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Starfax, Inc., manufactures a small part that is widely used in various electronic products such as home computers. Operating results for the first three years of activity were as follows (absorption costing basis): |
| Year 1 | Year 2 | Year 3 | ||||
| Sales | $ | 1,100,000 | $ | 880,000 | $ | 1,100,000 |
| Cost of goods sold | 835,000 | 588,000 | 885,000 | |||
| Gross margin | 265,000 | 292,000 | 215,000 | |||
| Selling and administrative expenses | 260,000 | 220,000 | 260,000 | |||
| Net operating income (loss) | $ | 5,000 | $ | 72,000 | $ | (45,000) |
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In the latter part of Year 2, a competitor went out of business and in the process dumped a large number of units on the market. As a result, Starfax’s Sales dropped by 20% during Year 2 even though production increased during the year. Management had expected sales to remain constant at 50,000 units; the increased production was designed to provide the company with a buffer of protection against unexpected spurts in demand. By the start of Year 3, management could see that inventory was excessive and that spurts in demand were unlikely. To reduce the excessive inventories, Starfax cut back production during Year 3, as shown below: |
| Year 1 | Year 2 | Year 3 | |
| Production in units | 50,000 | 60,000 | 40,000 |
| Sales in units | 50,000 | 40,000 | 50,000 |
| Additional information about the company follows: |
| a. |
The company’s plant is highly automated. Variable manufacturing expenses (direct materials, direct labor, and variable manufacturing overhead) total only $4.70 per unit, and fixed manufacturing overhead expenses total $600,000 per year. |
| b. |
Fixed manufacturing overhead costs are applied to units of product on the basis of each year’s production. That is, a new fixed manufacturing overhead rate is computed each year. |
| c. |
Variable selling and administrative expenses were $4 per unit sold in each year. Fixed selling and administrative expenses totaled $60,000 per year. |
| d. | The company uses a FIFO inventory flow assumption. |
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Starfax’s management can’t understand why profits doubled during Year 2 when sales dropped by 20%, and why a loss was incurred during Year 3 when sales recovered to previous levels.
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In: Accounting
Exercise 6-7 Segmented Income Statement [LO6-4]
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Shannon Company segments its income statement into its North and South Divisions. The company’s overall sales, contribution margin ratio, and net operating income are $700,000, 50%, and $56,000, respectively. The North Division’s contribution margin and contribution margin ratio are $217,500 and 75%, respectively. The South Division’s segment margin is $60,000. The company has $84,000 of common fixed expenses that cannot be traced to either division. |
| Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Prepare an income statement for Shannon Company that uses the contribution format and is segmented by divisions. (Round your percentage answers to 1 decimal place (i.e .1234 should be entered as 12.3))
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Exercise 6-9 Variable and Absorption Costing Unit Product Costs and Income Statements [LO6-1, LO6-2, LO6-3]
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Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations: |
| Variable costs per unit: | ||
| Manufacturing: | ||
| Direct materials | $ 25 | |
| Direct labor | $ 15 | |
| Variable manufacturing overhead | $ 5 | |
| Variable selling and administrative | $ 2 | |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 250,000 |
| Fixed selling and administrative expenses | $ | 80,000 |
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During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $60 per unit. |
| Required: | |
| 1. | Assume the company uses variable costing: |
| a. |
Compute the unit product cost for year 1 and year 2.
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| b. |
Prepare an income statement for year 1 and year 2.
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| b. |
Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places.)
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| 3. |
Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2.
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In: Accounting
You are valuing an investment that will pay you nothing the first two years, $5,000 the third year, $7,000 the fourth year, $11,000 the fifth year, and $17,000 the sixth year (all payments are at the end of each year). What is the value of the investment to you now if the appropriate annual discount rate is 10.00%?
In: Finance
The Carbondale Hospital is considering the purchase of a new ambulance. The decision will rest partly on the anticipated mileage to be driven next year. The miles driven during the past 5 years are as follows:
| Year | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Mileage | 3,100 | 4,050 | 3.400 | 3,800 | 3,700 |
a) Using a 2-year moving average, the forecast for year 6 = _______ miles (round your response to one decimal place).
b) If a 2-year moving average is used to make the forecast, the MAD based on this = _______ miles
c) The forecast for year 6 using a weighted 2-year moving average with weights of 0.35 and 0.65 (the weight of 0.65 is for the most recent period) =_______ (round your response to the nearest whole number).
The MAD for the forecast developed using a weighted 2-year moving average with weights of 0.35 and 0.65= _______ miles
d) Using exponential smoothing with α = 0.40 and the forecast for year 1 being 3.100, the forecast for year 6 = _______ miles
In: Other
Suppose a company wants to decide whether to lease or purchase an asset.
