Marie is considering buying a new printer for $100,000 that will be straight-lin

Question

Marie is considering buying a new printer for $100,000 that will be straight-line depreciated over 5 years with no salvage value. Cash inflows from the printer are expected to be $30,000 each year for 5 years. Compute the payback period and unadjusted rate of return. *Ignore taxe:s 3.3 year payback and 30% unadjusted rate of return 3.3 year payback and 10% unadjusted rate of return 5.0 year payback and 20% unadjusted rate of return 10.0 year payback and 10% unadjusted rate of return 3.3 year payback and 20% unadjusted rate of return 5.0 year payback and 30% unadjusted rate of return 10.0 year payback and 20% unadjusted rate of return 6.7 year payback and 10% unadjusted rate of return a. c. d. e. f. g. h, LTRA is a profitable company. They make 30,000 motors for their mowers and the cost per motor is shown in the chart below. The motor has become available for $25/motor from an outside supplier. If ULTRA doesn't utilize the facilities to manufacture motors they can lease them for $100,000 a year. In addition, 50% of the $120,000 fixed manufacturing overhead can be avoided. All variable manufacturing overhead costs are avoidable. How much higher or lower will net income be if ULTRA continues producing motors at a volume and sales of 30,000 units? a. b. c. d. e. $5,500 lower $74,500 higher $65,500 lower $125,000 lower None of the above $9.50 Direct Materials Direct Labor Variable Manufacturing Overhead $8.60 $3.75

Explanation / Answer

1 Payback Period = Initial Investment/Cash inflow $100000/$30000 3.333333 3.3 yrs Unadjusted rate of Return = 30000/100000*100 30.00% 3.3 year payback and 30% unadjusted rate of return 2 Cost of Producing 30000 motors Direct Materials 30000*9.50 285000 Direct Labor 30000*8.60 258000 Variable Manufacturing overhead 30000*3.75 112500 Fixed Manufacturing overhead 120000 Total Cost 775500 If motors are not produced Purchase from Outside Supplier 30000*25 750000 Fixed Manufacuring overhead 60000 Less : Receipt from lease -100000 710000 Increase in cost due to manufacturing = 775500-710000 65500 Therefore, net income would be lower by $65500

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