Comfy Corporation manufactures furniture in several divisions, including the patio furniture division. The manager of the...

Comfy Corporation manufactures furniture in several divisions, including the patio furniture division. The manager of the patio furniture division plans to retire in two years.
The manager receives a bonus based on the division’s ROI, which is currently 7%.
One of the machines that the patio furniture division uses to manufacture the furniture is rather old,
and the manager must decide whether to replace it. The new machine would cost $35,000 and would last
10 years. It would have no salvage value. The old machine is fully depreciated and has no trade-in value.
Comfy uses straight-line depreciation for all assets. The new machine, being new and more efficient, would
save the company $5,000 per year in cash operating costs. The only difference between cash flow and net
income is depreciation. The internal rate of return of the project is approximately 7%. Comfy Corporation’s
weighted-average cost of capital is 5%. Comfy is not subject to any income taxes.
1. Should Comfy Corporation replace the machine? Why or why not?
2. Assume that “investment” is defined as average net long-term assets (that is, after depreciation) during the year. Compute the project’s ROI for each of its first five years. If the patio furniture manager is
interested in maximizing his bonus, would he replace the machine before he retires? Why or why not?
3. What can Comfy do to entice the manager to replace the machine before retiring?

Expert Solution

ekkarill92 answered 5 months ago

Dewan INC. has several divisions, each with a manager responsible for the operations of the division....

Dewan INC. has several divisions, each with a manager responsible for the operations of the division. Each division of Dewan controls product design, sales, pricing, operating costs, and profits.. However, Dewan’s corporate management maintains control over the financial operations of the divisions by approving all capital expenditures above a small amount and by keeping tight reins on the financial reporting from the division to corporate headquarters. Each division has a corporate controller who manages the division's accounting system and provides...

Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and...

Sembotix Company has several divisions including a Semiconductor Division that sells semiconductors to both internal and external customers. The company's X-ray Division uses semiconductors as a component in its final product and is evaluating whether to purchase them from the Semiconductor Division or from an external supplier. The market price for semiconductors is $100 per 100 semiconductors. Dave Bryant is the controller of the X-ray Division, and Howard Hillman is the controller of the Semiconductor Division. The following conversation took...

Patiomaster Products manufactures patio furniture. The estimated numbers of sets to be sold for the last...

Patiomaster Products manufactures patio furniture. The estimated numbers of sets to be sold for the last three months of 2020 is: Month Sales October 10,000 November 7,000 December 5,000 January 6,000 Finished goods inventory at the end of September is expected to be 3,000 units. Finished goods inventory is set at 30 percent of next month's sales. How many tables will need to be produced in December? Select one: a. 1,500 units b. 6,800 units c. none of these d....

Truball Inc., which manufactures sports equipment, consists of several operating divisions. Division A has decided to...

Truball Inc., which manufactures sports equipment, consists of several operating divisions. Division A has decided to go outside the company to buy materials since division B plans to increase its selling price for the same materials to $200. Information for division A and division B follows: Outside price for materials $195 Division A’s annual purchases 14,500 units Division B’s variable costs per unit $185 Division B’s fixed costs, per year $ 1,340,000 Division B’s capacity utilization 100 % Required: 1....

Freeman Company has five divisions, and you are the division manager of one of these divisions....

Freeman Company has five divisions, and you are the division manager of one of these divisions. Assume that the Administrative Costs for Freeman Company represent corporate-sustaining fixed costs that are allocated to each division based on the division’s total assets. These costs represent long term commitments that cannot be changed within the next two years. Freeman Company decides to shut-down on of the other divisions (not your division) and dispose of the shut-down division’s assets. A. (6 points) How would...

The Ottoboni Corporation had two operating divisions, one manufacturing division and a finance division. Both divisions...

The Ottoboni Corporation had two operating divisions, one manufacturing division and a finance division. Both divisions are considered separate components. The finance division has been unprofitable, and on October 3, 2014, Ottoboni adopted a formal plan to sell the division, which subsequently was considered ‘held for sale’. The before-tax operating loss of the division for the year was $270,000. The company’s effective tax rate is 40%. The after-tax income from continuing operations for 2014 is $600,000. On December 31, 2014,...

A corporation has two divisions, the Parts Division and the Appliance Division. The Appliance Division currently...

A corporation has two divisions, the Parts Division and the Appliance Division. The Appliance Division currently buys its switches from an outside supplier for $25 each. It needs 4,000 switches a year. The Parts Division makes switches, and has recorded the following information: Parts Division – Outside sale of switches: Price $27 Direct materials $10 Direct labor $ 2 Variable overhead $ 4 Fixed overhead $ 4 The Appliance Division wants to buy the 4,000 switches from the Parts Division....

Walton Corporation has four divisions: the assembly division, the processing division, the machining division, and the...

Walton Corporation has four divisions: the assembly division, the processing division, the machining division, and the packing division. All four divisions are under the control of the vice president of manufacturing. Each division has a manager and several departments that are directed by supervisors. The chain of command runs downward from vice president to division manager to supervisor. The processing division is composed of the paint and finishing departments. The May responsibility reports for the supervisors of these departments follow:...

Campbell Corporation has four divisions: the assembly division, the processing division, the machining division, and the...

Campbell Corporation has four divisions: the assembly division, the processing division, the machining division, and the packing division. All four divisions are under the control of the vice president of manufacturing. Each division has a manager and several departments that are directed by supervisors. The chain of command runs downward from vice president to division manager to supervisor. The processing division is composed of the paint and finishing departments. The May responsibility reports for the supervisors of these departments follow:...

Amarillo Corporation has four divisions: the assembly division, the processing division, the machining division, and the...

Amarillo Corporation has four divisions: the assembly division, the processing division, the machining division, and the packing division. All four divisions are under the control of the vice president of manufacturing. Each division has a manager and several departments that are directed by supervisors. The chain of command runs downward from vice president to division manager to supervisor. The processing division is composed of the paint and finishing departments. The May responsibility reports for the supervisors of these departments follow:...

Question