EXERCISE 26-10
(a) 1. Cash payback period: $190,000 ÷ $50,000 = 3.8 years.
2. Annual rate of return: $12,000 ÷ [($190,000 + $0) ÷ 2] = 12.63%.
EXERCISE 26-11
(a)
Project
Capital
Investment
÷
Net Annual Cash
Flows*
=
Internal
Rate of
Return
Factor
Closest
Discount
Factor
Internal
Rate of
Return
22A
$240,000
÷
($15,500 + $40,000)
=
4.324
4.35526
10%
EXERCISE 26-12
(a) Project A: ($50,000 X 3.88965) – $200,000 = $(5,518)
Project B: ($65,000 X 5.03295) – $300,000 = $27,142
decision would change. Now both projects are acceptable.
SOLUTIONS TO PROBLEMS
PROBLEM 26–1A
(a)
Reject
Order
Accept
Order
Net Income
Increase
(Decrease)
Revenues (10,000 X $28)
$0
$280,000
$ 280,000
(1) Variable costs = $3,600,000 – $960,000 = $2,640,000;
$2,640,000 ÷ 120,000 units = $22.00 per unit;
10,000 X $22.00 = $220,000.
(b) Yes, the special order should be accepted because net income will
increase by $37,500.
PROBLEM 26–2A
(a)
Make CISCO
Buy CISCO
Net Income
Increase
(Decrease)
Direct materials
(8,000 X $4.80)
Direct labor
(8,000 X $4.30)
$38,400
34,400
$ 0
0
($38,400)
( 34,400)
(b) The company should continue to make CISCO because net income
would be $1,160 less if CISCO were purchased from the supplier.
(c) The decision would be different. Because of the opportunity cost of
$3,000, net income will be $1,840 higher if CISCO is purchased as
shown below:
Make CISCO
Buy CISCO
(Decrease)
Net Income
Increase
PROBLEM 26–3A
(a)
Cost
$120,000
Accumulated depreciation
(24,000*)
Book value
96,000
(b) (1)
Retain Old Elevator
Revenues ($240,000 X 4 yrs.)
$960,000
Less costs:
Variable costs ($35,000 X 4)
$140,000
Fixed costs ($23,000 X 4)
Selling & administrative
Depreciation
96,000
Net income
$516,000
(2)
Replace Old Elevator
Revenues
$960,000
Less costs:
Variable costs ($10,000 X 4)
$ 40,000
Fixed costs ($8,500 X 4)
34,000
Selling and administrative
Depreciation
Operating income
Less: Loss on old elevator
71,000
Net income
92,000
Sales proceeds
Loss on sale
$ 71,000
PROBLEM 26-3A (Continued)
(d) MEMO
TO: Ron Richter
FROM: Student
SUBJECT: Relevant Data for Decision to Replace Old Elevator
When deciding whether or not to replace any old equipment, the analysis
should only include cost data relevant to the replacement decision. The
$71,000 loss that would be experienced if we replace the old elevator with
PROBLEM 26–4A
(a)
Division I
Division II
Sales
Variable costs
Cost of goods sold
$250,000
140,000
$200,000
172,800
(b)
(1)
Division I
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed costs
Cost of goods sold
$(80,000)
(60,000)
$( 0)
(30,000)
$(80,000)
30,000
(2)
Division II
Continue
Eliminate
Net Income
Increase
(Decrease)
Contribution margin (above)
Fixed costs
Cost of goods sold
$ (8,800)
(19,200
$( 0)
( 9,600)
$ 8,800
( 9,600
PROBLEM 26-4A (Continued)
(c) BRISLIN COMPANY
CVP Income Statement
For the Quarter Ended March 31, 2017
Divisions
I
III
IV
Total
Sales
Variable costs
Cost of goods sold
$250,000
140,000
$500,000
240,000
$450,000
187,500
$1,200,000
567,500
(1) Division’s fixed cost of goods sold plus 1/3 of Division II’s
unavoidable fixed cost of goods sold [$192,000 X (100% – 90%) X
50% = $9,600]. Each division’s share is $3,200.
