Question

1a.) The production department is proposing the purchase of an automatic insertion machine. It has identified 3 machines, each with an estimated life of 10 years. Which machine offers the best internal rate of return?

	Machine A	Machine B	Machine C
Annual net cash flows	$50,000	$40,000	$75,000
Average investment	$250,000	$300,000	$500,000

a.Machine C only

b.Machines A and B

c.Machine A only

d.Machine B only

1b.)

Schedule of Activity Costs
Quality Control Activities	Activity Cost
Product testing	$55,000
Assessing vendor quality	26,000
Recalls	18,000
Rework	29,000
Scrap disposal	8,000
Product design	30,000
Training machine operators	46,000
Warranty work	12,000
Process audits	22,000

From the above schedule, calculate the following:

a. Prevention costs
$

b. Appraisal costs
$

1.c)

Laramie Technologies had the following data:

Cost of materials used	$50,000
Direct labor costs	56,000
Factory overhead	28,000
Work in process inventory, beginning	45,000
Work in process inventory, ending	32,000

Calculate the cost of goods manufactured.

$

Answer 1

(1a) IRR:-

Average Investment = PVAF * Annual net cash flows

Machine A:-

$250000 = $50000 * PVAF

PVAF = 5

PVAF for 10 years is 5.018 at 15%

Hence IRR = 15% (approx)

Machine B:-

$300000 = $40000 * PVAF

PVAF = 7.5

PVAF for 10 years is 7.72 at 5%

PVAF for 10 years is 7.36 at 6%

Hence IRR is between 5-6%

Machine C:-

$500000 = $75000 * PVAF

PVAF = 6.67

PVAF for 10 years is 6.71 at 8%

The Best IRR is provided by Machine A

Option C is correct

(1b)

1. Prevention Cost = Assessing vendor quality + Product Design + Training machine operators                                                                         
                            = $26000 + $30000 + $46000 = $102000
2. Appraisal Cost = Product testing + Process audits

                  = $55000 + $22000 = $77000

(1c) Cost of Goods Manufactured:-

beginning Work In process Inventory		$45000
Direct material used	$50000
direct labor	$56000
manufacturing overhead	$28000
total manufacturing costduring the year		$134000
total manufacturing costto account for		$179000
Less: ending work in process inventory		$32000
cost of goods manufactured		$147000