Fixed costs
Cost of goods sold (1)
63,200 63,200 65,700 192,100
Selling and administrative (2)
49,000 34,000 24,000 107,000
P26-4A Solution to additional question
1. Assume that Division II’s cost of goods sold and selling and administrative expenses changed to $180,000
and $75,000 respectively. How do these changes impact the decision to drop or not drop Division II?
(a) Compute the contribution margin for Division I and II.
Division I Division II
Sales $250,000 $200,000
Variable costs
Cost of goods sold
140,000 162,000
(b) (1) Prepare an incremental analysis concerning the possible discontinuance of Division I
Net Income
Increase
Continue Eliminate (Decrease)
Contribution margin (above)
$80,000 $0 ($80,000)
Fixed costs
Cost of goods sold
$60,000 $30,000 $30,000
(b) (2) Prepare an incremental analysis concerning the possible discontinuance of Division II.
Net Income
Increase
Continue Eliminate (Decrease)
Contribution margin (above)
($7,000) $0 $7,000
Fixed costs
What course of action do you recommend for each division?
Division I
Division II
BRISLIN COMPANY
CVP Income Statement
Division I should be continued because it is producing positive contribution margin of $80,000.
Income from operations will decrease by $27,500 by discontinuing this division.
IIII IV Total
Sales
$250,000 $500,000 $450,000 $1,200,000
Variable costs
Cost of goods sold
140,000 240,000 187,500 567,500
Selling and administrative
30,000 30,000 30,000 90,000
(d)
Reconcile the total income from operations ($210,000) with the total income from operations
without Division II.
For the Quarter Ended March 31, 2017
P26-5A Compute annual rate of return, cash payback, and net present value
U3 Company is considering three long-term capital investment proposals. Each investment has a useful life
of 5 years. Relevant data on each project are as follows.
Project Bono Project Edge Project Clayton
Capital investment $160,000 $175,000 $200,000
Annual net income:
Year 1 14,000 18,000 27,000
2 14,000 17,000 23,000
3 14,000 16,000 21,000
4 14,000 12,000 13,000
5 14,000 9,000 12,000
Total $70,000 $72,000 $96,000
Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 15%.
(Assume that cash flows occur evenly throughout the year.)
Instructions
(a) Compute the cash payback period for each project. (Round to two decimals.)
(b) Compute the net present value for each project. (Round to nearest dollar.)
(c ) Compute the annual rate of return for each project. (Round to two decimals.)
(Hint: Use average annual net income in your computation.)
(d) Rank the projects on each of the foregoing bases. Which project do you recommend?
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a “?” .
(a)
Net income Value Investment Value
Depreciation ? Annual net cash flows Value
Annual net cash flows ? Payback period in years ?
Net Annual Cumulative
Year Cash Flow Net Cash Flow
1 ? ?
2 ? ?
3 ? ?
4 ? ?
5 ? ?
Cash Payback Period:
Capital investment Value
Cumulative cash flow, year 3 ?
Remaining cost to be recovered (a) ?
Net cash flow, year 4 (b) Value
Payback period, year 4 (a) ÷ (b) ?
Total cash payback period in years ?
Net Annual Cumulative
Year Cash Flow Net Cash Flow
1 ? ?
2 ? ?
3 ? ?
4 ? ?
5 ? ?
Project Bono
Project Edge
Project Clayton
Cash Payback Period:
Capital investment Value
Cumulative cash flow, year 3 ?
Remaining cost to be recovered (a) ?
Net cash flow, year 4 (b) Value
Cash payback period, year 4 (a) ÷ (b) Value
Total cash payback period in years Value
(b) Project Bono 15% Present
Amount Years PV Factor Value
Net annual cash flows Value 1-5 3.35216 ?
Capital investment Value
Negative net present value ?
15%
Discount Cash Present Cash Present
Year Factor Flow Value Flow Value
1 0.86957 Value ? Value ?
2 0.75614 Value ? Value ?
3 0.65752 Value ? Value ?
4 0.57175 Value ? Value ?
5 0.49718 Value ? Value ?
Total Value ? Value ?
Capital Investment Value Value
Net present value ? ?
(c) Project Bono Project Edge Project Clayton
Average net income Value Value Value
Original Investment Value Value Value
Value at end of useful life Value Value Value
Average investment ? ? ?
Average net income (a) Value Value Value
Average investment (b) Value Value Value
Annual rate of return (a) ÷ (b) ? ? ?
Net Annual
(d) Project Cash Payback Present Value Rate of Return
Bono Value Value Value
Edge Value Value Value
Clayton Value Value Value
After you have completed the requirements of P26-5A, consider the additional question.
