Savallas Company is highly automated and uses computers to control manufacturing operations. The company uses a job-order costing system and applies manufacturing overhead cost to products on the basis of computer-hours. The following estimates were used in preparing the predetermined overhead rate at the beginning of the year:
Computer-hours
83,000
Fixed manufacturing overhead cost
$
1,280,000
Variable manufacturing overhead per computer-hour
$
3.50
During the year, a severe economic recession resulted in cutting back production and a buildup of inventory in the company’s warehouse. The company’s cost records revealed the following actual cost and operating data for the year:
Computer-hours
50,000
Manufacturing overhead cost
$
1,031,000
Inventories at year-end:
Raw materials
$
430,000
Work in process
$
200,000
Finished goods
$
1,040,000
Cost of goods sold
$
2,780,000
Required:
1.
Compute the company’s predetermined overhead rate for the year. (Round your answer to 2 decimal places. Omit the \"$\" sign in your response.)
2.
Compute the underapplied or overapplied overhead for the year. (Round your intermediate calculations to 2 decimal places and final answer to the nearest dollar amount. Input the amount as a positive value. Omit the \"$\" sign in your response.)
3.
Assume the company closes any underapplied or overapplied overhead directly to cost of goods sold. Prepare the appropriate entry. (Round your intermediate calculations to 2 decimal places and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.)
4.
Assume that the company allocates any underapplied or overapplied overhead to work in process, finished goods, and cost of goods sold on the basis of the amount of overhead applied during the year that remains in each account at the end of the year. These amounts are $37,840 for work in process, $208,120 for finished goods, and $700,040 for cost of goods sold. Prepare the journal entry to show the allocation. (Round your intermediate calculations and percentage values to 2 decimal places and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.)
5.
How much higher or lower will net operating income be for the year if the underapplied or overapplied overhead is allocated rather than closed directly to cost of goods sold? (Round your intermediate calculations and percentage values to 2 decimal places and final answers to the nearest dollar amount. Input the amount as a positive value. Omit the \"$\" sign in your response.)
Click here for the SOLUTION
Thursday, August 15, 2013
House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail level
House of Organs, Inc., purchases organs from a well-known manufacturer and sells them at the retail level. The organs sell, on the average, for $2,500 each. The average cost of an organ from the manufacturer is $1,500. The costs that the company incurs in a typical month are presented below:
Costs
Cost Formula
Selling:
Advertising
$950 per month
Delivery of organs
$60 per organ sold
Sales salaries and commissions
$4,800 per month, plus 4% of sales
Utilities
$650 per month
Depreciation of sales facilities
$5,000 per month
Administrative:
Executive salaries
$13,500 per month
Depreciation of office equipment
$900 per month
Clerical
$2,500 per month, plus $40 per organ sold
Insurance
$700 per month
During November, the company sold and delivered 60 organs.
Required:
1.
Prepare a traditional income statement for November. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the \"$\" sign in your response.)
2.
Prepare a contribution format income statement for November. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the \"$\" sign in your response.)
Click here for the SOLUTION
Costs
Cost Formula
Selling:
Advertising
$950 per month
Delivery of organs
$60 per organ sold
Sales salaries and commissions
$4,800 per month, plus 4% of sales
Utilities
$650 per month
Depreciation of sales facilities
$5,000 per month
Administrative:
Executive salaries
$13,500 per month
Depreciation of office equipment
$900 per month
Clerical
$2,500 per month, plus $40 per organ sold
Insurance
$700 per month
During November, the company sold and delivered 60 organs.
Required:
1.
Prepare a traditional income statement for November. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the \"$\" sign in your response.)
2.
Prepare a contribution format income statement for November. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the \"$\" sign in your response.)
Click here for the SOLUTION
The Central Area Well-Baby Clinic provides a variety of health services to newborn babies and their parents
The Central Area Well-Baby Clinic provides a variety of health services to newborn babies and their parents. The clinic is organized into a number of departments, one of which is the Immunization Center.
Required:
A number of costs of the clinic and the Immunization Center are listed below. For each cost listed below, indicate whether it is a direct or indirect cost of the Immunization Center, whether it is a direct or indirect cost of immunizing particular patients, and whether it is variable or fixed with respect to the number of immunizations administered.
Example
The cost of polio immunization tablets
a.
The salary of the head nurse in the Immunization Center.
b.
Costs of incidental supplies consumed in the Immunization Center, such as paper towels.
c.
The cost of lighting and heating the Immunization Center.
d.
