## paper instructions

**Question 1**

A family friend has asked your help in analyzing the operations of three anonymous companies operating in the same service sector industry. Supply the missing data in the table below: **(Loss amounts should be indicated by a minus sign. Round your percentage answers to nearest whole percent and other amounts to whole dollars.)**

Company A B C Sales $310,000 $670,000 $520,000 Net operating income 37,000 Average operating assets 161,000 151,000 Return on investment (ROI) 22 % 19 % % Minimum required rate of return: Percentage 16 % % 12 % Dollar amount $58,000 Residual income $5,000 |

**Question 2**

Selected sales and operating data for three divisions of different structural engineering firms are given as follows:

Division A | Division B | Division C | |||||||

Sales | $ | 12,640,000 | $ | 35,800,000 | $ | 20,640,000 | |||

Average operating assets | $ | 3,160,000 | $ | 7,160,000 | $ | 5,160,000 | |||

Net operating income | $ | 606,720 | $ | 608,600 | $ | 577,920 | |||

Minimum required rate of return | 10.00 | % | 10.50 | % | 11.20 | % | |||

**Required:**

1. Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover.

2. Compute the residual income (loss) for each division.

3. Assume that each division is presented with an investment opportunity that would yield a 11% rate of return.

a. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

b. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

**Requirement 1**

Compute the return on investment (ROI) for each division using the formula stated in terms of margin and turnover. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Margin Turnover ROI Division A % % Division B % % Division C % % |

**Requirement 2**

Compute the residual income (loss) for each division. (Do not round intermediate calculations. Loss amounts should be indicated by a minus sign.)

Division A Division B Division C Residual income (loss) |

**Requirement 3a**

Assume that each division is presented with an investment opportunity that would yield a 11% rate of return. If performance is being measured by ROI, which division or divisions will probably accept or reject the opportunity?

Division A Division B Division C |

**Requirement 3b**

Assume that each division is presented with an investment opportunity that would yield a 11% rate of return. If performance is being measured by residual income, which division or divisions will probably accept or reject the opportunity?

Division A Division B Division C |

**Question 3**

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet | ||||||

Beginning Balance | Ending Balance | |||||

Assets | ||||||

Cash | $ | 137,000 | $ | 129,000 | ||

Accounts receivable | 333,000 | 472,000 | ||||

Inventory | 579,000 | 474,000 | ||||

Plant and equipment, net | 791,000 | 805,000 | ||||

Investment in Buisson, S.A. | 390,000 | 426,000 | ||||

Land (undeveloped) | 253,000 | 248,000 | ||||

Total assets | $ | 2,483,000 | $ | 2,554,000 | ||

Liabilities and Stockholders’ Equity | ||||||

Accounts payable | $ | 371,000 | $ | 337,000 | ||

Long-term debt | 1,046,000 | 1,046,000 | ||||

Stockholders’ equity | 1,066,000 | 1,171,000 | ||||

Total liabilities and stockholders’ equity | $ | 2,483,000 | $ | 2,554,000 | ||

Joel de Paris, Inc. Income Statement | |||||||

Sales | $ | 5,022,000 | |||||

Operating expenses | 4,218,480 | ||||||

Net operating income | 803,520 | ||||||

Interest and taxes: | |||||||

Interest expense | $ | 113,000 | |||||

Tax expense | 203,000 | 316,000 | |||||

Net income | $ | 487,520 | |||||

The company paid dividends of $382,520 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company’s minimum required rate of return of 15%.

**Required:**

1. Compute the company’s average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. **(Round “Margin”, “Turnover” and “ROI” to 2 decimal places.)**

3. What was the company’s residual income last year?

1. Average operating assets 2. Margin % Turnover ROI % 3. Residual income |

**Question 4**

Delta Company produces a single product. The cost of producing and selling a single unit of this product at the company’s normal activity level of 96,000 units per year is:

Direct materials | $ | 1.60 | |

Direct labor | $ | 3.00 | |

Variable manufacturing overhead | $ | 0.70 | |

Fixed manufacturing overhead | $ | 3.55 | |

Variable selling and administrative expenses | $ | 2.00 | |

Fixed selling and administrative expenses | $ | 2.00 | |

The normal selling price is $19.00 per unit. The company’s capacity is 123,600 units per year. An order has been received from a mail-order house for 2,300 units at a special price of $16.00 per unit. This order would not affect regular sales or the company’s total fixed costs.

