# Bayshore Company Manufactures and Sells Product K

Bayshore Company manufactures and sells Product K. Results for last year are as follows:

Sales (10,000 units at $150 each) $1,500,000

Less expenses:

Variable production costs $900,000

Sales commissions (15% of sales) 225,000

Salary of product line manager 190,000

Traceable fixed advertising expense 175,000

Fixed manufacturing overhead 160,000

Total expenses 1,650,000

Net operating loss $ (150,000)

Bayshore is reexamining all of its product lines and is trying to decide whether to discontinue Product K. Dropping the product would have no effect on the total fixed manufacturing overhead incurred by the company.

34. Assume that dropping Product K will have no effect on the sale of other product lines. If the company drops Product K, the change in annual net operating income due to this decision will be a:

A) $10,000 decrease

B) $150,000 increase

C) $160,000 decrease

D) $310,000 decrease

E) None of the above

35. Assume that dropping Product K would result in a $15,000 increase in the contribution margin of other product lines. If Bayshore chooses to drop Product K, then the change in net operating income next year due to this action will be a:

A) $150,000 increase

B) $150,000 decrease

C) $5,000 increase

D) $140,000 increase

E) None of the above

The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The expected cost and revenue data for the F-27 fan are as follows:

Annual sales 4,000 units

Unit selling price $58

Unit variable costs:

Production $34

Selling $4

Avoidable fixed costs per year:

Production $20,000

Selling $30,000

If the F-27 model is added as a new product line, it is expected that the contribution margin of other product lines at Flint will drop by $7,000 per year.

36.If the F-27 product line is added next year, the change in operating income should be:

A) $30,000 increase

B) $5,000 decrease

C) $23,000 increase

D) $15,000 increase

E) None of the above

37.What is the lowest unit selling price that could be charged for the F-27 model and still make it economically desirable for Flint to add the new product line?

A) $64.25

B) $50.50

C) $55.75

D) $49.00

E) None of the above

38.(Ignore income taxes in this problem.) Stratford Company purchased a machine with an estimated useful life of seven years. The machine will generate cash inflows of $9,000 each year over the next seven years. If the machine has no salvage value at the end of seven years, and assuming the company's discount rate is 10%, what is the purchase price of the machine if the net present value of the investment is $17,000?

A) $43,812

B) $26,812

C) $17,000

D) $22,195

E) None of the above

39.(Ignore income taxes in this problem.) Anthony operates a part time auto repair service. He estimates that a new diagnostic computer system will result in increased cash inflows of $1,500 in Year 1, $2,100 in Year 2, and $3,200 in Year 3. If Anthony's required rate of return is 10%, then the most he would be willing to pay for the new computer system would be:

A) $4,599

B) $5,501

C) $5,638

D) $5,107

E) None of the above

40.(Ignore income taxes in this problem.) Fossa Road Paving Company is considering an investment in a curb-forming machine. The machine will cost $240,000, will last 10 years, and will have a $40,000 salvage value at the end of 10 years. The machine is expected to generate net cash inflows of $60,000 per year in each of the 10 years. Fossa's discount rate is 18%. What is the net present value of this machine?

A) $5,840

B) $37,280

C) $(48,780)

D) $69,640

E) None of the above

41.(Ignore income taxes in this problem.) Apnea Video Rental Store is considering the purchase of an almost new minivan to use as a vehicle to deliver and pick up video tapes for customers. The minivan will cost $18,000 and is expected to last 8 years but only if the engine is overhauled at a cost of $3,000 at the end of year 3. The minivan is expected to have a $1,000 salvage value at the end of 8 years. This delivery service is expected to generate net cash inflows of $6,000 per year in each of the 8 years. Apnea's discount rate is 14%. What is the net present value of this investment opportunity?

A) $(2,826)

B) $(3,801)

C) $7,185

D) $8,160

E) None of the above

42.(Ignore income taxes in this problem.) In an effort to reduce costs, Pontic Manufacturing Corporation is considering an investment in equipment that will reduce defects. This equipment will cost $420,000, will have an estimated useful life of 10 years, and will have an estimated salvage value of $50,000 at the end of 10 years. Pontic's discount rate is 22%. What amount of cost savings will this equipment have to generate per year in each of the 10 years in order for it to be an acceptable project?

A) $50,690 or more

B) $41,315 or more

C) $105,315 or more

D) $94,316 or more

E) None of the above

43.(Ignore income taxes in this problem.) Naomi Corporation has a capital budgeting project that has a negative net present value of $36,000. The life of this project is 6 years. Naomi's discount rate is 20%. By how much would the annual cash inflows from this project have to increase in order to have a positive net present value?