The cost of disposable syringes used in the Immunization Center.
e.
The salary of the Central Area Well-Baby Clinic\'s information systems manager.
f.
The costs of mailing letters soliciting donations to the Central Area Well-Baby Clinic.
h.
The cost of medical malpractice insurance for the Central Area Well-Baby Clinic.
i.
Depreciation on the fixtures and equipment in the Immunization Center.
Click here for the SOLUTION
Required:
A number of costs of the clinic and the Immunization Center are listed below. For each cost listed below, indicate whether it is a direct or indirect cost of the Immunization Center, whether it is a direct or indirect cost of immunizing particular patients, and whether it is variable or fixed with respect to the number of immunizations administered.
Example
The cost of polio immunization tablets
a.
The salary of the head nurse in the Immunization Center.
b.
Costs of incidental supplies consumed in the Immunization Center, such as paper towels.
c.
The cost of lighting and heating the Immunization Center.
d.
The cost of disposable syringes used in the Immunization Center.
e.
The salary of the Central Area Well-Baby Clinic\'s information systems manager.
f.
The costs of mailing letters soliciting donations to the Central Area Well-Baby Clinic.
h.
The cost of medical malpractice insurance for the Central Area Well-Baby Clinic.
i.
Depreciation on the fixtures and equipment in the Immunization Center.
Click here for the SOLUTION
Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity
Heritage Company manufactures a beautiful bookcase that enjoys widespread popularity. The company has a backlog of orders that is large enough to keep production going indefinitely at the plant\'s full capacity of 4,000 bookcases per year. Annual cost data at full capacity follow:
Direct materials used (wood and glass)
$
430,000
Administrative office salaries
$
110,000
Factory supervision
$
70,000
Sales commissions
$
60,000
Depreciation, factory building
$
105,000
Depreciation, administrative office equipment
$
2,000
Indirect materials, factory
$
18,000
Factory labor (cutting and assembly)
$
90,000
Advertising
$
100,000
Insurance, factory
$
6,000
Administrative office supplies (billing)
$
4,000
Property taxes, factory
$
20,000
Utilities, factory
$
45,000
Required:
1.
Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.) (Leave no cells blank - be certain to enter \"0\" wherever required. Omit the \"$\" sign in your response.)
2.
Compute the average product cost per bookcase. (Omit the \"$\" sign in your response.)
3.
Due to a recession, assume that production drops to only 2,000 bookcases per year. Would you expect the average product cost per bookcase to increase, decrease, or remain unchanged?
Click here for the SOLUTION
Direct materials used (wood and glass)
$
430,000
Administrative office salaries
$
110,000
Factory supervision
$
70,000
Sales commissions
$
60,000
Depreciation, factory building
$
105,000
Depreciation, administrative office equipment
$
2,000
Indirect materials, factory
$
18,000
Factory labor (cutting and assembly)
$
90,000
Advertising
$
100,000
Insurance, factory
$
6,000
Administrative office supplies (billing)
$
4,000
Property taxes, factory
$
20,000
Utilities, factory
$
45,000
Required:
1.
Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as either variable or fixed with respect to the number of units produced and sold; and second, as either a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.) (Leave no cells blank - be certain to enter \"0\" wherever required. Omit the \"$\" sign in your response.)
2.
Compute the average product cost per bookcase. (Omit the \"$\" sign in your response.)
3.
Due to a recession, assume that production drops to only 2,000 bookcases per year. Would you expect the average product cost per bookcase to increase, decrease, or remain unchanged?
Click here for the SOLUTION
The following data relate to the operations of Picanuy Corporation, a wholesale distributor of consumer goods:
The following data relate to the operations of Picanuy Corporation, a wholesale distributor of consumer goods:
Current assets as of December 31:
Cash
$
6,000
Accounts receivable
$
36,000
Inventory
$
9,800
Buildings and equipment, net
$
110,885
Accounts payable
$
32,550
Capital stock
$
100,000
Retained earnings
$
30,135
a.
The gross margin is 30% of sales. (In other words, cost of goods sold is 70% of sales.)
b.
Actual and budgeted sales data are as follows:
December (actual)
$60,000
January
$70,000
February
$80,000
March
$85,000
April
$55,000
c.
Sales are 40% for cash and 60% on credit. Credit sales are collected in the month following sale. The accounts receivable at December 31 are the result of December credit sales.
d.
Each month’s ending inventory should equal 20% of the following month’s budgeted cost of goods sold.
e.
