Average Rate of Return Method, Net Present Value Method, and Analysis

The capital investment committee of Ellis Transport and Storage Inc. is considering two investment projects. The estimated income from operations and net cash flows from each investment are as follows:

Each project requires an investment of $380,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 15% for purposes of the net present value analysis.

Required:

1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place.

1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, use the minus sign to indicate a negative net present value.

2. The warehouse has a   net present value as tracking technology cash flows occur   in time. Thus, if only one of the two projects can be accepted, the   would be the more attractive.

NUMBER THREE:

The financial statements for Castile Products, Inc., are given below:

Account balances at the beginning of the year were: accounts receivable, $190,000; and inventory, $310,000. All sales were on account.

Required:

Compute the following financial data and ratios:

1. Working capital.

2. Current ratio. (Round your answer to 1 decimal place.)

3. Acid-test ratio. (Round your answer to 2 decimal places.)

4. Debt-to-equity ratio. (Round your answer to 2 decimal places.)

5. Times interest earned ratio. (Round your answer to 2 decimal places.)

6. Average collection period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

7. Average sale period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

8. Operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

Tolson Company purchased a building by paying $85,000. The building has an estimated life of 40 years and an estimated residual value of $5,000.

Required:

A bond’s credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 6.0%. A-rated bonds sell at yields of 6.3%. Suppose that a 10-year bond with a face value of $1,000 and a coupon rate of 5.5% is downgraded by Moody’s from an Aa to A rating. Assume annual compounding.

a. What is the likely bond price before the downgrade? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Initial price $

b. What is the likely bond price after the downgrade? (Do not round intermediate calculations. Round your answer to 2 decimal places.) New price $

Crafty Ceramics makes custom ceramic tiles. During March Crafty worked on 25 jobs and purchased $25,600 of raw materials on the account, paid direct labor cost of $31,000, and incurred manufacturing overhead costs of $26,530. Crafty applies overhead at a rate of 80% of direct labor cost.

Job #231, one of the 25 jobs, started and completed during the month. The company’s records show the following direct materials were requisitioned for Job #231: White tiles: 1,000 units at $1.00 per unit, and High Gloss Glaze: 2 quarts at $2.00 per quart. Labor time records show Jenny Jones worked 10 hours at $20 per hour on Job #231.       

Required:

      A) Make journal entries to record the material requisition for Job #231.

• Make journal entry to record the labor cost for Job #231.
• Make journal entry to apply [i.e., to allocate] the manufacturing overhead to Job #231.

D) Given the total production costs for this month over all the jobs, make journal entries:

       (1) to apply the total manufacturing overhead to all 25 jobs, and

       (2) to close under- [or over-] applied overhead to the firm’s cost of goods sold account.

Average Rate of Return, Cash Payback Period, Net Present Value Method

Bi-Coastal Railroad Inc. is considering acquiring equipment at a cost of $144,000. The equipment has an estimated life of 10 years and no residual value. It is expected to provide yearly net cash flows of $72,000. The company’s minimum desired rate of return for net present value analysis is 12%.

Compute the following:

a. The average rate of return, assuming the annual earnings are equal to the net cash flows less the annual depreciation expense on the equipment. If required, round your answer to one decimal place.
%

b. The cash payback period.
  years

c. The net present value. Use the above table of the present value of an annuity of $1. Round to the nearest dollar. If required, use a minus sign to indicate negative net present value" for current grading purpose.

Andretti Company has a single product called a Dak. The company normally produces and sells 87,000 Daks each year at a selling price of $40 per unit. The company’s unit costs at this level of activity are given below:

A number of questions relating to the production and sale of Daks follow. Each question is independent.

Required:

1-a. Assume that Andretti Company has sufficient capacity to produce 108,750 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its sales by 25% above the present 87,000 units each year if it were willing to increase the fixed selling expenses by $140,000. Calculate the incremental net operating income. (Round your answers to the nearest whole number.)

