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:
- 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.
- 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
- 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.
- The devices would sell for $45 each; variable costs for production, administration, and sales would be $30 per unit.
- 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.)
- 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
- 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
·