One-quarter of a month’s inventory purchases is paid for in the month of purchase; the other three-quarters is paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory.
f.
Monthly expenses are as follows: commissions, $12,000; rent, $1,800; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $2,400 for the quarter and includes depreciation on new assets acquired during the quarter.
g.
Equipment will be acquired for cash: $3,000 in January and $8,000 in February.
h.
Management would like to maintain a minimum cash balance of $5,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow and repay in increments of $1,000 at the beginning of each month, up to a total loan balance of $50,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.
Required:
Using the data above:
1.
Complete the following schedule. (Omit the \"$\" sign in your response.)
2.
Complete the following: (Leave no cells blank - be certain to enter \"0\" wherever required. Input all amounts as positive values. Omit the \"$\" sign in your response.)
3.
Complete the following schedule: (Omit the \"$\" sign in your response.)
4.
Complete the following cash budget: (Borrow and repay in increments of $1,000. Input all amounts as positive values except cash deficiency, repayments and interest which should be indicated by a minus sign. Leave no cells blank - be certain to enter \"0\" wherever required. Omit the \"$\" sign in your response.)
5.
Prepare an absorption costing income statement for the quarter ended March 31. (Input all amounts as positive values. Omit the \"$\" sign in your response.)
Click here for the SOLUTION
Current assets as of December 31:
Cash
$
6,000
Accounts receivable
$
36,000
Inventory
$
9,800
Buildings and equipment, net
$
110,885
Accounts payable
$
32,550
Capital stock
$
100,000
Retained earnings
$
30,135
a.
The gross margin is 30% of sales. (In other words, cost of goods sold is 70% of sales.)
b.
Actual and budgeted sales data are as follows:
December (actual)
$60,000
January
$70,000
February
$80,000
March
$85,000
April
$55,000
c.
Sales are 40% for cash and 60% on credit. Credit sales are collected in the month following sale. The accounts receivable at December 31 are the result of December credit sales.
d.
Each month’s ending inventory should equal 20% of the following month’s budgeted cost of goods sold.
e.
One-quarter of a month’s inventory purchases is paid for in the month of purchase; the other three-quarters is paid for in the following month. The accounts payable at December 31 are the result of December purchases of inventory.
f.
Monthly expenses are as follows: commissions, $12,000; rent, $1,800; other expenses (excluding depreciation), 8% of sales. Assume that these expenses are paid monthly. Depreciation is $2,400 for the quarter and includes depreciation on new assets acquired during the quarter.
g.
Equipment will be acquired for cash: $3,000 in January and $8,000 in February.
h.
Management would like to maintain a minimum cash balance of $5,000 at the end of each month. The company has an agreement with a local bank that allows the company to borrow and repay in increments of $1,000 at the beginning of each month, up to a total loan balance of $50,000. The interest rate on these loans is 1% per month, and for simplicity, we will assume that interest is not compounded. The company would, as far as it is able, repay the loan plus accumulated interest at the end of the quarter.
Required:
Using the data above:
1.
Complete the following schedule. (Omit the \"$\" sign in your response.)
2.
Complete the following: (Leave no cells blank - be certain to enter \"0\" wherever required. Input all amounts as positive values. Omit the \"$\" sign in your response.)
3.
Complete the following schedule: (Omit the \"$\" sign in your response.)
4.
Complete the following cash budget: (Borrow and repay in increments of $1,000. Input all amounts as positive values except cash deficiency, repayments and interest which should be indicated by a minus sign. Leave no cells blank - be certain to enter \"0\" wherever required. Omit the \"$\" sign in your response.)
5.
Prepare an absorption costing income statement for the quarter ended March 31. (Input all amounts as positive values. Omit the \"$\" sign in your response.)
Click here for the SOLUTION
A restaurant regularly overfills trash cans in the alley and improperly disposes left-over meat and other perishables
A restaurant regularly overfills trash cans in the alley and improperly disposes left-over meat and other perishables. Which of the following laws will regulate this incident?
Private law
Public and civil law
Public law
Criminal and public law
A collection of rules and decisions made by government agencies is known as _____ law.
agency
common
corporate
administrative
New statutory law can revoke _____ law.
criminal
case
private
corporate
“Not letting morality interfere with the obedience of law” comes under which concept?
Legal positivism
Natural law
Identification with the vulnerable
Tradition
Which of the following concepts come under legal realism?
Law can never be enforced with complete consistency.
Past practice was the product of careful thought.
Some higher law or body of moral principles connects all of us in the human community.
