E19.9 (LO 2) Tiger Golf Accessories sells golf shoes, gloves, and a laser-guided range-finder that measures distance. Shown below are unit cost and sales data.

Compute break-even point in units for a company with multiple products.

Fixed costs are $620,000.

Instructions

a. Compute the break-even point in units for the company.

b. Determine the number of units to be sold at the break-even point for each product line.

c. Verify that the mix of sales units determined in (b) will generate a zero net income.

Xavier Corporation predicts that net income in the coming year will be $300 million. There are 30 million shares of common stock outstanding and Xavier maintains a debt to equity ratio of .8. The current market price per share for Xavier is $100.

                        Required:

1. If Xavier wishes to maintain its present debt-equity ratio, calculate the maximum investment funds available without issuing new equity and the increase in borrowing that goes along with it. Show Computations
2. Suppose that the firm uses a residual dividend policy. Planned capital expenditures total $150 million. Based on this information, what will be the dividend yield and the dividend per share? Show computations
3. Suppose Xavier plans no capital outlays for the coming year. What will be the dividend yield and the dividend per share, assuming that Xavier uses the residual dividend policy? Show Computations

The company announces that it will make an investment. As a result of the investment, it will have to reduce its dividend to be paid after one year to EUR 3, whereas it was previously expected to pay a dividend of EUR 5 after one year. Prior to the announcement, dividends were expected to grow 2% per year and the company’s share price was € 100.

The new investment is expected to increase the growth rate of dividends to 4 percent. After a dividend of EUR 3 after one year, the dividend will therefore increase by 4% per year as expected.

Assuming that the new investment does not affect the riskiness of the company, what can we deduce from the investment with this information?

Select one:

a. The NPV of the investment is positive.

b. The NPV of the investment is negative.

c. The NPV of the investment is zero.

d. The investment will not pay for itself.

Company XYZ has two fixed price contracts for two different clients. The company has enough capacity for both contracts but is uncertain whether they will be profitable.

Data as follows:

Customer                                  AAA                BBB

Component Type                         A999                B999

Contract Value($)                       $27,000            $100,000

Contract Quantity                      1,000 unit          2,000 units

Material cost/unit                        $15                  $20

Molding time/batch                     5 hours            7.5 hours         

Batch Size                                 100 units          50 units

Annual Budgeted overheads as follows:

Activity                                    Cost Driver                 Cost driver       Cost

                      volume/year   pool

Molding                                    Molding hours                2,000                $150,000

Inspection                                 Batches                        150                  $75,000

Production Mgmt                       Contracts                      20                    $125,000   

Calculate the activity-based costs and profits for each contract.

Problem 3

An entity entered into a construction contract to build a condo building at a fixed price of $54,000,000. Construction started in 20x0 and ended in 20x3. Data on the contract is as follows (in ‘000’s):

20x0 20x1 20x2 20x3

Costs incurred during the year $ 6500 19500 25000 5800

Estimated costs to complete 38500 26000 6500 -

Billings 18000 18000 - 18000

For each of the parts below, prepare the ‘mini’ income statement for the project for each year and calculate the net investment of the project that will be shown on the balance sheet at the end of each year.

a. The entity uses an input based approach to calculating the percentage of completion.

b. The entity uses an output based approach to calculating the percentage of completion and has calculated the percentages of completion as follows: 20x0:16% | 20x1: 60% | 20x2: 90% | 20x3: 100%

You are considering the purchase of a machine with an expected life of 3 years. It costs $800,000 and belongs to class 10 (CCA rate = 30%). Its estimated market value at the end of 3 years equals $125,000. The number of products you expect to sell over the next 3 years is 20,000, 25,000 and 20,000 in years 1, 2 and 3, respectively. Expected selling price per unit is $100 while annual production costs consist of $50,000 in fixed costs and an additional $80 per unit in variable costs. Working capital required equals $30,000 in year 0, and 10% of sales in years 1 through 3. Working capital will be recaptured at the end of year 3. The corporate tax rate is 40%, and the required rate of return for such projects equals 10%. Should you buy the machine?

Midias Mechanical Company reconditions motors for Drift Racing cars. They bought a shipping container of 500 motors from Japan (model number ZF290) for $1,000,000. The reconditioning cost of each motor is $900 and the recomputing cost of each motor is $700. Commission on sales was paid to the head mechanic of Race Teams, at $80 per motor.

The average sale price of a ZF290 motor is $11,000. Administrative costs was $88,500 each year. In 2017, Midias Mechanical Company sold 100 motors and in 2018 sold 250 motors.

Requirement:

Prepare Absorption Income Statement for 2017

Prepare Absorption Income Statement for 2018

Prepare Variable Income Statement for 2017

Prepare Variable Income Statement for 2018

Note: you are required to show your workings

Let demand for car batteries be such that Q = 100 − 2P. Assume constant marginal costs of 25. Compute the equilibrium price, quantity, consumer surplus, producer surplus and if relevant deadweight loss for:

1. A perfectly competitive market
2. A monopoly
3. Two firms engaged in Cournot Competition.
4. Two firms engaged in Bertrand Competition.

Repeat the above, excluding Bertrand Competition, for a model 2 where firms have a fixed cost for all production greater than zero of 5 dollars. Note that the perfectly competitive outcome is hard to define. So lets replace that with a simple version of monopolistic competition. Using a zero-profits condition as a guide for the amount of entry what would be the outcome for this market (including the number of firms) following monopolistic competition?

Answer the second part of the question Repeat the above etc..

Required information

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

Oslo Company prepared the following contribution format income statement based on a sales volume of 1,000 units (the relevant range of production is 500 units to 1,500 units):

1. If the selling price increases by $2 per unit and the sales volume decreases by 100 units, what would be the net operating income?

2. If the variable cost per unit increases by $1, spending on advertising increases by $1,300, and unit sales increase by 160 units, what would be the net operating income?

3. What is the break-even point in unit sales?

Consider a project to supply 100 million postage stamps per year to the USPS for the next five

years. To pursue the project, you will need to install $4.1 million in new manufacturing plant

and equipment. This will be depreciated straight-line to zero over the project’s five years. The

equipment can be sold for $540,000 at the end of the project. You will also need $600,000 in

initial net working capital for the project and an additional investment of $50,000 in every year

thereafter. All net working capital will be recouped at the end of the project. Your production

costs are $.005 per stamp and you have fixed costs of $950,000 per year. If your tax rate is 34%

and your required return is 12%, what bid price should you submit on the contract?