**Required:**

1. What is the financial advantage (disadvantage) of accepting the special order?

2. As a separate matter from the special order, assume the company’s inventory includes 1,000 units of this product that were produced last year and that are inferior to the current model. The units must be sold through regular channels at reduced prices. The company does not expect the selling of these inferior units to have any effect on the sales of its current model. What unit cost is relevant for establishing a minimum selling price for these units?

**Requirement 1**

What is the financial advantage (disadvantage) of accepting the special order?

**Requirement 2**

As a separate matter from the special order, assume the company’s inventory includes 1,000 units of this product that were produced last year and that are inferior to the current model. The units must be sold through regular channels at reduced prices. The company does not expect the selling of these inferior units to have any effect on the sales of its current model. What unit cost is relevant for establishing a minimum selling price for these units? (Round your answer to 2 decimal places.)

Relevant cost per unit |

**Question 5**

Futura Company purchases the 68,000 starters that it installs in its standard line of farm tractors from a supplier for the price of $10.20 per unit. Due to a reduction in output, the company now has idle capacity that could be used to produce the starters rather than buying them from an outside supplier. However, the company’s chief engineer is opposed to making the starters because the production cost per unit is $11.30 as shown below:

Per Unit | Total | |||||

Direct materials | $ | 4.00 | ||||

Direct labor | 3.00 | |||||

Supervision | 2.00 | $ | 136,000 | |||

Depreciation | 1.20 | $ | 81,600 | |||

Variable manufacturing overhead | 0.70 | |||||

Rent | 0.40 | $ | 27,200 | |||

Total product cost | $ | 11.30 | ||||

If Futura decides to make the starters, a supervisor would have to be hired (at a salary of $136,000) to oversee production. However, the company has sufficient idle tools and machinery such that no new equipment would have to be purchased. The rent charge above is based on space utilized in the plant. The total rent on the plant is $83,000 per period. Depreciation is due to obsolescence rather than wear and tear.

**Required:**

What is the financial advantage (disadvantage) of making the 68,000 starters instead of buying them from an outside supplier?

**Question 6**

Andretti Company has a single product called a Dak. The company normally produces and sells 89,000 Daks each year at a selling price of $60 per unit. The company’s unit costs at this level of activity are given below:

Direct materials | $ | 9.50 | |

Direct labor | 10.00 | ||

Variable manufacturing overhead | 3.50 | ||

Fixed manufacturing overhead | 7.00 | ($623,000 total) | |

Variable selling expenses | 2.70 | ||

Fixed selling expenses | 4.00 | ($356,000 total) | |

Total cost per unit | $ | 36.70 | |

A number of questions relating to the production and sale of Daks follow. Each question is independent.

**Required:**

1-a. Assume that Andretti Company has sufficient capacity to produce 111,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional $110,000 in fixed selling expenses?

1-b. Would the additional investment be justified?

2. Assume again that Andretti Company has sufficient capacity to produce 111,250 Daks each year. A customer in a foreign market wants to purchase 22,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $17,800 for permits and licenses. The only selling costs that would be associated with the order would be $1.50 per unit shipping cost. What is the break-even price per unit on this order?

3. The company has 500 Daks on hand that have some irregularities and are therefore considered to be “seconds.” Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price?

4. Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 40% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period.

a. How much total contribution margin will Andretti forgo if it closes the plant for two months?

b. How much total fixed cost will the company avoid if it closes the plant for two months?

c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?

d. Should Andretti close the plant for two months?

5. An outside manufacturer has offered to produce 89,000 Daks and ship them directly to Andretti’s customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. What is Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer?

