net present value
1
2
.89286
.79719
$ 47,500
47,000
$ 42,411
37,468
$ 57,000
54,000
$ 50,893
43,048
(c) Project Mary = $10,000 ÷ [($140,000 + $0) ÷ 2] = 14.29%.
(d)
Project
Cash Payback
Net
Present Value
Annual
Rate of Return
Mary
2
1
1
PROBLEM 26-6B
(a)
(1)
Annual
Net Income
(2)
Annual
Cash Inflow
Sales
Expenses
Drivers’ salaries
Out-of-pocket expenses
*$144,000*
43,000
* 42,000***
$144,000
43,000
42,000
(b) 1. Cash payback period = $90,000 ÷ $59,000 = 1.53 years.
(c) Present value of annual cash inflows ($59,000 X 2.28323*) = $134,711
Capital investment = (90,000)
Net present value = $ 44,711
PROBLEM 26-7B
(a)
(1) Option A
Cash
Flows
X
11% Discount
Factor
=
Present
Value
Less: Capital investment
Present value of net annual cash inflows
Present value of cost to rebuild
Present value of salvage value
a$32,000a
( (53,000)
( 0)
X
X
X
4.23054
.73119
.53464
=
=
=
($135,377)
( (38,753)
( 0)
(3) The internal rate of return can be approximated by finding the discount
rate that results in a net present value of approximately zero. This is
accomplished with a 10% discount rate.
Cash
Flows
X
10% Discount
Factor
=
Present
Value
Present value of salvage value
Les: Capital investment
=
( 0)
(1) Option B
Cash
Flows
X
11% Discount
Factor
=
Present
Value
Present value of net annual cash inflows
b$36,000b
X
4.23054
=
$152,299
Present value of salvage value
Less: Capital investment
.53464
160,000
PROBLEM 26-7B (Continued)
(3) Internal rate of return on Option B is 12%, as calculated below:
Cash
Flows
X
12% Discount
Factor
=
Present
Value
Less: Capital investment
Present value of net annual cash inflows
Present value of cost to rebuild
b$36,000b
0
X
X
4.11141
.71178
=
=
$148,011
0