| 1) |
Calculations of Incremental Revenues and costs |
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Revenue |
Per Unit |
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Selling price of Material B |
20.25 |
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Selling price of Product D (Baking Dept) |
30.00
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Incremental Revenue per unit (A) |
9.75 |
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Incremental Revenue for 100,000 pounds |
975,000.00 |
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Expenses |
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Direct Labor of Baking Dept - D |
3.50 |
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Variable Manufacturing Overhead |
4.00
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Fixed Manufcturing Overhead - Avoidable |
1.80 |
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Total Expenses per pound (B) |
9.30 |
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Incremental Revenue over Expense per pound |
0.45 |
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(A) - (B) |
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Total Incremental Revenue per 100,000 Pound |
45,000.00 |
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| 2) |
Two reason for not installing Baking Dept |
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| a) |
The first reason would be:
by selling product directly i.e. Material B company |
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earns $ 7.05 per pound whereas
by converting into product it earns $ 6.75 per pound |
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| b) |
It wil initial additional capital
expenditure which would take time to pay back |
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| 3) |
Reason for installing Baking Department |
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| a) |
Better use of factory space |
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| b) |
Increase in product line |
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| Question
# 2 |
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| 1) |
Best selling Price |
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The best price to transfer
the cabinets to Electonics Division would be $ 109.20 |
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The resons for the other alternatives
not correct would be: |
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a) $ 120 per cabinet - this
is the market price that would force Electornics division |
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to buy from other suppliers
on as and when required basis and avoid additional storage costs |
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b) $ 110 is the price at which
other suppliers would provide to Electronics division |
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this
is not only higher than the price of Electronics division but will
also lead to |
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additional
storage costs and buying in bulk which can leave them with some dead
stock |
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or incurring additional carrying
costs etc |
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c) The price of $ 92.40 is
too low which wont be able to cover the fixed selling costs |
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of cabinet division and throw
them in losses or this price would tamper their performance |
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d)
The price of $ 109.20 not only ensures that Cabinet division makes
20 % profits |
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but also provides electronic
divisions with the goods at prices lower than market |
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and avoid additional storage
costs leading to a win-win situation |
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| 2) |
No |
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The reason is if there was
an outside market at $ 120 it would have forced |
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Electronics division to buy
at $ 110/- per unit and incurr additional storage costs |
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which would have reduced the
total profitability of the company. |
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The
$ 120/- price would be achieved only with the additional variable
cost of $ 9/- |
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per unit which in case of sale
internally is saved and doesn’t expose the company |
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to outsiders |
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| Question #3 |
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| A) |
Net Present Value
Method |
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| Outflows |
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| Years |
$ |
Present Value |
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Net Value |
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| 0 |
250,000.00
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1 |
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250,000 |
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| 1 |
- |
0.892857143 |
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| 2 |
- |
0.797193878 |
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| 3 |
- |
0.711780248 |
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| 4 |
- |
0.635518078 |
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(15,887.95) |
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| 5 |
(25,000) |
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| Total
Outflow |
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234,112 |
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| Inflows |
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| Years |
Net Inflows |
Present Value |
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Net Value |
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| 0 |
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1 |
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0 |
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| 1 |
75000 |
0.892857143 |
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66964.2857 |
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| 2 |
70000 |
0.797193878 |
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55803.5714 |
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| 3 |
65000 |
0.711780248 |
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46265.7161 |
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| 4 |
60000 |
0.635518078 |
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38131.0847 |
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| Total
Inflow |
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207164.658 |
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| Basedon
NPV method the machine is not worth buying |
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| B) |
the accounting rate of return
method |
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Average Income |
11,250
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Cost of Machine |
250,000
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Rate of Return - % |
4.50 |
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| C) |
Pay back period |
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The cost of machine |
250000 |
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Residual Value |
25000 |
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Average Life |
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4 |
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Total Depreciation each year |
56250 |
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Annual net income |
11250 |
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Pay back period |
5 |
Years |
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| 2) |
Suggestion to Ms. Smit |
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NOT to buy the Machine |
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Based
on any method used, its seen that Machine is not able to return the |
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amount invested. |
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Based on First method the net
outflow is more than the projected inflow |
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based on the use of machine |
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Second Method shows the return
from the machine of 4.5 % whereas |
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the company's internal rate
of return has been 12 % |
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third method shows the payback
period for machine to be 5 years |
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whereas machine's estimated
life has been 4years |
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