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Classify variable and fixed costs, net present value NPV

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1) Cost Classification: The Lee's have provided you with the following costs and relevant information that are assumed for year 20XY. Classify the costs as variable costs or fixed costs. Explain the importance of distinguishing between variable and fixed costs. If business is expected to be steady from month to month, provide a monthly budget based on these figures.
a)Advertising Fees = $4,000
b)Labor = $400/month
One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.
c)Packaging Supplies = $3,000
d)Office Supplies = $800
e)Phone and Internet Service = $115/month
f)Product Supplies = $9,000
g)Shipping Fees = $1,000/month
h)Conference Exhibitor Fee = $3,000
i)Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1,200
j)Utilities for the Home Workshop = $105/month

2)Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is $42,000. It is expected that the new piece of equipment will lead to cash flows of $17,000, $29,000, and $40,000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.

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Your discussion and computations are in excel, attached. Click in the cells to see computations.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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