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Exam 26: Incremental Analysis and Capital Budgeting

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Question 41

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Salem Co. is contemplating the replacement of an old machine with a new one. The following information has been gathered: $\begin{array}{lrr}&\text { Old Machine}&\text { New Machine }\\\text { Price } & \$ 390,000 & \$ 530,000 \\\text { Accumulated Depreciation } & 170,000 & -0 \text { - } \\\text { Remaining useful life } & 6 \text { years } & -0 \text { - } \\\text { Useful life } & -0- & 10 \text { years } \\\text { Annual operating costs } & \$ 167,000 & \$ 151.500\end{array}$ If the old machine is replaced it can be sold for $120000. Which of the following amounts is relevant to the replacement decision?

A) $170000
B) $390000
C) $151500
D) $0

E) C) and D)
F) B) and C)

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Question 42

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TAD Company gathered the following data about the three products that it produces: $\begin{array}{lrrr}& \text { Present } & \text { Estimated Additional } & \text { Estimated Sales } \\\text { Product } & \text { Sales Value } & \text { Processing Costs } & \text { if Processed Further } \\\hline \text { Alpha } & \$ 12,000 & \$ 8,000 & \$ 21,000 \\\text { Beta } & 14,000 & 6,000 & 18,000 \\\text { Delta } & 11,000 & 3,000 & 16,000\end{array}$ Which of the products should not be processed further?

A) Product Alpha
B) Product Beta
C) Product Delta
D) Products Alpha and Delta

E) None of the above
F) A) and B)

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Question 43

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A company's cost of capital refers to the

Raymond Corporation currently manufactures 3000 units of component XYZ annually for its main product. The costs per unit are as follows: $\begin{array} { l r } \text { Direct materials } & \$ 4.00 \\\text { Direct labor } & 7.00 \\\text { Variable overhead } & 3.20 \\\text { Fixed overhead } & 7.00 \\\text { Total } & \$ 21.20 \\\hline\end{array}$ Dorie Company has contacted Raymond with an offer to sell it 3000 components of XYZ for $17.40 each. Sixty percent of the fixed overhead per unit is unavoidable. Instructions Prepare an incremental analysis for the make-or-buy decision.

A company is considering purchasing factory equipment which costs $480000 and is estimated to have no salvage value at the end of its 8-year useful life. If the equipment is purchased annual revenues are expected to be $225000 and annual operating expenses exclusive of depreciation expense are expected to be $95000. The straight-line method of depreciation would be used. If the equipment is purchased the annual rate of return expected on this project is

Sutton Inc. can produce 100 units of a component part with the following costs: $\begin{array} { l r } \text { Direct Materials } & \$ 130,000 \\\text { Direct Labor } & 103,000 \\\text { Variable Overhead } & 82,000 \\\text { Fixed Overhead } & 62,000\end{array}$ If Sutton Inc. can purchase the component part externally for $345000 and only $28000 of the fixed costs can be avoided what is the correct make-or-buy decision?

Wayne Company spent $13000 to produce Product 612 which can be sold as is for $15000 or processed further incurring additional costs of $11500 and then be sold for $17000. Which amounts are relevant to the decision about Product 612?

Abel Quail Farm Inc. produces a crop of heritage quail at a total cost of $66000. The production generates 16000 quail which can be sold for $4 each to restaurants or the quail can be processed in house and then sold for $9 each. It costs $55000 more to process the quail . Instructions If Abel Quail Farm processes the quail determine how much incremental profit or loss it would report. What should Abel Quail Farm do?

De Longo Inc. has excess capacity. Under what situations should the company accept a special order for less than the current selling price?

Mountain Lumber Corporation uses a machine that removes the bark from cut timber. The machine is unreliable resulting in significant downtime and wasted labor costs. Management is considering replacing the machine with a more efficient one which will minimize downtime and excessive labor costs. Data are presented below for the two machines: Old Machine New Machine Original purchase cost $325000 $405000 Accumulated depreciation 230000 - Estimated life 4 years 4 years It is estimated that the new machine will produce annual cost savings of $107000. The old machine can be sold to a scrap dealer for $12000. Both machines will have a salvage value of zero if operated for the remainder of their useful lives. Instructions Determine whether the company should purchase the new machine.

Brigg Enterprises produces miniature parasols. Each parasol consists of $1.20 of variable costs and $.90 of fixed costs and sells for $4.50. A French wholesaler offers to buy 8000 units at $1.40 each of which Brigg has the capacity to produce. Brigg will incur extra shipping costs of $.12 per parasol. Instructions Determine the incremental income or loss that Brigg Enterprises would realize by accepting the special order.

The cash payback method is frequently used as a screening tool but it does not take into consideration the profitability of a project.

If a plant is operating at full capacity and receives a one-time opportunity to accept an order at a special price below its usual price then

Crapty Company is considering investing in a new facility to extract and produce salt. The facility will increase revenues by $240000 but will also increase annual expenses by $180000. The facility will cost $980000 to build but will have a $20000 salvage value at the end of its 20-year useful life. Instructions Calculate the annual rate of return on this facility.

Accountants are mainly involved in developing nonfinancial information for management's consideration in choosing among alternatives.

Calico Company is starting business and is unsure of whether to sell its product assembled or unassembled. The unit cost of the unassembled product is $90 and Calico Company would sell it for $180. The cost to assemble the product is estimated at $36 per unit and Calico Company believes the market would support a price of $232 on the assembled unit. What is the correct decision using the sell or process further decision rule?

In incremental analysis

Grouperman Corporation currently manufactures a subassembly for its main product. The costs per unit are as follows: $\begin{array} { l r } \text { Direct materials } & \$ 10 \\\text { Direct labor } & 10 \\\text { Variable overhead } & 7 \\\text { Fixed overhead } & \underline { 9 } \\\text { Total } & \underline { \underline { \$ 36 } }\end{array}$ Fez Company has contacted Grouperman with an offer to sell it 7000 of the subassemblies for $30 each. If Fez makes the subassemblies $4 of the fixed overhead per unit will be allocated to other products. Instructions Should Grouperman make or buy the subassemblies? Explain your answer.

Nelson Manufacturing Company can make 100 units of a necessary component part with the following costs: $\begin{array} { l r } \text { Direct Materials } & \$ 120,000 \\\text { Direct Labor } & 25,000 \\\text { Variable Overhead } & 45,000 \\\text { Fixed Overhead } & 20,000\end{array}$ If Nelson Manufacturing Company can purchase the component externally for $190000 and only $5000 of the fixed costs can be avoided what is the correct make-or-buy decision?

A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?