Incremental Analysis and Capital Budgeting

Fixed costs for the period were cost of goods sold $960,000, and selling and administrative expenses $225,000.

In July, normally a slack manufacturing month. ThreePoint Sports receives a special order for 10,000 basketballs at $28 each from the Greek Basketball Association (GBA). Acceptance of the order would increase variable selling and administrative expenses $0.75 per unit because of shipping costs but would not increase fixed costs and expenses.

Instructions

1. Prepare an incremental analysis for the special order.
2. Should ThreePoint Sports inc. accept the special order? Explain your answer
3. What is the minimum selling price on the special order to produce net income of $5.00 per ball?
4. What nonfinancial factors should management consider in making its decision?

Solution

The management of Shatner Manufacturing Company is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier. The part, called CISCO, is component of the company's finished product.

The following information was collected from the accounting records and production data for the year ending December 31, 2023

1. 8,000 units of CISCO were produced in the Machining Department
2. Variable manufacturing costs applicable to the production of each CISCO unit were direct materials $4.80, direct labor $4.30, Indirect labor $0.43, utilities $0.40.

Solution

Solution

Brislin Company has four operating divisions. During the first quarter of 2020, the company reported aggregate income from operations of $213,000 and the following divisional results.

Depreciation is computed by the straight-line method with no salvage value. The company's cost of capital is 15%. (Assume that cash flows occur evenly throughout the year.)

Instructions

1. Compute the cash payback period for each project. (Round to two decimals.)
2. Compute the net present value for each project. (Round to nearest dollar.)
3. Compute the annual rate of return for each project. (Round to two decimals.)
4. Rank the projects on each of the foregoing bases. Which project do yourecommend?

U3 Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.

1. Five used vans would cost a total of $75,000 to purchase and would have a 3-year useful life with negligible salvage value. Lon plans to use straight-line depreciation.
2. Ten drivers would have to be employed at a total payroll expense of $48,000.
Other annual out-of-pocket expenses associated with running the commuter service would include Gasoline $16,000, Maintenance $3,300, Repairs $4,000, Insurance $4,200, and Advertising $2,500.
3. Lon has visited several financial institutions to discuss funding. The best interest rate he has been able to negotiate is 15%. Use this rate for cost of capital.
4. Lon expects each van to make ten round trips weekly and carry an average of six students each trip. The service is expected to operate 30 weeks each year, and each student will e charged $12,00 for a round trip ticket.

Instructions

1. Determine the annual (1) net income, and (2) net annual cash flows for the commuter service.
2. Compute (1) the cash payback period and (2) the annual rate of return. (Round to two decimals.)
3. Compute the net present value of the computer service. (Round to the nearest dollar.)
4. ------ What should Lon conclude from these computations?

Lon Timur is an accounting major at a midwestern state university located approximately 60 miles from a major city. Many of the students attending the university are from the metropolitan area and visit their homes regularly on the weekends. Lon, an entrepreneur at heart, realizes that few good commuting alternatives are available for students doing weekend travel. He believes that a weekend commuting service could be organized and run profitably from several suburban and downtown shopping mall locations. Lon has gathered the following investment information.

Brooks Clinic is considering investing in new heart - monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows. The company's cost of capital is 8%.

Gruden Company produces golf discs which it normally sells to retailers for $7 each

Moonbeam Company manufactures toasters. For the first 8 months of 2020, the company reported the following operating results while operating at 75% of plant capacity

Pottery Ranch Inc. has been manufacturing its own finials for its curtain rods