A) $1,200 or more

B) $2,412 or more

C) $6,000 or more

D) $10,824 or more

E) None of the above

45.Beaver Company (a multi-product firm) produces 5,000 units of Product X each year. Each unit of Product X sells for $8 and has a contribution margin of $5. If Product X is discontinued, $18,000 of fixed overhead would be eliminated. As a result of discontinuing Product X, the company's overall operating income would:

A) decrease by $25,000

B) increase by $43,000

C) decrease by $7,000

D) increase by $7,000

E) None of the above

46.ABD Realty manages five apartment complexes in its region. Shown below are summary income statements for each apartment complex:

U V W X Y

Rental income $1,000 $1,210 $2,347 $1,878 $1,065

Expenses 800 1,300 2,600 2,400 1,300

Operating income $ 200 ($ 90) ($ 253) ($ 522) ($ 235)

Included in the expenses is $1,200 of common corporate expenses that have been allocated to the apartment complexes based on rental income. These common corporate expenses would have to be incurred regardless of how many apartment complexes ABD Realty manages. The apartment complex(es) that ABD Realty should consider dropping is (are):

A) V, W, X, Y

B) W, X, Y

C) X, Y

D) X

E) None of the above

Meade Nuptial Bakery makes very elaborate wedding cakes to order. The company has an activity-based costing system with three activity cost pools. The activity rate for the Size-Related activity cost pool is $1.13 per guest. (The greater the number of guests, the larger the cake.) The activity rate for the Complexity-Related cost pool is $43.52 per tier. (Cakes with more tiers are more complex.) Finally, the activity rate for the Order-Related activity cost pool is $61.44 per order. (Each wedding involves one order for a cake.) The activity rates include the costs of raw ingredients such as flour, sugar, eggs, and shortening. The activity rates do not include the costs of purchased decorations such as miniature statues and wedding bells, which are accounted for separately.

Data concerning two recent orders appear below:

Ericson Wedding Haupt Wedding

Number of reception guests 60 162

Number of tiers on the cake 4 3

Cost of purchased decorations for cake $16.89 $38.61

49.Assuming that all of the costs listed above are avoidable costs in the event that an order is turned down, what amount would the company have to charge for the Ericson wedding cake to just break even?

A) $61.44

B) $387.45

C) $16.89

D) $340.21

E) None of the above

50.Assuming that the company charges $500.54 for the Haupt wedding cake, what would be the overall margin on the order?

A) $86.87

B) $413.67

C) $148.31

D) $125.48

E) None of the above

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#### Solution Preview

Bayshore Company manufactures and sells Product K. Results for last year are as follows:

Sales (10,000 units at $150 each) $1,500,000

Less expenses:

Variable production costs $900,000

Sales commissions (15% of sales) 225,000

Salary of product line manager 190,000

Traceable fixed advertising expense 175,000

Fixed manufacturing overhead 160,000

Total expenses 1,650,000

Net operating loss $ (150,000)

Bayshore is reexamining all of its product lines and is trying to decide whether to discontinue Product K. Dropping the product would have no effect on the total fixed manufacturing overhead incurred by the company.

34. Assume that dropping Product K will have no effect on the sale of other product lines. If the company drops Product K, the change in annual net operating income due to this decision will be a:

A) $10,000 decrease

Droppinhg product K will have following impact

Sales will reduce by $1,500,000

Expenses will reduce by

Variable production costs =$900,000

Sales commissions=225,000

Salary of product line manager =190,000

Traceable fixed advertising expense =175,000

Total expenses reduced = 1,490,000

Change in net operating profits = 1490,000-1500,000 = -10,000 (decrease)

Answer A.

35. Assume that dropping Product K would result in a $15,000 increase in the contribution margin of other product lines. If Bayshore chooses to drop Product K, then the change in net operating income next year due to this action will be a:

C) $5,000 increase

= -10,000 (as calculated above) + 15000 = +5000 (increase)

Answer C. An incraese of $5,000

The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current product lines. The expected cost and revenue data for the F-27 fan are as follows:

Annual sales 4,000 units

Unit selling price $58

Unit variable costs:

Production $34

Selling $4

Avoidable fixed costs per year:

Production $20,000

Selling $30,000

If the F-27 model is added as a new product line, it is expected that the contribution margin of other product lines at Flint will drop by $7,000 per year.

36.If the F-27 product line is added next year, the change in operating income should be:

C) $23,000 increase

The incremental changes in revenues and expenses will be as below:

Additional sales due to new line = 4,000*58=$232,000

Expenses

variable production cost = 4000*$34=$136,000

variable selling cost = ...

#### Solution Summary

The solution examines Bayshore Company Manufactures to Sell Product K.