1. Assume that the investment amount of Project Clayton changed to $190,000, and the annual
cash inflows for years 1 to 5 changed to $65,000, $61,000, $59,000, $51,000, and $50,000.
Recalculate the payback period, net present value and annual return on Project Clayton.
Project Clayton
Item
Project Edge
Response:
P26-5A Solution
(a)
Net income $14,000 Investment $160,000
Net Annual Cumulative
Year Cash Flow Net Cash Flow
1 $53,000 $53,000
Cash Payback Period:
Capital investment $175,000
Cumulative cash flow, year 3 156,000
Net Annual Cumulative
Year Cash Flow Net Cash Flow
1 $67,000 $67,000
2 63,000 130,000
Cash Payback Period:
Capital investment $200,000
Cumulative cash flow, year 3 191,000
(b) Project Bono 15% Present
Amount Years PV Factor Value
Net annual cash flows $46,000 1-5 3.35216 $154,199
15%
Discount Cash Present Cash Present
Year Factor Flow Value Flow Value
1 0.86957 $53,000 $46,087 $67,000 $58,261
Project Bono
Project Edge
Project Clayton
Item
Project Edge
Project Clayton
(c) Project Bono Project Edge Project Clayton
Average net income $14,000 $14,400 $19,200
Net Annual
(d) Project Cash Payback Present Value Rate of Return
Bono 3 2 2
Edge 2 3 3
Clayton 1 1 1
The best project is Clayton.
P26-5A Solution to additional problem
1. Assume that the investment amount of Project Clayton changed to $190,000, and the annual
cash inflows for years 1 to 5 changed to $65,000, $61,000, $59,000, $51,000, and $50,000.
Recalculate the payback period, net present value and annual return on Project Clayton.
Net Annual Cumulative
Year Cash Flow Net Cash Flow
1$65,000 $65,000
261,000 126,000
Cash Payback Period:
Capital investment $190,000
Cumulative cash flow, year 3 185,000
(b) 15% 15%
Discount Cash Present
Year Factor Flow Value
1 0.86957 $65,000 $56,522
2 0.75614 61,000 46,125
3 0.65752 59,000 38,794
(c) Project Clayton
Average net income $19,200
Original Investment $190,000
Net Annual
(d) Project Cash Payback Present Value Rate of Return
Bono 3 2 2
Project Clayton
Project Clayton
The best project is still Clayton.
CD26 EXCEL Tutorial
CURRENT DESIGNS
Current Designs faces a number of important decisions that require incremental analysis. Consider each
of the following situations independently.
Situation 1
Recently, Mike Cichanowski, owner and CEO of Current Designs, received a phone call from the president
of a brewing company. He was calling to inquire about the possibility of Current Designs producing “floating
coolers” for a promotion his company was planning. These coolers resemble a kayak but are about one-third
the size. They are used to float food and beverages while paddling down the river on a weekend leisure trip.
The company would be interest in purchasing 100 coolers for the upcoming summer. It is willing to pay $250
per cooler. The brewing company would pick up the coolers upon completion of the order.
Mike met with Diane Buswell, controller, to identify how much it would cost Current Designs to produce
the coolers. After careful analysis, the following costs were identified.
Direct materials $80/unit
Variable overhea
$20/unit
Direct labor $60/unit Fixed overhead $1,000
Current Designs would be able to modify an existing mold to produce the coolers. The cost of these
modifications would be approximately $2,000.
Instructions
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to
produce the coolers.
(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at
full capacity.
Situation 2
A company that manufactures recreational pedal boats has approached Mike Cichanowski to ask if he would be
interested in using Current Designs’ rotomold expertise and equipment to produce some of the pedal boat components.
Mike is intrigued by the idea and thinks it would be an interesting way of complementing the present product line.
One of Mike’s hesitations about the proposal is that the pedal boats are a different shape than the kayaks that Current
Designs produces. As a result, the company would need to buy an additional roto-mold oven in order to produce the
pedal boat components. This project clearly involves risks, and Mike wants to make sure that the returns justify the
risks. In this case, since this is a new venture, Mike thinks that a 15% discount rate is appropriate to use to evaluate
the project.
As an intern at Current Designs, Mike has asked you to prepare an initial evaluation of this proposal. To aid in your
analysis, he has provided the following information and assumptions.
1. The new rotomold oven will have a cost of $256,000, a salvage value of $0, and an 8-year useful ife.
Straight-line depreciation will be used.
2. The projected revenues, costs, and results for each of the 8 years of this project are as follows.
Sales $220,000
Less:
Manufacturing costs $140,000
Depreciation 32,000
Shipping and administrative costs 22,000 194,000
Income before income taxes 26,000
Income tax expense 10,800
Net income $15,200
Instructions
(a) Compute the annual rate of return. (Round to two decimal places.)
