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In: Accounting

Required information [The following information applies to the questions displayed below.] Beacon Company is considering automating...

Required information

[The following information applies to the questions displayed below.]

Beacon Company is considering automating its production facility. The initial investment in automation would be $6.41 million, and the equipment has a useful life of 5 years with a residual value of $1,160,000. The company will use straight-line depreciation. Beacon could expect a production increase of 48,000 units per year and a reduction of 20 percent in the labor cost per unit.

Current (no automation) Proposed (automation)
73,000 units 121,000 units
Production and sales volume Per Unit Total Per Unit Total
Sales revenue $ 92 $ ? $ 92 $ ?
Variable costs
Direct materials $ 18 $ 18
Direct labor 20 ?
Variable manufacturing overhead 10 10
Total variable manufacturing costs 48 ?
Contribution margin $ 44 ? $ 48 ?
Fixed manufacturing costs $ 1,170,000 $ 2,280,000
Net operating income ? ?

5. Recalculate the NPV using a 8 percent discount rate. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Negative amount should be indicated by a minus sign. Enter the answer in whole dollars.)


Solutions

Expert Solution

Current (No Automation) Proposed (Automation)
73000 121000
Per unit Total Per unit Total Difference
Sales Revenue $92 $6,716,000 $92 $11,132,000 $4,416,000
Variable cost
Direct Material $18 $1,314,000 $18 $2,178,000 $864,000
Direct Labour (20*80%) $20 $1,460,000 $16 $1,936,000 $476,000
Variable Manufacturing OH $10 $730,000 $10 $1,210,000 $480,000
Less: Total Variable maufacturing cost $48 $3,504,000 $44 $5,324,000 $1,820,000
Contribution Margin $44 $3,212,000 $48 $5,808,000 $2,596,000
Less: Fixed Manufacturing costs $1,170,000 $2,280,000 $1,110,000
Net opeating Income $2,042,000 $3,528,000 $1,486,000
Computation of Present Value
Annual Net Operating Income $1,486,000.00
Cumm PVAF @ 8% for 5 Year 3.99271
PV of Annual Cash Flow (C=AXB) $5,933,167.06
PV of Residual Value (116000X0.68058) $78,947.28
Presetn Value of Cash Inflow ( C+D) $6,012,114.34
Less: Initial Investment $6,410,000.00
NPV -$397,885.66

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