1-The capital budgeting method that calculates the discount rate at which the pr
ID: 2399432 • Letter: 1
Question
1-The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.
none of the above
2-
Sarasota Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labor cost. The direct materials and direct labor cost per unit to make the wheels are $3.00 and $3.60 respectively. Normal production is 200,000 wheels per year.
A supplier offers to make the wheels at a price of $8 each. If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.
Required:
a. Prepare an incremental analysis for the decision to make or buy the wheels.
b. Should Sarasota Bicycles buy the wheels from the outside supplier? Justify your answer.
3-
Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:
Variable costs:
Direct materials $140
Direct labor 100
Manufacturing support 105
Marketing costs 55
Fixed costs:
Manufacturing support 175
Marketing costs 65
Total costs 640
Markup (50%) 320
Targeted selling price $960
For Crandle Manufacturers Inc., what is the minimum acceptable price of this special order?
NPV methodExplanation / Answer
Solution 1:
The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the "internal rate of return method"
Hence 3rd option is correct.
Solution 2a:
Solution 2b:
As buying cost of wheel is higher than making cost of Wheel, therefore Sarasota Bicycle should not buy the wheels from outside supplier.
Solution 3:
As company is having excess capacity, therefore minimum acceptable price for special order = Variable cost to regular customer = $140 + $100 + $105 + $55 = $400 per unit
Differential Analysis - Making Wheels (alt 1) or Buying Wheels (Alt2) - Sarasota Particulars Making Wheel (Alt 1) Buying Wheel (Alt 2) Financial advantage (Disadvantage) of buying (Alternative 2) Relevant Costs: Purchase Price (200000*$8) $0.00 $1,600,000.00 -$1,600,000.00 Direct material $600,000.00 $0.00 $600,000.00 Direct Labor $720,000.00 $0.00 $720,000.00 Variable overhead $216,000.00 $0.00 $216,000.00 Total Cost $1,536,000.00 $1,600,000.00 -$64,000.00Related Questions
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