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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 | $ 29 | |
| Direct labor | $ 17 | |
| Variable manufacturing overhead | $ 5 | |
| Variable selling and administrative | $ 4 | |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 320,000 |
| Fixed selling and administrative expenses | $ | 80,000 |
|
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 $52 per unit. |
| Required: | |
| 1. | Assume the company uses variable costing: |
| a. | Compute the unit product cost for year 1 and year 2. |
| b. |
Prepare an income statement for year 1 and year 2. |
| 2. | Assume the company uses absorption costing: | |
| a. |
Compute the unit product cost for year 1 and year 2. (Round your answer to 2 decimal places.) |
| b. |
Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places) |
| 3. |
Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2. |
In: Accounting
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 $ 26 Direct labor $ 13 Variable manufacturing overhead $ 3 Variable selling and administrative $ 2 Fixed costs per year: Fixed manufacturing overhead $ 240,000 Fixed selling and administrative expenses $ 80,000 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 $52 per unit. Required: 1. Assume the company uses variable costing: a. Compute the unit product cost for year 1 and year 2. b. Prepare an income statement for year 1 and year 2. 2. Assume the company uses absorption costing: a. Compute the unit product cost for year 1 and year 2. (Round your answer to 2 decimal places.) b. Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places) 3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2.
In: Accounting
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 | $ | 30 |
| Direct labor | $ | 13 |
| Variable manufacturing overhead | $ | 7 |
| Variable selling and administrative | $ | 6 |
| Fixed costs per year: | ||
| Fixed manufacturing overhead | $ | 320,000 |
| Fixed selling and administrative expenses | $ | 60,000 |
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 $58 per unit.
Required:
1. Assume the company uses variable costing:
a. Compute the unit product cost for year 1 and year 2.
b. Prepare an income statement for year 1 and year 2.
2. Assume the company uses absorption costing:
a. Compute the unit product cost for year 1 and year 2.
(Round your answers to 2 decimal places.)
b. Prepare an income statement for year 1 and year 2. (Round your intermediate calculations to 2 decimal places)
3. Reconcile the difference between variable costing and absorption costing net operating income in year 1 and year 2.
In: Accounting
Trademark Inc. is planning to set up a new manufacturing plant in New York to produce safety tools. The company bought some land six years ago for $4.3 million in anticipation of using it as a warehouse and distribution site, but the company has since decided to rent these facilities from a competitor instead. If the land were sold today, the company would sell for $4.6 million on an after-tax basis. In four years, the land could be sold for $4.8 million after taxes. The company hired a marketing firm to analyze the market at a cost of $250,000. Here is the summary of marketing report: We believe that the company will be able to sell 5,600, 6,300, 7,200, and 5,900 units each year for the next four years, respectively. We believe that $550 can be charged for each unit. We believe at the end of the four-year period, sales should be discontinued. The company believes that fixed costs for the project will be $615,000 per year. Variable costs are $462,000, $519,750, $594,000, 486,750 each year for the next four years, respectively. The equipment necessary for production will cost $2.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $450,000. Net working capital of $325,000 will be required immediately. The company has a 21 percent tax rate, and the required return on the project is 9 percent.
Which of the following is true
$250,000 is an incremental cash flow and it will be part of the total project cash flow of year zero as an outflow.
$4,300,000 is an incremental cash flow since it is the original cost of land.
$4,800,000 is an opportunity cost and it will be part of the project cash flow of year zero as an outflow.
$4,600,000 is an opportunity cost and it will be part of the total project cash flow of year zero as an outflow.
$4,300,000 and $250,000 are sunk costs and they will be part of the total project cash flow of year zero as outflows.
What is the Year 2 depreciation expense
$833,250
$370,250
$185,250
$1,111,250
$370,379.63
What is the after-tax cash flow from the sale of the equipment?
$450,000
$185,250
$555,500
$355,500
$94,500
What is the capital spending cash flow of Year 0 and Year 4
Year 0:$2,500,000, outflow / Year 4:$4,800,000, inflow
Year 0:$7,100,000, outflow / Year 4:$5,155,500, inflow
Year 0:$7,100,000, outflow / Year 4:$5,250,000, inflow
Year 0:$6,800,000, outflow / Year 4:$5,155,500, inflow
Year 0:$2,500,000, outflow / Year 4:$355,500, inflow
What is the operating cash flow at Year 4?
$2,074,260.00
$1,732,070.00
$2,140,150
$2,251,042.50
$1,757,352.50
What is the project's NPV? Should you accept or reject the project?
(NO CHOICES)
In: Finance
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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. |
|
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 |
|
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.
|
| 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 | $ |
|
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