MODULE 10 EXERCISES- Capital Budgeting and other miscellaneous topics

1. Recent balance sheets of Duncan Company are presented below, along with an income statement for the most recent year. Ex. 111 Cash flow DUNCAN COMPANY Comparative Balance Sheet December 31, 2012 Assets Cash Accounts receivable Inventories Prepaid expenses Land Plant and equipment Accumulated depreciationplant and equipment Total assets Liabilities and Stockholders Equity Accounts payable Accrued expenses payable Mortgage payable Common stock ($5 par) Retained earnings Total 2011

$ 25,000 84,000 14,300 2,000 80,000 300,000 (45,000) $460,300

$ 13,300 68,000 10,800 1,200 30,000 300,000 (37,500) $385,800

24,200 1,500 80,000 200,000 154,600 $460,300

42,000 3,800 50,000 150,000 140,000 $385,800

DUNCAN COMPANY Income Statement For the Year Ended December 31, 2012 Revenues Cost of goods sold Operating expenses Interest expense Income from operations Income tax expense Net income $135,000 $57,250 28,750 6,800

92,800 $ 42,200 12,600 $ 29,600

Additional information: 1. Operating expenses include depreciation expense of $7,500. 2. Cash dividends of $15,000 were declared and paid in 2003. 3. Interest expense amounting to $6,800 was paid in cash. 4. Land costing $50,000 was purchased. Duncan paid $20,000 in cash and borrowed the remaining $30,000, giving a mortgage on the land for collateral. 5. Common stock ($5 par) of $50,000 was issued for cash. 6. All accounts payable pertain to merchandise purchases on account. 1

Instructions Prepare a statement of cash flows for Duncan using the indirect method. 2. Tanner, Inc. produces two models of cameras, Standard and Luxury. They sell 100,000 Standard cameras and 15,000 Luxury cameras annually. Tanner switched from traditional costing to activity-based costing and discovered that the cost allocated to Luxury cameras increased so dramatically that the Luxury was now only marginally profitable. ABC Ex. 77 Instructions Give a probable explanation for this shift. 3. Compute activity-based costing rates from the following budgeted data for Freddy's Fashions: EX. 74 ABC Activity Cost Pool Cutting and stitching Trimming and packing Designing Budgeted Cost $5,100,000 1,050,000 930,000 Budgeted Cost Driver 150,000 machine hours 42,000 operator hours 62,000 designer hours

4. Cool Designs manufactures metal trim used for a variety of projects. Cool Designs' activity-based costing overhead rates are: Purchasing Storing Machining Supervision $170 per order $1 per square foot/days $50 per machine hour $2 per direct labor hour

Job 319 involved three purchase orders, 4,000 square feet/days, 60 machine hours, and 30 direct labor hours. The cost of direct materials on the job was $8,500 and the direct labor rate is $15 per hour. Instructions Determine the total cost of Job 319. 5. Herbart Company gathered the following information on power costs and factory machine usage for the last six months: EX. 114 CVP Month January February March April May June Power Cost $24,400 31,300 29,000 22,340 19,900 14,800 Factory Machine Hours 13,900 17,600 16,800 13,200 11,600 6,600

Instructions Using the high-low method of analyzing costs, answer the following questions and show computations to support your answers. (a) (b) (c) What is the estimated variable portion of power costs per factory machine hour? What is the estimated fixed power cost each month? If it is estimated that 10,000 factory machine hours will be run in July, what is the expected total power costs for July?

6. Unruh Company reports the following results for the month of November: Sales (12,000 units) $600,000 Variable costs 450,000 Contribution margin 150,000 Fixed costs 110,000 Net income $ 40,000 Management is considering the following independent courses of action to increase net income. 1. Increase selling price by 10% with no change in total variable costs. 2. Reduce variable costs to 67% of sales. 3. Reduce fixed costs by $30,000. Instructions If maximizing net income is the objective, which is the best course of action? 7. Swine Skins specializes in Super Bowl memorabilia. Therefore, the companys sales are seasonal. Budgeted figures are presented below. Quarter 1 2 3 4 Budgeted Sales $560,000 $200,000 $160,000 $380,000 From past experience, Swine Skins has learned that of credit sales, 70% are collected in the month of sale and 30% are collected in the month following the sale. Instructions Assuming the fourth quarter sales for he previous year totaled $420,000, determine Swine Skins cash collections for each of the four quarters. 8. In September 2012, the management of Yancey Company assembles the following data in preparation of budgeted merchandise purchases for the months of October and November. 1. Expected Sales October November December $1,000,000 1,400,000 1,800,000

2. Cost of goods sold is expected to be 60% of sales. 3. Desired ending merchandise inventory is 25% of the next month's cost of goods sold. 4. The beginning inventory at October 1 will be the desired amount. Instructions Compute the budgeted merchandise purchases for October and November. Use a columnar format with separate columns for each month. 9. Old Tennessee Candy Company produces and sells chocolate covered cherries. The cherries are dipped by hand. Ernie Olds, production manager, is considering purchasing a machine that will dip the cherries in chocolate. Ernie has shopped for machines and found that the machine he wants will cost $131,000. In addition, Ernie estimates that the new machine will increase the companys annual net cash inflows by $21,200. The machine will have a 12-year useful life and no salvage value. Instructions (a) (b) (c) (d) Calculate the cash payback period. Calculate the machines internal rate of return. Calculate the machines net present value using a discount rate of 10%. Assuming Old Tennessee Candy Companys cost of capital is 10%, is the investment acceptable? Why or why not?

10. Newman Medical Center is considering purchasing an ultrasound machine for $950,000. The machine has a 10-year life and an estimated salvage value of $55,000. Installation costs and freight charges will be $24,200 and $800, respectively. Newman uses straight-line depreciation. The medical center estimates that the machine will be used five times a week with the average charge to the patient for ultrasound of $800. There are $10 in medical supplies and $40 of technician costs for each procedure performed using the machine. The present value of an annuity of 1 for 10 years at 9% is 6.418. Instructions For the new ultrasound machine, compute the: (a) cash payback period. (b) net present value. (c) annual rate of return. 11. Renfro Company is considering a capital investment of $120,000 in new equipment. The equipment is expected to have a 5-year useful life with no salvage value. Depreciation is computed by the straightline method. During the life of the investment, annual net income and cash inflows are expected to be $15,000 and $39,000, respectively. Renfro's minimum required rate of return is 10%. The present value of 1 for 5 periods at 10% is .621 and the present value of an annuity of 1 for 5 periods at 10% is 3.791. Instructions Compute each of the following: (a) cash payback period. 4

(b) net present value. (c) annual rate of return. 12. Barkley Company is considering two capital investment proposals. Relevant data on each project are as follows: Project AA Project BB Capital investment $200,000 $280,000 Annual net income 15,000 25,000 Estimated useful life 8 years 8 years Depreciation is computed by the straight-line method with no salvage value. Barkley requires an 8% rate of return on all new investments. The present value of 1 for 8 periods at 8% is .540 and the present value of an annuity of 1 for 8 periods is 5.747. Instructions (a) Compute the cash payback period for each project. (b) Compute the net present value for each project. (c) Compute the annual rate of return for each project. (d) Which project should Barkley select?