Problem 2 (18 minutes) The Bruggs & Strutton Company manufactures an engine for carpet cleaners called the "Snooper." Budgeted cost and revenue data for the coming month of the "Snooper" are given below, based on sales of 40,000 units. Sales (40,000 units) $1,600,000 Less: Cost of goods sold 1,120,000 Gross margin $ 480,000 Less: Operating expenses 100,000 Operating income $ 380,000 Cost of goods sold consists of $800,000 of variable costs and $320,000 of fixed costs. Operating expenses consist of $40,000 of variable costs and $60,000 of fixed costs. Required: a. Calculate the break-even point in units. b. How many units must be sold to generate an operating income equal to 15% of sales? c. Using the degree of operating leverage, calculate the percentage increase in operating income that would result if sales were to increase by 25% over the budgeted amount. d. Management wants to increase sales and feels that this can be done by cutting the selling price by 10% and increasing the advertising budget by $20,000 per month. Management believes that these actions will increase unit sales by 50%. Should these changes be made? Use incremental analysis.

Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $13.00 million fully installed and will be fully depreciated over a 20 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.25 million per year and increased operating costs of $561,639.00 per year. Caspian Sea Drinks' marginal tax rate is 34.00%. If Caspian Sea Drinks uses a 12.00% discount rate, then the net present value of the RGM-7000 is _____. Currency: Round to: 2 decimal places.

Caspian Sea Drinks' is financed with 69.00% equity and the remainder in debt. They have 10.00-year, semi-annual pay, 5.33% coupon bonds which sell for 97.81% of par. Their stock currently has a market value of $24.72 and Mr. Bensen believes the market estimates that dividends will grow at 3.92% forever. Next year’s dividend is projected to be $2.91. Assuming a marginal tax rate of 35.00%, what is their WACC (weighted average cost of capital)? Percentage Round to: 2 decimal places

McNulty, Inc., produces desks and chairs. A new CFO has just been hired and announces a new policy that if a product cannot earn a margin of at least 20 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.

Manufacturing overhead for year 1 totaled $800,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:

Required:

a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks.

a-2. Which of the two products should be dropped?

b. Regardless of your answer in requirement a, the CFO decides at the beginning of year 2 to drop the chair product. The company cost analyst estimates that overhead without the chair line will be $650,000. The revenue and costs for desks are expected to be the same as last year. What is the estimated margin for desks in year 2? (Enter your answer as a percentage rounded to 1 decimal place (i.e., 32.1).)

Mattawa Manufacturing Inc. has four categories of overhead. The expected overhead costs for each of the categories for the next year are as follows:

Expected Costs Cost Driver

Activity Maintenance $510,000

Machine hours 60,000

Material handling 250,000

Material moves 20,000

Setups 60,000

Setups 3,000

Inspection 21,000

Inspections 12,000

Currently, the company applies overhead using a predetermined overhead rate based upon budgeted direct labour hours of 100,000. The company has been asked to submit a bid on a proposed job. Usually bids are based upon full manufacturing costs plus a percentage of 10 percent. Estimates for the proposed job are as follows:

Direct materials $30,000

Direct labour $24,000

Number of direct labour hours 8,000

Number of material moves 100

Number of inspections 120

Number of setups 24

Number of machine hours 4,000

Required:

1. If the company used activity-based cost drivers to assign overhead, calculate the bid price of the proposed job.

2. If the company used direct labour hours as the cost driver, calculate the bid price of the proposed job.

McNulty, Inc., produces desks and chairs. A new CFO has just been hired and announces a new policy that if a product cannot earn a margin of at least 15 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $910,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following: Chairs Desks Sales revenue $ 1,112,100 $ 2,570,400 Direct materials 603,000 990,000 Direct labor 170,000 480,000 Required: a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks. a-2. Which of the two products should be dropped? Chairs Desks b. Regardless of your answer in requirement (a), the CFO decides at the beginning of year 2 to drop the chair product. The company cost analyst estimates that overhead without the chair line will be $840,000. The revenue and costs for desks are expected to be the same as last year. What is the estimated margin for desks in year 2? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 1 decimal place.)

suppose ABC firm is considering an investment that would extend the life of one of its facilities for 5 years. the project will require upfront cost of 8 m plus (35+2) 37 millions investment in equipment. The equipment will be obsolete in 2 years and will be depreciated via straight line over that period (assume that the equipment can’t be sold). During the next 5 years ABC expect annual sales of 55 M per year from this facility. Material cost and operating expenses are expected to total 40 M and 6.8 M respectively per year. ABC expect no networking capital requirement for the project, and it pays a tax rate of 38%. ABC has 70% of equity and the remaining is in debt. if the cost of equity and debt are 8% and 6% respectively, should they take the project? a) WACC (in percentage, thus 3.8% must be entered as 3.8); b) Incremental FCF at 0; c) Incremental FCF from year 1 to year 5; d) NPV. All dollars’ answers must be submitted in Millions, thus 4.56M must be entered as 4.56. Round to the second decimal in each case.

McNulty, Inc., produces desks and chairs. A new CFO has just been hired and announces a new policy that if a product cannot earn a margin of at least 25 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost. Manufacturing overhead for year 1 totaled $944,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following: Chairs Desks Sales revenue $ 1,156,800 $ 2,769,000 Direct materials 600,000 960,000 Direct labor 140,000 450,000 Required: a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks. a-2. Which of the two products should be dropped? Chairs Desks b. Regardless of your answer in requirement (a), the CFO decides at the beginning of year 2 to drop the chair product. The company cost analyst estimates that overhead without the chair line will be $810,000. The revenue and costs for desks are expected to be the same as last year. What is the estimated margin for desks in year 2? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 1 decimal place.)

McNulty, Inc., produces desks and chairs. A new CFO has just been hired and announces a new policy that if a product cannot earn a margin of at least 15 percent, it will be dropped. The margin is computed as product gross profit divided by reported product cost.

Manufacturing overhead for year 1 totaled $935,000. Overhead is allocated to products based on direct labor cost. Data for year 1 show the following:

Required:

a-1. Based on the CFO's new policy, calculate the profit margin for both chairs and desks.

a-2. Which of the two products should be dropped?

b. Regardless of your answer in requirement (a), the CFO decides at the beginning of year 2 to drop the chair product. The company cost analyst estimates that overhead without the chair line will be $720,000. The revenue and costs for desks are expected to be the same as last year. What is the estimated margin for desks in year 2? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 1 decimal place.)

1. Your company designs and makes electronic counting and control devices for manufacturers. It employs 300 people in the Midwest and has been in business on a privately owned basis for nine years. The industry is competitive, and your company must preserve an edge in getting new products to market faster than others, maintaining a high-quality product, offering good and sustained service to its customers, and selling at a competitive price. The company offers a privately insured health care plan, among other benefits and rewards, for all employees and their dependents. It is a traditional indemnity plan design and the cost as a percentage of total employee compensation has increased from 16 percent to 25 percent over the last two years. There is no cost to the employees for their health care. Your competitors are sponsoring much less expensive plans. Your CEO has asked you for a complete review of the health care plan and to create a design that is in line with the business strategy, is cost-effective, provides employees with choice and quality, and helps recruit and retain employees.

Can you link your health care plan to a potential increase in productivity? How? How would you measure?