Question

  The Matisse Co. is contemplating investing in several major asset purchases. The data below has been presented for one of the proposed investment projects.

Cost of equipment	$50,000
Working capital required at the beginning of the project	$30,000
Salvage value	$0
Annual cash inflows from the project	$20,000
Life of the project	8 years
Required rate of return	20%

The working capital would be released for use elsewhere at the end of the project. The net present value of the project would be closest to:

	1) $0.
	2) $3,720.
	3) $32,450.
	4) $88,370.

The Sparkle Company manufactures affordable costume jewelry. At the beginning of the year, the Sparkle Company received a request from an oversees customer who would like to purchase 10,000 necklaces for a Breast Cancer Fund Raising event; due to the large order the customer has offered to purchase each necklace for $10 (current selling price is $20 per unit). If the Sparkle Company accepts the special order, then an additional $2,000 in shipping costs and $5,000 in custom packaging/wrapping will be incurred. The company currently has the capacity to produce the 10,000 necklaces without incurring any additional fixed costs for factory space (current production 150,000 necklaces each year – maximum capacity is 200,000 units a year).

Current Selling Price	$20.00
Direct Labor per unit	$2.00
Direct Materials per unit	$6.00
Fixed Cost per unit	$7.00
Total Cost per Unit	$15.00

What are the total relevant costs per unit to be considered in deciding whether or not to accept or reject this special order?

	1) $5.00.
	2) $8.00.
	3) $8.20.
	4) $8.70.

The Sparkle Company manufactures affordable costume jewelry. At the beginning of the year, the Sparkle Company received a request from an oversees customer who would like to purchase 10,000 necklaces for a Breast Cancer Fund Raising event; due to the large order the customer has offered to purchase each necklace for $10 (current selling price is $20 per unit). If the Sparkle Company accepts the special order, then an additional $2,000 in shipping costs and $5,000 in custom packaging/wrapping will be incurred. The company currently has the capacity to produce the 10,000 necklaces without incurring any additional fixed costs for factory space (current production 150,000 necklaces each year – maximum capacity is 200,000 units a year).

Current Selling Price	$20.00
Direct Labor per unit	$2.00
Direct Materials per unit	$6.00
Fixed Cost per unit	$7.00
Total Cost per Unit	$15.00

Assume the special order is accepted. Which of the following statements is true?

	1) The Sparkle Company will report a profit of $18,000 by accepting the special order.
	2) The Sparkle Company will report a loss of $50,000 by accepting the special order.
	3) The Sparkle Company will report a profit of $13,000 by accepting the special order.
	4) The Sparkle Company will report a profit of $20,000 by accepting the special order.

The Karnes Company makes three energy drinks: Beautiful Berry Blue, Fantastic Fruity Freeze and Pumping Passion Pink. Last year, the Fantastic Fruity Freeze drink lost money so the company is considering discontinuing the product. The fixed costs of the company will not change if the product is discontinued. The following information relates to last years’ operations.

	Beautiful Berry Blue	Fantastic Fruity Freeze	Pumping Passion Pink	Total
Sales	$300,000	$220,000	$340,000	$860,000
Less Variable Cost	($180,000)	($190,000)	($220,000)	($590,000)
Contribution Margin	$120,000	$30,000	$120,000	$270,000
Common Fixed Cost (Allocated)	($50,000)	($50,000)	($40,000)	($140,000)
Income from Operations	$70,000	($20,000)	$80,000	$130,000

Based on the information provided, if the Karnes Company decides to discontinue making Fantastic Fruity Freeze, the overall impact on the company would be:

	1) A $30,000 reduction in profits due to the lost contribution margin from the product line.
	2) An increase of $20,000 in profits due to eliminating the product line.
	3) A decrease of $240,000 in total relevant costs specific to the discontinued product line.
	4) An increase of $190,000 in profits due to eliminating the product line.

Answer 1