Brief Exercise 26.2 (Static) Using Return on Investment to Evaluate Proposals (LO26-3)
Bramblett Recording Studio is considering two investment proposals (1 and 2). Data for the two proposals are presented here.
1
2
Cost of investment
$
80,000
$
86,000
Estimated salvage value
16,000
24,000
Average estimated net income
17,280
13,750
Calculate the return on average investment for both proposals.
ROI
Proposal 1
%
Proposal 2
%
Hawkins Poultry Farms is considering the purchase of feeding equipment that costs $139,000 and will produce annual cash flows of approximately $36,000 for five years. The equipment is expected to be sold at the end of five years for $40,000.
What is the net present value of the proposed investment? Hawkins requires a 15 percent return on all capital investments using the present value tables inExhibits 26-3 and 26-4.
Net present value
Pete Nunn is trying to decide whether to go ahead with an investment opportunity that costs $60,000. The expected incremental cash inflows are $32,000, while the expected incremental cash outflows are $17,000.
What is the payback period?
Payback period
years
Burns Industries currently manufactures and sells 14,000 power saws per month, although it has the capacity to produce 29,000 units per month. At the 14,000-unit-per-month level of production, the per-unit cost is $52, consisting of $33 in variable costs and $19 in fixed costs. Burns sells its saws to retail stores for $74 each. Allen Distributors has offered to purchase 4,400 saws per month at a reduced price. Burns can manufacture these additional units with no change in its present level of fixed manufacturing costs.
Using an incremental analysis approach, Burns should consider accepting this special order only if the price per unit offered by Allen is at least:
Multiple Choice
$74.
$52.
$19.
$33.
Aircraft Products, a manufacturer of aircraft landing gear, makes 2,700 units each year of a special valve used in assembling one of its products. The unit cost of producing this valve includes variable costs of $63 and fixed costs of $55. The valves could be purchased from an outside supplier at $70 each. If the valve were purchased from the outside supplier, 40% of the total fixed costs incurred in producing this valve could be eliminated. Buying the valves from the outside supplier instead of making them would cause the company's operating income to:
Multiple Choice
INCREASE BY $40,500.
DECREASE BY $40,500.
INCREASE BY $70,200.
DECREASE BY $70,200.
BT&T Corporation manufactures telephones. Recently, the company produced a batch of 570 defective telephones at a cost of $8,700. BT&T can sell these telephones as scrap for $10 each. It can also rework the entire batch at a cost of $6,200, after which the telephones could be sold for $21 per unit.
If BT&T reworks the defective telephones, by how much will its operating income change?
Multiple Choice
DECREASE BY $5,770
INCREASE BY $5,770
INCREASE BY $6,270
DECREASE BY $2,930
Seidman Company manufactures and sells 23,000 units of product X per month. Each unit of product X sells for $15 and has a contribution margin of $6. If product X is discontinued, $20,000 in fixed monthly overhead costs would be eliminated and there would be no effect on the sales volume of Seidman Company's other products. If product X is discontinued, Seidman Company's monthly income before taxes should:
Multiple Choice
DECREASE BY $138,000.
DECREASE BY $118,000.
INCREASE BY $138,000.
INCREASE BY $118,000.
Express, Incorporated, is considering replacing equipment. The following data are available:
Old Equipment
Replacement Equipment
Original cost
$ 55,000
$ 44,500
Disposal value now
$ 8,500
$ 0
Disposal value in 5 years
$ 0
$ 0
Annual cash operating costs
$ 9,500
$ 8,500
What are the total relevant costs of keeping the old equipment?
Multiple Choice
$47,500.
$8,500.
$10,500.
$55,000.
In preparing a responsibility income statement that shows contribution margin and responsibility margin, generally two concepts are involved in allocating costs to the various centers. These concepts are:
Multiple Choice
WHETHER THE COSTS ARE VARIABLE OR FIXED AND WHETHER THEY ARE MATERIAL IN DOLLAR AMOUNT.
WHETHER THE COSTS ARE TRACEABLE TO THE RESPONSIBILITY CENTER AND WHETHER THE RESPONSIBILITY CENTER IS ORGANIZED AS A PROFIT CENTER OR AN INVESTMENT CENTER.
WHETHER THE COSTS ARE TRACEABLE TO THE RESPONSIBILITY CENTER AND WHETHER THEY ARE MATERIAL IN DOLLAR AMOUNT.
WHETHER THE COSTS ARE VARIABLE OR FIXED AND WHETHER THEY ARE DIRECTLY TRACEABLE TO THE RESPONSIBILITY CENTER.
In the short run, the greatest increase in profitability will result from increasing sales in those profit centers with the:
Multiple Choice
LOWEST TRACEABLE FIXED COSTS.
HIGHEST CONTRIBUTION MARGIN RATIOS.
HIGHEST RESPONSIBILITY MARGINS.
HIGHEST PERFORMANCE MARGINS.
John Thomas is the manager of materials movement for the Syracuse plant of Carrier Corporation. Thomas should be evaluated as manager of:
Multiple Choice
A COST CENTER.
HUMAN RESOURCES UNDER HIS SUPERVISION.
AN INVESTMENT CENTER.
A PROFIT CENTER (OTHER THAN AN INVESTMENT CENTER).
Disneyland is one of several theme parks owned by The Walt Disney Company. Assume that Disneyland's management has been given decision-making responsibility for making significant capital investment decisions. Disneyland should be evaluated as:
Multiple Choice
AN ENTERTAINMENT CENTER.
A COST CENTER.
AN INVESTMENT CENTER.
A PROFIT CENTER (OTHER THAN AN INVESTMENT CENTER).
One of the unique services provided by San Francisco's Saint Francis Hotel is cleaning and polishing coins (pocket change) for the guests. From the standpoint of hotel management, this "money laundry" should be viewed as:
Multiple Choice
A COST CENTER.
AN INVESTMENT CENTER.
A CONTRIBUTION CENTER.
A PROFIT CENTER (OTHER THAN AN INVESTMENT CENTER).
One of the unique services provided by San Francisco's Saint Francis Hotel is cleaning and polishing coins (pocket change) for the guests. From the standpoint of hotel management, this "money laundry" should be viewed as:
Multiple Choice
A COST CENTER.
AN INVESTMENT CENTER.
A CONTRIBUTION CENTER.
A PROFIT CENTER (OTHER THAN AN INVESTMENT CENTER).
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Ross Corporation makes all sales on account. The June 30th balance sheet balance in its accounts receivable is $310,000, of which $250,000 pertain to sales that were made during June. Budgeted sales for July are $1,160,000. Ross collects 80% of sales in the month of sale; 10% in the following month; and the final 10% in the second month after the sale.
What is the budgeted balance of Ross's accounts receivable as of July 31?