Certain ethical laws and principles believed to be morally right and “above” the laws devised by humans.
What is an ethical dilemma?
Application of ethics to the special problems and opportunities experienced by businesspeople.
A problem about what a firm should do, for which no clear, right decision is available.
Study and practice of decisions about what is good, or right.
The expectations that communities have from businesses.
The legality of a business decision is the _____ standard that must be met.
optional
maximal
minimal
moderate
Why must multinational companies take into account the different ethical understandings that prevail in a different country?
Law and business ethics serve as an interactive system—informing and assessing each other.
Business ethics can never produce a list of correct business decisions that all ethical businesses will make.
Legal rules that govern the exchange have been shaped in large part by our sense of commercial ethics.
Ethical conceptions shape business law and business relationships uniquely in each country.
Which of the following statements is true according to the categorical imperative of deontology?
No decision taken by the business manager can be wrong as morality is subjective.
A business manager should put himself in the shoes of the person to be affected by his decision and then decide.
A business decision can be evaluated on the basis that it would be consistent for everyone in society to take the same decision.
A business manager should choose the action which yields the greatest amount of pleasure over pain for all involved.
Which of the following theories of business ethics is most concerned with human relationships?
Virtue ethics
Utilitarianism
Ethics of care
Deontology
Which of the following cases would fall under concurrent federal jurisdiction?
Federal-question cases
Cases involving admiralty law
Federal patent, trademark, and copyright cases
Bankruptcy cases
In a case between Mann versus Roberts in the state of Iowa, one party appealed the verdict of the state trial court. In the absence of an intermediate court of appeal, where would the case be heard?
State Trial Court
Federal Circuit court
State Supreme Court
Federal Trials Court
Usually the issue of _________ arises when one party claims that the case is moot.
ripeness
controversy
personal stake
standing
What is a directed verdict?
A verdict reached through an informal meeting of the judge with the attorneys representing the parties where the parties try to work out a settlement.
A verdict for the defendant as the jury would have no legal basis for decision in favor of plaintiff even if it regarded the plaintiff’s claims to be true.
A verdict given in favor of the plaintiff when the defendant fails to answer the summons.
A verdict given by recruited individuals who match the demographics of the jury.
A _____ is a written argument explaining why an appeal is being made.
motion
verdict
settlement
brief
Firm X and Firm Y are in dispute over a contract. They decide to use a form of alternative dispute resolution (ADR) to settle the dispute in which both parties meet to discuss the issue. Firm X brings their lawyer to this meeting but Firm Y does not. Which form of ADR is most likely being used here?
Arbitration
Facilitation
Mediation
Negotiation
Which of the following is one of the main goals of a mediator in a dispute?
Describing the problematic incident leading to the dispute.
Helping each party to listen to their opponent’s concerns.
Generating alternatives for the disputed points.
Helping each party to receive the maximum gains.
Which of these differentiates an arbitration proceeding from a trial?
The outcome of the hearing is a legally binding decision.
The use of legal counsel by the parties involved.
The absence of official written records of the hearing.
The presence of a neutral third party at the hearing.
David Myer seeks to resolve his dispute with his manager Ray Thorn. They both zero in on Rachel Moran to act as a neutral third party. Myer and Thorn take turns to explain their position to Ms. Moran who enumerates the strengths and weaknesses of the case. Using this assessment, Myer and Thorn reach a settlement. Which form of ADR is being used here?
Peer review
Private trial
Med-Arb
Early neutral case evaluation
Which of the following forms of ADR generally occurs after a case has been filed in a district or state court?
Arbitration
Summary jury trial
Private trial
Minitrial
What is meant by federal supremacy?
It is a clause which annuls any state or local law that directly conflicts with the U.S. Constitution or federal laws.
It is a clause that prohibits states from passing laws that significantly interfere with interstate legislations.
It is a clause that grants the federal government the authority to pass regulations that significantly affect the governance of the state legislatures.
It is a clause that strikes down laws that do not directly conflict with a federal law but attempt to regulate an area within federal jurisdiction.
In addition to the federal environmental standards of solid waste management, the state of Illinois was allowed to pass a new law regulating the disposal of toxic industrial wastes into the Great Lakes. This was a result of:
concurrent authority.
federal supremacy.
state preemption.
federal preemption.
