Question

1-The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

NPV method

payback method

internal rate of return method

none of the above 2- Sarasota Bicycles has been manufacturing its own wheels for its bikes.  The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labor cost.  The direct materials and direct labor cost per unit to make the wheels are $3.00 and $3.60 respectively.  Normal production is 200,000 wheels per year. A supplier offers to make the wheels at a price of $8 each.  If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products. Required: a.   Prepare an incremental analysis for the decision to make or buy the wheels. b.   Should Sarasota Bicycles buy the wheels from the outside supplier?  Justify your answer. 3- Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:                               Variable costs:                                     Direct materials                        $140                                     Direct labor                                100                                     Manufacturing support              105                                     Marketing costs                           55                               Fixed costs:                                     Manufacturing support              175                                     Marketing costs                           65                               Total costs                                        640                               Markup (50%)                                  320                               Targeted selling price                      $960 For Crandle Manufacturers Inc., what is the minimum acceptable price of this special order?

Answer 1

Solution 1:

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the "internal rate of return method"

Hence 3rd option is correct.

Solution 2a:

Differential Analysis - Making Wheels (alt 1) or Buying Wheels (Alt2) - Sarasota
Particulars	Making Wheel (Alt 1)	Buying Wheel (Alt 2)	Financial advantage (Disadvantage) of buying (Alternative 2)
Relevant Costs:
Purchase Price (200000*$8)	$0.00	$1,600,000.00	-$1,600,000.00
Direct material	$600,000.00	$0.00	$600,000.00
Direct Labor	$720,000.00	$0.00	$720,000.00
Variable overhead	$216,000.00	$0.00	$216,000.00
Total Cost	$1,536,000.00	$1,600,000.00	-$64,000.00

Solution 2b:

As buying cost of wheel is higher than making cost of Wheel, therefore Sarasota Bicycle should not buy the wheels from outside supplier.

Solution 3:

As company is having excess capacity, therefore minimum acceptable price for special order = Variable cost to regular customer = $140 + $100 + $105 + $55 = $400 per unit