(b) Compute the payback period. (Round to two decimal places.)
(c ) Compute the net present value using a discount rate of 9%. (Round to nearest dollar.)
Should the proposal be accepted using this discount rate?
(d) Compute the net present value using a discount rate of 15%. (Round to nearest dollar.)
Should the proposal be accepted using this discount rate?
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a “?” .
Situation 1
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to
produce the coolers.
Reject Order Accept Order
Increase (Decrease)
Revenues Value ?
Costs Value ?
Net income ? ?
(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at
full capacity.
Situation 2
(a) Compute the annual rate of return. (Round to two decimal places.)
Net income Value
Average investment Value
Annual rate of return ?
(b) Compute the payback period. (Round to two decimal places.)
Net income Value
Depreciation Value
Net annual cash flow ?
Cost of investment Value
Net annual cash flow Value
Payback period in years ?
(c ) Compute the NPV using a discount rate of 9%. (Round to nearest dollar.)
Should the proposal be accepted using this discount rate?
Event Time Period Cash Flows
9%
Discount
Factor
Present
Value
Net annual cash flow
1-8 Value 5.53482 ?
Less: Oven purchase
0Value 1.00000 ?
Net present value ?
Net Income
Value
Value
?
Response:
Response:
Response:
(d) Compute the NPV using a discount rate of 15%. (Round to nearest dollar).
Should the proposal be accepted using this discount rate?
Event Time Period Cash Flows
15%
Discount
Factor
Present
Value
Net annual cash flow
1-8 Value 4.48732 ?
Less: Oven purchase
0Value 1.00000 ?
Net present value ?
After you have completed CD26, consider the following additional questions.
1. Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and
the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or
reject the special order.
2. Assume that the initial cost of the oven and the salvage value changed to $260,000 and $5,000 respectively.
Also assume that net income changed to $14,700. What impact do these changes have on your calculations?
Response:
CD26 Solution
Situation 1
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to
produce the coolers.
Reject Order Accept Order Increase (Decrease)
Revenues $0 $25,000
(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at
full capacity.
Situation 2
(a) Compute the annual rate of return. (Round to two decimal places.)
Net income $15,200
Net Income
$25,000
Assuming that Current Designs is currently operating with excess capacity, it should accept the
order based on the calculations shown in part (a).
Cost of investment $256,000
(c ) Compute the NPV using a discount rate of 9%. (Round to nearest dollar.)
Should the proposal be accepted using this discount rate?
Event Time Period Cash Flows
9%
Discount
Factor
Present
Value
Net annual cash flow 1-8 $47,200 5.53482 $261,244
(d) Compute the NPV using a discount rate of 15%. (Round to nearest dollar).
Should the proposal be accepted using this discount rate?
Event Time Period Cash Flows
15%
Discount
Factor
Present
Value
Net annual cash flow 1-8 $47,200 4.48732 $211,802
CD26 Solution to additional questions
1. Assume in situation 1, the unit selling price changed to $195, fixed overhead changed to $1,800 and
the cost of modifications changed to $3,000. Show the impact of these changes on decision to accept or
reject the special order.
Situation 1
(a) Prepare an incremental analysis to determine whether Current Designs should accept this special order to
produce the coolers.
Reject Order Accept Order Increase (Decrease)
Revenues $0 $19,500
Costs 0 (20,800)
(b) Discuss additonal factors that Mike and Diane should consider if Current Designs is currently operating at
full capacity.
Situation 2
2. Assume that the initial cost of the oven and the salvage value changed to $260,000 and $5,000 respectively.
Also assume that net income changed to $14,700. What impact do these changes have on your calculations?
(a) Compute the annual rate of return. (Round to two decimal places.)
Net income $14,700
(b) Compute the payback period. (Round to two decimal places.)
Net income $14,700
Depreciation 31,875
Net Income
$19,500
(20,800)
Assuming that Current Designs is currently operating with excess capacity, it should not accept the
order based on the calculations shown in part (a).
Payback period in years 5.58
(c ) Compute the NPV using a discount rate of 9%. (Round to nearest dollar.)
Should the proposal be accepted using this discount rate?
Event Time Period Cash Flows
9%
Discount
Factor
Present
Value
Net annual cash flow 1-8 $46,575 5.53482 $257,784
(d) Compute the NPV using a discount rate of 15%. (Round to nearest dollar).
Should the proposal be accepted using this discount rate?
Time Period Cash Flows
15%
Discount
Factor
Present
Value
Net annual cash flow
1-8
$46,575 4.48732 $208,997
Event