PROBLEM 26-5A
(a) Project Bono $160,000 ÷ ($14,000 + $32,000) = 3.48 years
Project Edge
Year
Cash Flow
Cumulative Cash Flow
1
2
$53,000 ($18,000 + $35,000)
$52,000 ($17,000 + $35,000)
$ 53,000
$105,000
Project Clayton
Year
Cash Flow
Cumulative Cash Flow
1
2
$67,000 ($27,000 + $40,000)
$63,000 ($23,000 + $40,000)
$ 67,000
$130,000
PROBLEM 26-5A (Continued)
(b) Project Bono
Item
Amount
Years
PV Factor
Present
Value
Net annual cash flows
Less: Capital investment
Negative net present value
$46,000
1–5
3.35216
$154,199
160,000
$ (5,801)
Project Edge
Project Clayton
Year
Discount
Factor
Cash
Flow
PV
Cash
Flow
PV
1
2
.86957
.75614
$ 53,000
52,000
$ 46,087
39,319
$ 67,000
63,000
$ 58,261
47,637
(c) Project Bono = $14,000 ÷ [($160,000 + $0) ÷ 2] = 17.5%.
(d)
Project
Cash Payback
Net
Present Value
Annual
Rate of Return
Bono
3
2
2
5
44,000
PROBLEM 26-6A
(a)
(1)
Annual
Net Income
(2)
Annual
Cash Inflow
Sales
Expenses
Drivers’ salaries
*$108,000*
* 48,000*
$108,000
48,000
(b) 1. Cash payback period = $75,000 ÷ $30,000 = 2.50 years.
(c) Present value of annual cash inflows ($30,000 X 2.28323*) = $68,497
Less: Capital investment = 75,000
Net present value = $ (6,503 )
(d) The computations show that the commuter service is not a wise
investment for these reasons: (1) annual net income will only be
Total expenses
PROBLEM 26-7A
(a)
(1) Option A
Cash
Flows
X
8% Discount
Factor
=
Present
Value
Present value of net annual cash flows
Present value of cost to rebuild
a$41,000a
( (50,000)
X
X
5.20637
.73503
=
=
($213,461)
( (36,752)
(2) 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 11% discount rate.
Cash
Flows
X
11% Discount
Factor
=
Present
Value
a$41,000a
(1) Option B
Cash
Flows
X
8% Discount
Factor
=
Present
Value
Present value of net annual cash flows
Present value of cost to rebuild
b$49,000b
0
X
X
5.20637
.73503
=
=
$255,112
0
PROBLEM 26-7A (Continued)
(2) Internal rate of return on Option B is 12%, as calculated below:
Cash
Flows
X
12% Discount
Factor
=
Present
Value
Present value of net annual cash flows
Present value of cost to rebuild
b$49,000b
0
X
X
4.56376
.63552
=
=
$223,624
0
COMPREHENSIVE PROBLEM: CHAPTERS 19 TO 26
Note to instructor: Solutions will vary by student. This is an extensive,
comprehensive problem whose solution will depend on the assumptions
and computations in previous parts. While the variety of assumptions that
may be made by students are valuable in themselves, requiring students to
Product Costs
Item
Direct
Materials
Direct
Labor
Manufacturing
Overhead
Period
Costs
Totals
10,000
Rent on production
equipment
Insurance on building
Raw materials (plastics,
$ 6,000
1,500
COMPREHENSIVE PROBLEM (Continued)
(d) Assume first month of operations is December 2017.
BICYCLE HELMET COMPANY
Cost of Goods Manufactured Schedule
For the Month Ended December 31, 2017
Work in process, December 1 $ 0
Direct materials
Raw materials inventory $ 0
(Dec. 1)
Manufacturing overhead
Rent on production equipment $ 6,000
Insurance on building 1,500
Utility costs 900
(e) Assume 10,000 helmets will be produced the first month of operations.
COMPREHENSIVE PROBLEM (Continued)
find it useful, using a process costing system, to identify the cost of
(g) In a process cost system, manufacturing costs (direct materials, direct
labor, and manufacturing overhead) are assigned to Work in Process
accounts for each department or process. As helmets are completed,
the cost of the work in process is transferred out to Finished Goods
(h)
Item
Variable
Costs
Fixed
Costs
Total
Costs
Rent on production equipment
Insurance on building
Raw materials (plastics,
polystyrene, etc.)
Utility costs
Office supplies
$ 70,000
$ 6,000
1,500
900
300
$ 6,000
1,500
70,000
900
300