Week 1 Assignment

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Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information:

1. New equipment would have to be      acquired to produce the device. The equipment would cost $114,000 and have      a six-year useful life. After six years, it would have a salvage value of      about $6,000.
2. Sales in units over the next six      years are projected to be as follows:

 

Year

Sales in Units

 

1

8,000

 

2

13,000

 

3

15,000

 

4–6

17,000

 

1. Production and sales of the device      would require working capital of $51,000 to finance accounts receivable,      inventories, and day-to-day cash needs. This working capital would be      released at the end of the project’s life.
2. The devices would sell for $45      each; variable costs for production, administration, and sales would be      $30 per unit.
3. Fixed costs for salaries,      maintenance, property taxes, insurance, and straight-line depreciation on      the equipment would total $177,000 per year. (Depreciation is based on      cost less salvage value.)
4. To gain rapid entry into the      market, the company would have to advertise heavily. The advertising costs      would be:

 

Year

Amount of Yearly
Advertising

 

1–2

$

32,000

 

3

$

60,000

 

4–6

$

50,000

 

1. The company’s required      rate of return is 6%.

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 cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years.

2-a. Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment.

2-b. Would you recommend that Matheson accept the device as a new product?

Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years. (Negative amounts should be indicated by a minus sign.)

 

 

 

Year 1

Year 2

Year 3

Year 4-6

 

Incremental     contribution margin

 

Incrememental     fixed expenses

 

Net cash inflow     (outflow)

 

Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.)

 

 

 

Net present value

 

 

Would you recommend that Matheson accept the device as a new product?

 

 

 

No

 

Yes

The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The company has enough customer demand to justify producing its full capacity of 4,000 sets per year. Annual cost data at full capacity follow:

 

 

Direct labor

$

86,000

 

Advertising

$

96,000

 

Factory supervision

$

72,000

 

Property taxes, factory   building

$

19,000

 

Sales commissions

$

56,000

 

Insurance, factory

$

7,000

 

Depreciation,   administrative office equipment

$

2,000

 

Lease cost, factory   equipment

$

16,000

 

Indirect materials,   factory

$

20,000

 

Depreciation, factory   building

$

101,000

 

Administrative office   supplies (billing)

$

4,000

 

Administrative office   salaries

$

112,000

 

Direct materials used   (wood, bolts, etc.)

$

432,000

 

Utilities, factory

$

48,000

 

Required:

1. Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.)

2. Compute the average product cost of one patio set.
3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged?

 

Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.)

 

 

 

Cost Behavior

Period (Selling or Administrative) Cost

Product Cost

 

Cost Item

Variable

Fixed

Direct

Indirect

 

Direct labor

 

Advertising

 

Factory supervision

 

Property taxes, factory     building

 

Sales commissions

 

Insurance, factory

 

Depreciation, administrative     office equipment

 

Lease cost, factory     equipment

 

Indirect materials, factory

 

Depreciation, factory     building

 

Administrative office     supplies (billing)

 

Administrative office     salaries

 

Direct materials used (wood,     bolts, etc.)

 

Utilities, factory

 

Total costs

$

Compute the average product cost of one patio set. (Round your final answer to nearest whole dollar.)

 

 

 

Average product     cost

per set

·

Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged?

 

 

 

Increase

 

Decrease

 

Remain unchanged