The city of Chicago passed an ordinance banning spray painting in the city as a means to reduce graffiti. X Emulsions, a Texan paint manufacturing giant, challenged this legislation as a violation of the ____.
dormant commerce clause
supremacy clause
commerce clause
immunity clause
According to the takings clause:
all privately owned property used by the government are protected under the Fourth Amendment.
if a regulation prohibits the owner from deriving any economic benefit from his land, a taking has occurred and the owner must be compensated.
regulatory taking does not warrant compensation by the government as it is not protected by the constitution.
when the government takes private property for public use, it must pay compensation only when the property has been used for commercial purposes.
The Fifth Amendment provides that when the government deprives a private property owner of all economically beneficial uses of property, it constitutes a taking for which the takings clause requires payment.
If a law prevents individuals from exercising a fundamental right, the action will be subject to ____.
transitional scrutiny
strict scrutiny
intermediate scrutiny
the rational-basis test
Click here for the SOLUTION
Private law
Public and civil law
Public law
Criminal and public law
A collection of rules and decisions made by government agencies is known as _____ law.
agency
common
corporate
administrative
New statutory law can revoke _____ law.
criminal
case
private
corporate
“Not letting morality interfere with the obedience of law” comes under which concept?
Legal positivism
Natural law
Identification with the vulnerable
Tradition
Which of the following concepts come under legal realism?
Law can never be enforced with complete consistency.
Past practice was the product of careful thought.
Some higher law or body of moral principles connects all of us in the human community.
Certain ethical laws and principles believed to be morally right and “above” the laws devised by humans.
What is an ethical dilemma?
Application of ethics to the special problems and opportunities experienced by businesspeople.
A problem about what a firm should do, for which no clear, right decision is available.
Study and practice of decisions about what is good, or right.
The expectations that communities have from businesses.
The legality of a business decision is the _____ standard that must be met.
optional
maximal
minimal
moderate
Why must multinational companies take into account the different ethical understandings that prevail in a different country?
Law and business ethics serve as an interactive system—informing and assessing each other.
Business ethics can never produce a list of correct business decisions that all ethical businesses will make.
Legal rules that govern the exchange have been shaped in large part by our sense of commercial ethics.
Ethical conceptions shape business law and business relationships uniquely in each country.
Which of the following statements is true according to the categorical imperative of deontology?
No decision taken by the business manager can be wrong as morality is subjective.
A business manager should put himself in the shoes of the person to be affected by his decision and then decide.
A business decision can be evaluated on the basis that it would be consistent for everyone in society to take the same decision.
A business manager should choose the action which yields the greatest amount of pleasure over pain for all involved.
Which of the following theories of business ethics is most concerned with human relationships?
Virtue ethics
Utilitarianism
Ethics of care
Deontology
Which of the following cases would fall under concurrent federal jurisdiction?
Federal-question cases
Cases involving admiralty law
Federal patent, trademark, and copyright cases
Bankruptcy cases
In a case between Mann versus Roberts in the state of Iowa, one party appealed the verdict of the state trial court. In the absence of an intermediate court of appeal, where would the case be heard?
State Trial Court
Federal Circuit court
State Supreme Court
Federal Trials Court
Usually the issue of _________ arises when one party claims that the case is moot.
ripeness
controversy
personal stake
standing
What is a directed verdict?
A verdict reached through an informal meeting of the judge with the attorneys representing the parties where the parties try to work out a settlement.
A verdict for the defendant as the jury would have no legal basis for decision in favor of plaintiff even if it regarded the plaintiff’s claims to be true.
A verdict given in favor of the plaintiff when the defendant fails to answer the summons.
A verdict given by recruited individuals who match the demographics of the jury.
A _____ is a written argument explaining why an appeal is being made.
motion
verdict
settlement
brief
Firm X and Firm Y are in dispute over a contract. They decide to use a form of alternative dispute resolution (ADR) to settle the dispute in which both parties meet to discuss the issue. Firm X brings their lawyer to this meeting but Firm Y does not. Which form of ADR is most likely being used here?
Arbitration
Facilitation
Mediation
Negotiation
Which of the following is one of the main goals of a mediator in a dispute?
Describing the problematic incident leading to the dispute.
Helping each party to listen to their opponent’s concerns.
Generating alternatives for the disputed points.
Helping each party to receive the maximum gains.
Which of these differentiates an arbitration proceeding from a trial?
The outcome of the hearing is a legally binding decision.
The use of legal counsel by the parties involved.
The absence of official written records of the hearing.
The presence of a neutral third party at the hearing.
