1. RSA Company has decided to introduce a new product. The new product can be
manufactured by either a capital-intensive method or a labor-intensive method. The manufacturing method will not affect the quality of the product. The estimated manufacturing costs by the two methods are as follows.
Capital- Labor-
Intensive Intensive
Direct materials $5 per unit $5.50 per unit
Direct labor $6 per unit $8.00 per unit
Variable overhead $3 per unit $4.50 per unit
Fixed manufacturing costs $2,508,000 $1,538,000
The company’s market research department has recommended an introductory unit sales price of $30. The incremental selling expenses are estimated to be $502,000 annually plus $2 for each unit sold, regardless of manufacturing method.
Instructions
(a) Calculate the estimated break-even point in annual unit sales of the new product if Martinez
Company uses the:
(1) Capital-intensive manufacturing method.
(2) Labor-intensive manufacturing method.
(b) Determine the annual unit sales volume at which the company would be indifferent between the two manufacturing methods.
(c) Explain the circumstance under which RSA should employ each of the two manufacturing methods.
2. Make incremental analysis for elimination of a product line:
Company A makes three models of phasers. Information on the three products is given below.
Stunner Double-Set Mega-Power
Sales $300,000 $500,000 $200,000
Variable expenses 150,000 200,000 140,000
Contribution margin 150,000 300,000 60,000
Fixed expenses 120,000 225,000 90,000
Net income $ 30,000 $75,000 $ (30,000)
Fixed expenses consist of $300,000 of common costs allocated to the three products based
on relative sales, and additional fixed expenses of $30,000 (Stunner), $75,000 (Double-
Set), and $30,000 (Mega-Power). The common costs will be incurred regardless of how
many models are produced. The other fixed expenses would be eliminated if a model is
phased out.
An executive with the company, feels the Mega-Power line should be discontinued
to increase the company’s net income.
Instructions
(a) Compute current net income for Company A.
(b) Compute net income by product line and in total for the Company if the company
discontinues the Mega-Power product line. (Hint: Allocate the $300,000 common
costs to the two remaining product lines based on their relative sales.)
(c) Should the company eliminate the Mega-Power product line? Why or why not?
3. Compute cash payback period and annual rate of return.
ASC Company purchased an automobile hoist for $15,000. The
hoist has a 5-year life and an estimated salvage value of $1,080. Installation costs were
$2,900, and freight charges were $820. ASC uses straight-line depreciation.
The new hoist will be used to replace mufflers and tires on automobiles. The company
estimates that the new hoist will enable his mechanics to replace four extra mufflers
per week. Each muffler sells for $65 installed. The cost of a muffler is $35, and the
labor cost to install a muffler is $10.
Instructions
(a) Compute the payback period for the new hoist.
(b) Compute the annual rate of return for the new hoist. (Round to one decimal.)
4. Compute cash payback period and net present value.
BIG Manufacturing Company is considering three new projects, each requiring
an equipment investment of $22,000. Each project will last for 3 years and produce
the following cash inflows.
Year AA BB CC
1 $ 7,000 $ 9,500 $13,000
2 9,000 9,500 10,000
3 15,000 9,500 9,000
Total $31,000 $28,500 $32,000
The equipment’s salvage value is zero. Buford uses straight-line depreciation. BIG will
not accept any project with a payback period over 2 years. Buford’s minimum required
rate of return is 12%.
Instructions
(a) Compute each project’s payback period, indicating the most desirable project and the
least desirable project using this method. (Round to two decimals.)
(b) Compute the net present value of each project. Does your evaluation change? (Round
to nearest dollar.)
Answer will be sent by email as attachment.
