The following information applies to the questions displayed below.] Beacon Comp
ID: 2533397 • Letter: T
Question
The following information applies to the questions displayed below.] Beacon Company is considering automating its production facility. The initial investment in automation would be $15 million, and the equipment has a useful life of 10 years with a residual value of $500,000. The company will use straight-line depreciation. Beacon could expect a production increase of 40,000 units per year and a reduction of 20 percent in the labor cost per unit. Current (no automation) Proposed (automation) Production and sales volume 80,000 units 120,000 units Per Unit Total Per Unit Total Sales revenue $ 90 $ 90 Variable costs Direct materials $ 18 $ 18 Direct labor 25 Variable manufacturing overhead 10 10 Total variable manufacturing costs 53 Contribution margin $ 37 $ 42 Fixed manufacturing costs $ 1,250,000 $ 2,350,000 Net operating income
2. Determine the project's accounting rate of return. (Round your answer to 2 decimal places.)
3. Determine the project's payback period. (Round your answer to 2 decimal places.)
Explanation / Answer
Current Proposed Incremental Sales units 80000 120000 Sales revenue 7200000 10800000 3600000 Less: Variable ccost Material @ 18. 1440000 2,160,000 -720,000 Labour 2000000 2400000 -400,000 Variable OH @ 10 800000 1200000 -400,000 Contribution margin 2960000 5,040,000 2,080,000 Less: Fixed cost 1,250,000 2,350,000 -1,100,000 Net income 1,710,000 2,690,000 980,000 Note: Depreciation expense shall have been included in Fixed cost. Net Incremental income 980,000 Add: Annual depreciation 1450000 (15000,000-500,000)10 years Annual cash inflows 2,430,000 Investment: 15,000,000 Salvage 500,000 Average Investment 7,750,000 (15000,000+500,000)/2 Accounting rate of return: Average Net income/ Average Investment *100 $ 980,000 /7750,000 *100 = 12.65% Payback period: Initial Investment / Annual Cash inflows $ 15000,000 / 2430,000 = 6.17 years
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