Fluty Corporation, Kirkland Company, Book & Bible Bookstore
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1. Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two alternative proposals related to these parts.
The first proposal is for buying Part A. This would free up some of the plant space for the manufacture of more of Part B and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed.
The second proposal is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero.
Required:
Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently.
a. Total variable manufacturing overhead, Part A
b. Total variable manufacturing overhead, Part B
c. Cost of old equipment for manufacturing Part B
d. Cost of new equipment for manufacturing Part B
e. Total variable selling and administrative costs
f. Sales revenue of the product
g. Total variable costs of assembling final products
h. Total direct manufacturing materials, Part A
i. Total direct manufacturing materials, Part B
j. Total direct manufacturing labor, Part A
k. Total direct manufacturing labor, Part B
2. Kirkland Company manufactures a part for use in its production of hats. When 10,000 items are produced, the costs per unit are:
Direct materials $0.60
Direct manufacturing labor 3.00
Variable manufacturing overhead 1.20
Fixed manufacturing overhead 1.60
Total $6.40
Mike Company has offered to sell to Kirkland Company 10,000 units of the part for $6.00 per unit. The plant facilities could be used to manufacture another item at a savings of $9,000 if Kirkland accepts the offer. In addition, $1.00 per unit of fixed manufacturing overhead on the original item would be eliminated.
Required:
a. What is the relevant per unit cost for the original part?
b. Which alternative is best for Kirkland Company? By how much?
3. Book & Bible Bookstore desires to buy a new coding machine to help control book inventories. The machine sells for $36,586 and requires working capital of $4,000. Its estimated useful life is five years and will have a salvage value of $4,000. Recovery of working capital will be $4,000 at the end of its useful life. Annual cash savings from the purchase of the machine will be $10,000.
Required:
a. Compute the net present value at a 14% required rate of return.
b. Compute the internal rate of return.
c. Determine the payback period of the investment.
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Solution Summary
This solution is comprised of a detailed explanation and calculation to find relevant costs, net present value, internal rate of return, and payback period of the investment for the accounting problems.
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1. Fluty Corporation manufactures a product that has two parts, A and B. It is currently considering two alternative proposals related to these parts.
The first proposal is for buying Part A. This would free up some of the plant space for the manufacture of more of Part B and assembly of the final product. The product vice president believes the additional production of the final product can be sold at the current market price. No other changes in manufacturing would be needed.
The second proposal is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal value of zero.
Required:
Tell whether the following items are relevant or irrelevant for each proposal. Treat each proposal independently.
For the first proposal
a. Total variable manufacturing overhead, Part A
relevant because total variable manufacturing overhead, Part A will be reduced.
b. Total variable manufacturing overhead, Part B
relevant because total variable manufacturing overhead, Part B will be increased.
c. Cost of old equipment for manufacturing Part B
irrelevant because no changes would be made to the old equipment.
d. Cost of new equipment for manufacturing Part B
irrelevant because Fluty is not going to purchase new equipment under this proposal.
e. Total variable selling and administrative costs
relevant because of higher sales of additional final products.
f. Sales revenue of the product
relevant because sales revenue will be increased.
g. Total variable costs of assembling final products
relevant because of higher production of additional final products.
h. Total direct manufacturing materials, Part A
relevant because total direct manufacturing materials, Part A will be reduced.
i. Total direct manufacturing materials, Part B
relevant because total direct manufacturing materials, Part B will be increased.
j. Total direct manufacturing labor, Part A
relevant because total direct manufacturing labor, Part A will be reduced.
k. Total direct manufacturing labor, Part B
relevant because total direct manufacturing labor, Part B will be increased.
The second proposal is for buying new equipment for the production of Part B. The new equipment requires fewer workers and uses less power to operate. The old equipment has a net disposal ...
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