**Requirement 1a**

Assume that Andretti Company has sufficient capacity to produce 111,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $110,000. What is the financial advantage (disadvantage) of investing an additional $110,000 in fixed selling expenses?

**Requirement 1B**

Assume that Andretti Company has sufficient capacity to produce 111,250 Daks each year without any increase in fixed manufacturing overhead costs. The company could increase its unit sales by 25% above the present 89,000 units each year if it were willing to increase the fixed selling expenses by $110,000. Would the additional investment be justified?

Yes No |

**Requirement 2**

Assume again that Andretti Company has sufficient capacity to produce 111,250 Daks each year. A customer in a foreign market wants to purchase 22,250 Daks. If Andretti accepts this order it would have to pay import duties on the Daks of $3.70 per unit and an additional $17,800 for permits and licenses. The only selling costs that would be associated with the order would be $1.50 per unit shipping cost. What is the break-even price per unit on this order? (Round your answers to 2 decimal places.)

Break-even price per unit |

**Requirement 3**

The company has 500 Daks on hand that have some irregularities and are therefore considered to be “seconds.” Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What is the unit cost figure that is relevant for setting a minimum selling price? (Round your answer to 2 decimal places.)

Relevant unit cost per unit |

**Requirement 4a to c**

Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 40% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. (Round number of units produced to the nearest whole number. Round your intermediate calculations and final answers to 2 decimal places. Any losses/reductions should be indicated by a minus sign.)

a. How much total contribution margin will Andretti forgo if it closes the plant for two months?

b. How much total fixed cost will the company avoid if it closes the plant for two months?

c. What is the financial advantage (disadvantage) of closing the plant for the two-month period?

Forgone contribution margin Total avoidable fixed costs |

**Requirement 4 D**

Due to a strike in its supplier’s plant, Andretti Company is unable to purchase more material for the production of Daks. The strike is expected to last for two months. Andretti Company has enough material on hand to operate at 25% of normal levels for the two-month period. As an alternative, Andretti could close its plant down entirely for the two months. If the plant were closed, fixed manufacturing overhead costs would continue at 40% of their normal level during the two-month period and the fixed selling expenses would be reduced by 20% during the two-month period. Should Andretti close the plant for two months?

Yes No |

**Requirement 5**

An outside manufacturer has offered to produce 89,000 Daks and ship them directly to Andretti’s customers. If Andretti Company accepts this offer, the facilities that it uses to produce Daks would be idle; however, fixed manufacturing overhead costs would be reduced by 30%. Because the outside manufacturer would pay for all shipping costs, the variable selling expenses would be only two-thirds of their present amount. What is Andretti’s avoidable cost per unit that it should compare to the price quoted by the outside manufacturer? (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Avoidable cost per unit |

**Question 7**

Perit Industries has $155,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are:

Project A | Project B | |||

Cost of equipment required | $ | 155,000 | $ | 0 |

Working capital investment required | $ | 0 | $ | 155,000 |

Annual cash inflows | $ | 25,000 | $ | 57,000 |

Salvage value of equipment in six years | $ | 9,600 | $ | 0 |

Life of the project | 6 years | 6 years | ||

The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries’ discount rate is 15%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

**Required:**

1. Compute the net present value of Project A. **(Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)**

2. Compute the net present value of Project B. **(Enter negative values with a minus sign. Round your final answer to the nearest whole dollar amount.)**

3. Which investment alternative (if either) would you recommend that the company accept?

1. Net present value project A 2. Net present value project B 3. Which investment alternative (if either) would you recommend that the company accept? |

**Question 8**

Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined by his division’s return on investment (ROI), which has been above 22% each of the last three years. Casey is considering a capital budgeting project that would require a $3,800,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company’s discount rate is 18%. The project would provide net operating income each year for five years as follows:

Sales | $ | 3,700,000 | ||

Variable expenses | 1,720,000 | |||

Contribution margin | 1,980,000 | |||

Fixed expenses: | ||||

Advertising, salaries, and other fixed out-of-pocket costs | $ | 730,000 | ||

Depreciation | 760,000 | |||

Total fixed expenses | 1,490,000 | |||

Net operating income | $ | 490,000 | ||

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

**Required:**

1. What is the project’s net present value?

2. What is the project’s internal rate of return to the nearest whole percent?

3. What is the project’s simple rate of return?

4-a. Would the company want Casey to pursue this investment opportunity?

