Question

The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $15 million, and the equipment has a useful life of 10 years with a residual value of $500,000. The company will use straight-line depreciation. Beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) Proposed (automation) Production and sales volume 80,000 units 120,000 units Per Unit Total Per Unit Total Sales revenue $ 90 $ 90 Variable costs Direct materials $ 18 $ 18 Direct labor 25 Variable manufacturing overhead 10 10 Total variable manufacturing costs 53 Contribution margin $ 37 $ 42 Fixed manufacturing costs $ 1,250,000 $ 2,350,000 Net operating income

2. Determine the project's accounting rate of return. (Round your answer to 2 decimal places.)

3. Determine the project's payback period. (Round your answer to 2 decimal places.)

Answer 1

			Current	Proposed	Incremental
Sales units			80000	120000
Sales revenue			7200000	10800000	3600000
Less: Variable ccost
Material @ 18.			1440000	2,160,000	-720,000
Labour			2000000	2400000	-400,000
Variable OH @ 10			800000	1200000	-400,000
Contribution margin			2960000	5,040,000	2,080,000
Less: Fixed cost			1,250,000	2,350,000	-1,100,000
Net income			1,710,000	2,690,000	980,000
Note: Depreciation expense shall have been included in Fixed cost.
Net Incremental income			980,000
Add: Annual depreciation			1450000
(15000,000-500,000)10 years
Annual cash inflows			2,430,000
Investment:			15,000,000
Salvage			500,000
Average Investment			7,750,000
(15000,000+500,000)/2
Accounting rate of return: Average Net income/ Average Investment *100
		$ 980,000 /7750,000 *100 = 12.65%
Payback period: Initial Investment / Annual Cash inflows
		$ 15000,000 / 2430,000 = 6.17 years