David Myer seeks to resolve his dispute with his manager Ray Thorn. They both zero in on Rachel Moran to act as a neutral third party. Myer and Thorn take turns to explain their position to Ms. Moran who enumerates the strengths and weaknesses of the case. Using this assessment, Myer and Thorn reach a settlement. Which form of ADR is being used here?
Peer review
Private trial
Med-Arb
Early neutral case evaluation
Which of the following forms of ADR generally occurs after a case has been filed in a district or state court?
Arbitration
Summary jury trial
Private trial
Minitrial
What is meant by federal supremacy?
It is a clause which annuls any state or local law that directly conflicts with the U.S. Constitution or federal laws.
It is a clause that prohibits states from passing laws that significantly interfere with interstate legislations.
It is a clause that grants the federal government the authority to pass regulations that significantly affect the governance of the state legislatures.
It is a clause that strikes down laws that do not directly conflict with a federal law but attempt to regulate an area within federal jurisdiction.
In addition to the federal environmental standards of solid waste management, the state of Illinois was allowed to pass a new law regulating the disposal of toxic industrial wastes into the Great Lakes. This was a result of:
concurrent authority.
federal supremacy.
state preemption.
federal preemption.
The city of Chicago passed an ordinance banning spray painting in the city as a means to reduce graffiti. X Emulsions, a Texan paint manufacturing giant, challenged this legislation as a violation of the ____.
dormant commerce clause
supremacy clause
commerce clause
immunity clause
According to the takings clause:
all privately owned property used by the government are protected under the Fourth Amendment.
if a regulation prohibits the owner from deriving any economic benefit from his land, a taking has occurred and the owner must be compensated.
regulatory taking does not warrant compensation by the government as it is not protected by the constitution.
when the government takes private property for public use, it must pay compensation only when the property has been used for commercial purposes.
The Fifth Amendment provides that when the government deprives a private property owner of all economically beneficial uses of property, it constitutes a taking for which the takings clause requires payment.
If a law prevents individuals from exercising a fundamental right, the action will be subject to ____.
transitional scrutiny
strict scrutiny
intermediate scrutiny
the rational-basis test
Click here for the SOLUTION
Atwood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes
Atwood Company has an opportunity to produce and sell a revolutionary new smoke detector for homes. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential:
a.
New equipment would have to be acquired to produce the smoke detector. The equipment would cost $100,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost.
b.
Production and sales of the smoke detector would require a working capital investment of $40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years.
c.
An extensive marketing study projects sales in units over the next 12 years as follows:
Year
Sales in Units
1
4,000
2
7,000
3
10,000
4-12
12,000
d.
The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per unit.
e.
To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows:
Year
Amount of Yearly Advertising
1-2
$70,000
3
$50,000
4-12
$40,000
f.
Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $127,500 per year. (Depreciation is based on cost less salvage value.)
g.
The company’s required rate of return is 20%.
Click here to viewExhibit 13B-1andExhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1.
Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the smoke detectors for each year over the next 12 years. (Input all amounts as positive values except net cash outflow which should be indicated with a minus sign. Round your intermediate and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.)
2a.
Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.)
2b.
Would you recommend that Matheson accept the device as a new product?
Click here for the SOLUTION
a.
New equipment would have to be acquired to produce the smoke detector. The equipment would cost $100,000 and be usable for 12 years. After 12 years, it would have a salvage value equal to 10% of the original cost.
b.
Production and sales of the smoke detector would require a working capital investment of $40,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released for use elsewhere after 12 years.
c.
An extensive marketing study projects sales in units over the next 12 years as follows:
Year
Sales in Units
1
4,000
2
7,000
3
10,000
4-12
12,000
d.
The smoke detectors would sell for $45 each; variable costs for production, administration, and sales would be $25 per unit.
e.
To gain entry into the market, the company would have to advertise heavily in the early years of sales. The advertising program follows:
Year
Amount of Yearly Advertising
1-2
$70,000
3
$50,000
4-12
$40,000
f.
Other fixed costs for salaries, insurance, maintenance, and straight-line depreciation on equipment would total $127,500 per year. (Depreciation is based on cost less salvage value.)
g.
The company’s required rate of return is 20%.
Click here to viewExhibit 13B-1andExhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1.
Compute the net cash inflow (cash receipts less yearly cash operating expenses) anticipated from sale of the smoke detectors for each year over the next 12 years. (Input all amounts as positive values except net cash outflow which should be indicated with a minus sign. Round your intermediate and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.)
2a.
Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the \"$\" sign in your response.)
2b.
Would you recommend that Matheson accept the device as a new product?
Click here for the SOLUTION
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