4-b. Would Casey be inclined to pursue this investment opportunity?

**Requirement 1**

What is the project’s net present value? (Round your final answer to the nearest whole dollar amount.)

Net present value |

**Requirement 2**

What is the project’s internal rate of return? (Round your answer to whole decimal place i.e. 0.123 should be considered as 12%.)

Internal rate of return % |

**Requirement 3**

What is the project’s simple rate of return? (Round percentage answer to 1 decimal place.)

Simple rate of return % |

**Requirement 4A**

Would the company want Casey to pursue this investment opportunity?

Yes No |

** Requirement 4B**

Would Casey be inclined to pursue this investment opportunity?

Yes No |

**Question 9**

In five years, Kent Duncan will retire. He is exploring the possibility of opening a self-service car wash. The car wash could be managed in the free time he has available from his regular occupation, and it could be closed easily when he retires. After careful study, Mr. Duncan determined the following:

- A building in which a car wash could be installed is available under a five-year lease at a cost of $4,900 per month.
- Purchase and installation costs of equipment would total $300,000. In five years the equipment could be sold for about 10% of its original cost.
- An investment of an additional $5,000 would be required to cover working capital needs for cleaning supplies, change funds, and so forth. After five years, this working capital would be released for investment elsewhere.
- Both a wash and a vacuum service would be offered. Each customer would pay $1.17 for a wash and $.60 for access to a vacuum cleaner.
- The only variable costs associated with the operation would be 7.5 cents per wash for water and 10 cents per use of the vacuum for electricity.
- In addition to rent, monthly costs of operation would be: cleaning, $3,400; insurance, $55; and maintenance, $1,925.
- Gross receipts from the wash would be about $3,276 per week. According to the experience of other car washes, 60% of the customers using the wash would also use the vacuum.

Mr. Duncan will not open the car wash unless it provides at least a 13% return.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

**Required:**

1. Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation.

2-a. Determine the net present value using the net present value method of investment analysis.

2-b. Would you advise Mr. Duncan to open the car wash?

**Requirement 1**

Assuming that the car wash will be open 52 weeks a year, compute the expected annual net cash receipts from its operation.

Auto wash cash receipts Vacuum cash receipts Total cash receipts Less cash disbursements: Water Electricity Rent Cleaning Insurance Maintenance Total cash disbursements Annual net cash flow from operations |

**Requirement 2a**

Determine the net present value using the net present value method of investment analysis. (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

Net present value |

**Requirement 2b**

Would you advise Mr. Duncan to open the car wash?

Yes No |

**Question 10**

Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information:

Present Truck | New Truck | |||||

Purchase cost new | $ | 23,000 | $ | 29,000 | ||

Remaining book value | $ | 11,000 | – | |||

Overhaul needed now | $ | 10,000 | – | |||

Annual cash operating costs | $ | 12,000 | $ | 8,500 | ||

Salvage value-now | $ | 6,000 | – | |||

Salvage value-five years from now | $ | 5,000 | $ | 5,000 | ||

If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesel-operated, resulting in a substantial reduction in annual operating costs, as shown above.

The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 12% discount rate.

**Required:**

1. What is the net present value of the “keep the old truck” alternative?

2. What is the net present value of the “purchase the new truck” alternative?

3. Should Bilboa Freightlines keep the old truck or purchase the new one?

**Requirement 1**

What is the net present value of the “keep the old truck” alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

Net present value |

**Requirement 2**

What is the net present value of the “purchase the new truck” alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

Net present value |

**Requirement 3**

Should Bilboa Freightlines keep the old truck or purchase the new one?

Purchase the new truck Keep the old truck |

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