Purchase: The capital cost required to purchase the asset is $1,000,000 (at time zero) with a salvage value of $500,000 at the end of the 5th year. The purchased asset can be depreciated based on MACRS 5-year life depreciation with the half year convention (table A-1 at IRS (https://www.irs.gov/publications/p946) over six years (from year 0 to year 5).
Lease: The asset can be leased for 5 years and annual operating lease payments (LP) of $250,000 (from year 1 to year 5).
The asset would yield the annual revenue of $350,000 for five years (from year 1 to year 5) and operating cost of $60,000 for year 1 to 5.
Considering income tax of 35% and minimum ROR of 16%, calculate the ATCF and NPV for both alternatives and conclude which alternative is a better decision.
In: Finance
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Keiper, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.7 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $2,080,000 in annual sales, with costs of $775,000. The project requires an initial investment in net working capital of $300,000, and the fixed asset will have a market value of $210,000 at the end of the project. If the tax rate is 35 percent, what is the project’s year 0 net cash flow? Year 1? Year 2? Year 3? (Negative amounts should be indicated by a minus sign.) |
| Years | Cash Flow |
| Year 0 | $ |
| Year 1 | $ |
| Year 2 | $ |
| Year 3 | $ |
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If the required return is 12 percent, what is the project's NPV? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| NPV |
$ |
In: Finance
Keener Company has had 900 shares of 6%, $100 par preferred stock and 42,000 shares of $5 stated value common stock outstanding for the last 3 years. During that period, dividends paid totaled $3,900, $22,500, and $27,600 for each year, respectively. Required: Compute the amount of dividends that Keener must have paid to preferred shareholders and common shareholders in each of the 3 years, given the following 3 independent assumptions:
1. Preferred stock is nonparticipating and noncumulative.
Keener Company
Schedule of Dividends
Preferred Common Total
Year 1 Year 2 Year 3
2. Preferred stock is nonparticipating and cumulative.
Keener Company
Schedule of Dividends
Preferred Common Total
Year 1 Year 2 Year 3
3. Preferred stock is fully participating and cumulative.
Keener Company
Schedule of Dividends
Preferred Common Total
Year 1 Year 2 Year 3
In: Accounting
Assume that a taxpayer can choose when he is to receive $10,000 of fully taxable income. If the taxpayer receives the income at the end of Year 1, he will receive exactly $10,000. If he delays receipt of the income until the end of Year 2, the amount will grow to $11,000. If the taxpayer takes the money at the end of Year 1, he can invest the proceeds and earn a pretax return of 10 percent over the next year.
If the taxpayer faces a marginal tax rate of 31 percent in both Year 1 and Year 2, when should he elect to receive the income?
At what pretax rate of return will the taxpayer be indifferent to taking the money in Year 1 and Year 2?
If the taxpayer’s marginal tax rate increases to 35 percent in Year 2, when should he elect to receive the income?
What would the tax rate need to be in Year 2 to make the taxpayer indifferent to the alternatives?
In: Accounting
Consider that Luxio has identified the following two mutually exclusive projects:
Cash Flow (A)
Year 0.........-34000
Year 1..........16500
Year 2.........14000
Year 3.........10000
Year 4..........6000
Cash Flow (B)
Year 0........-$34,000
Year 1...........5,000
Year 2.........10,000
Year 3........18,000
Year 4........19,000
The required return is 11%.
Question: Over what range of discount rates would the company choose project A? Explain.
P.S. I have calculated the IRR and NPV for 11% required return.
Project A: IRR= 16.60% NPV= $ 3,491.88
Project B: IRR= 15.72% NPV= $ 4,298.06
I have also calculated the crossover rate at which the company will be indifferent between the two projects: 13.75%.
I'm having a hard time explaining why the company will choose project A if the discount rate is above 13.75?
In: Finance
XYZ company is considering investing in Project Q or Project U. Project Q generates the following cash flows: year “zero” = 281 dollars (outflow); year 1 = 211 dollars (inflow); year 2 = 330 dollars (inflow); year 3 = 318 dollars (inflow); year 4 = 196 dollars (inflow). Project U generates the following cash flows: year “zero” = 230 dollars (outflow); year 1 = 150 dollars (inflow); year 2 = 105 dollars (inflow); year 3 = 201 dollars (inflow); year 4 = 110 dollars (inflow). The MARR is 6%. Compute the External Rate of Return (ERR) of the BEST project. (note1: if your answer is 10.25% then write 10.25 as your answer, not 0.1025) (note2: round your answer to two decimal places, and do not include spaces, currency signs, plus or minus signs, or commas)
In: Finance