2. Assume again that Andretti Company has sufficient capacity to produce 108,750 Daks each year. A customer in a foreign market wants to purchase 21,750 Daks. Import duties on the Daks would be $1.70 per unit, and costs for permits and licenses would be $17,400. The only selling costs that would be associated with the order would be $1.50 per unit shipping cost. Compute the per unit break-even price on this order. (Round your answers to 2 decimal places.)

3. The company has 500 Daks on hand that have some irregularities and are therefore considered to be "seconds." Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)

4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 35% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20%. What would be the impact on profits of closing the plant for the two-month period? (Any losses should be indicated by a minus sign. Round all calculations (intermediate and final) to whole numbers. Round unit calculations to whole numbers.)

5. An outside manufacturer has offered to produce Daks and ship them directly to Andretti’s customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. Compute the unit cost that can be avoided if purchased from the outside manufacturer. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $27,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he would like to purchase a cabin in Rivendell in 10 years at an estimated cost of $350,000. Third, after he passes on at the end of the 20 years of withdrawals, he would like to leave an inheritance of $1,150,000 to his nephew Frodo. He can afford to save $2,700 per month for the next 10 years. If he can earn an EAR of 10 percent before he retires and an EAR of 7 percent after he retires, how much will he have to save each month in Years 11 through 30

Use this information to answer the next two questions.

A) Consider the side of the supplier. What is the cost plus profit for a cost reduction of $80,000 if the sharing arrangement is 80/20?

B) What is the cost plus profit if there is a cost over run of $70,000 and the sharing arrangement is 75/25?

Packaging Solutions Corporation manufactures and sells a wide variety of packaging products. Performance reports are prepared monthly for each department. The planning budget and flexible budget for the Production Department are based on the following formulas, where q is the number of labor-hours worked in a month: Direct labor $ 16.40 q Indirect labor $ 4,000 + $ 1.70 q Utilities $ 5,600 + $ 0.50 q Supplies $ 1,600 + $ 0.40 q Equipment depreciation $ 18,200 + $ 2.40 q Factory rent $ 8,400 Property taxes $ 2,900 Factory administration $ 13,100 + $ 0.80 q The actual costs incurred in March in the Production Department are listed below: Actual Cost Incurred in March Direct labor $ 72,120 Indirect labor $ 10,830 Utilities $ 8,240 Supplies $ 3,610 Equipment depreciation $ 28,520 Factory rent $ 8,800 Property taxes $ 2,900 Factory administration $ 15,930. Actual Labor Hours 44,300, and Budget Labor Hours 4,500

2. The company actually worked 4,300 labor-hours in March. Complete the Production Department’s flexible budget for the month.

3. Complete the Production Department’s flexible budget performance report for March, including both the spending and activity variances. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Problem 23-2

The comparative balance sheets for Nash Corporation show the following information.

Additional data related to 2017 are as follows.

Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part of the country. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Bandar Industries Berhad of Malaysia manufactures sporting equipment. One of the company’s products, a football helmet for the North American market, requires a special plastic. During the quarter ending June 30, the company manufactured 3,000 helmets, using 1,890 kilograms of plastic. The plastic cost the company $14,364. According to the standard cost card, each helmet should require 0.53 kilograms of plastic, at a cost of $8.00 per kilogram. Required: 1. According to the standards, what cost for plastic should have been incurred to make 3,000 helmets? How much greater or less is this than the cost that was incurred? (Round Standard kilograms of plastic per helmet to 2 decimal places.) 2. Break down the difference computed in (1) above into a materials price variance and a materials quantity variance. (Round your actual materials price to two decimal places, and round your final answers to the nearest whole dollar. Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance).)

1)Generally speaking, what is the difference between direct cost and indirect cost? Assume you are a manager, which one would concern you more when you are analyzing the cost of your product/service? Why?

2)Traditionally, in a manufacturing company, what is the most popular way to treat indirect cost? What is the advantage and disadvantage of that?

Exercise 23-11

Condensed financial data of Cheyenne Company for 2017 and 2016 are presented below.

Additional information:

During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2017.

Prepare a statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)