Academia.eduAcademia.edu

Analysis of Project Cash Flows

Just some Cash flows

7-1 Part 3 Analysis of Project Cash Flows Copyright © 2012 Pearson Canada Inc., Toronto, Ontario. 7-2 Chapter 7 Cost Concepts Relevant to Decision Making Classifying Cost 7.1  Storage and material handling costs for raw materials: product cost (indirect costs)  Gains or loss on disposal of factory equipment: period income (costs)  Lubricants for machinery and equipment used in production: product cost (manufacturing overhead)  Depreciation of a factory building: product cost (manufacturing overhead)  Depreciation of manufacturing equipment: product cost (manufacturing overhead)  Depreciation of the company president’s automobile: period cost  Leasehold costs for land on which factory buildings stand: period cost  Inspection costs of finished goods: product cost  Direct labour cost: product cost  Raw materials cost: product cost  Advertising expenses: period cost Cost Behaviour 7.2 *  Wages paid to temporary workers: variable cost  Property taxes on factory building: fixed cost  Property taxes on administrative building: fixed cost  Sales commission: variable cost  Electricity for machinery and equipment in the plant: variable cost  Heat and air-conditioning for the plant: fixed cost  Salaries paid to design engineers: fixed cost  Regular maintenance on machinery and equipment: fixed cost * An asterisk next to a problem number indicates that the solution is available to students on the Companion Website. Copyright © 2012 Pearson Canada Inc., Toronto, Ontario. 7-3  Basic raw materials used in production: variable cost  Factory fire insurance: fixed cost 7.3 (a) 6 (b) 11 (c) 5, (Note: It is tempting to select “1,” but the graphs are drawn in cumulative basis) (d) 4 (e) 2 (f) 10 (g) 3 (h) 7 (i) 9 7.4 Question (a) Total manufacturing cost (b) Manufacturing cost per unit (c) Total variable costs (d) Total variable costs per unit (e) Total costs to be recovered Output Level 1,000 Units 2,000 Units $98,000 $130,000 $98 $67,000 $67 $125,000 $65 $104,000 $52 $162,000 Cost-Volume-Profit Relationships 7.5 * (a) Total unit manufacturing costs if 30,000 units are produced: $21 Total mfg. costs  $150, 000  $300, 000  $180, 000  $630, 000 Unit cost =$630, 000 / 30, 000  $21 (b) Total unit manufacturing costs if 40,000 units are produced: $20.33 Total mfg. costs  $200, 000  $400, 000  $133,333  $80, 000  $813,333 Unit cost =$813,333 / 40, 000  $20.33 Copyright © 2012 Pearson Canada Inc., Toronto, Ontario. 7-4 (c) Break-even price with 30,000 units produced: $29.33 Total cost  Mfg. cost + Selling & Admin =$630,000+$250,000  $880, 000 Unit cost =$880, 000 / 30, 000  $29.33 7.6 * (a) Break-even sales volume: $200,000 (b) Marginal contribution rate (MCR) = $20,000/$100,000 = 20%, which is equivalent to the slope of the profit-loss function. (c) Let R = break-even sales dollars; F = total fixed cost; V = variable cost per unit; Q = sales price per unit R 1 F 1V  Q F V V  0.8; ; 1   0.2; MCR Q Q V V 1 0.8  1  1  0.1579; Q 0.95 0.95Q 0.95 $40, 000 R  $253,333 0.1579 (d) F  1.1F  $44, 000 $44, 000 R  $220, 000 0.2 (e) 1 (f) $40, 000  $20, 000  $100, 000 0.2 V V  0.2;  0.8; Q Q 1.06V  1  1.06(0.8)  0.1520; 1 Q $40, 000 R  $263,158 0.1520 7.7 (a) Total fixed cost to be recovered (b) Sales volume & Profit/Loss Copyright © 2012 Pearson Canada Inc., Toronto, Ontario. 7-5 (c) Profit = 0 (d) Profit per sales volume (e) Break-even volume 7.8 (a) No. 1. 2. 3. 4. 5. Description Profit (Loss) Sales volume Total manufacturing cost Variable costs Fixed costs No. 6. 7. 8. 9. 10. Description Break even Loss Profit Total revenue Marginal contribution (b) Case Unit Sold Sales Variable Expenses Contribution Margin per Unit Fixed Expenses Net Income (Loss) A B C D 9,000 14,000 20,000 5,000 $270,000 $350,000 $400,000 $100,000 $162,000 $140,000 $280,000 $30,000 $12 $15 $6 $14 $90,000 $170,000 $85,000 $82,000 $18,000 $40,000 $35,000 ($12,000) Cost Concepts Relevant to Decision Making 7.9 Additional units ordered = 100 Labour cost = ($12)(5)(100) = $6,000 Material cost = ($14)(100) = $1,400 Overhead cost = (50%) ($6,000) = $3,000 Total cost = $6,000 + $1,400 + $3,000 = $10,400 Profit = (30%) ($10,400) = $3,120 ∴ Unit price to quote = $10,400 + $3,120 = $13,520 7.10 (a) Product mix that must satisfy: A:B = 4:3, or 4B = 3A (or B = 0.75A) Break-even formula: Total revenue = Total cost: 10A + 12(0.75)A = 5A + 10(0.75)A + 2,600; 6.5A = 2,600; A = 400 units and B = 300 units (b) 10A + 12A = 5A + 10A + 2,600; A = 371.43 units Copyright © 2012 Pearson Canada Inc., Toronto, Ontario. 7-6 (c) Compute the marginal contribution rate (MCR) for each product: Product A = $5, Product B= $2; with the assumption (A > 0 and B > 0), more preference should be given to Product A (d) Product A: MCR = $5 per unit; Production time = 0.5 hour per unit; profit per hour = $10 Product B: MCR = $2 per unit; Production time = 0.25 hour per unit; profit per hour = $8 Conclusion: Product A is more profitable, so it should be pushed first. 7.11 (a) Incremental cost Description Soldering operation Direct m aterials Direct labor M fg. O v erhead Fixed cost Unit cost In-house O utscoring O ption O ption $4.80 $7.50 $6.00 $5.00 $4.25 $4.00 $3.40 $0.20 $0.20 $16.70 $18.65 The outsourcing option would cost $1.95 more for each unit. Note that the fixed cost of $20,000 (or $0.20 per unit based on 100,000 production volume) remains unchanged under either option. (b) Break-even price = $4.80 - $1.95 = $2.85 per unit Short Case Studies ST 7.1 (a) Break-even volume:  six-day operation: capacity → 270 tonnes/day, 6 days, Q = $270/tonne F = ($4,200)(6 days) = $25,200, V = [$7.56+($0.16)(1.2)(1000)] = $199.56/tonne F  NV  NQ Nb  F $25, 200   357.75 tonnes Q  V $270  $199.56  seven-day operation: capacity → 270 tonnes/day, 7 days, Q = $270/tonne F = ($4,200)(6 days) + $420 = $29,820, Copyright © 2012 Pearson Canada Inc., Toronto, Ontario. 7-7 V = [$7.56(6/7) + $15.12(1/7) + ($0.16)(1.2)(1000)] = $200.64/tonne F  NV  NQ Nb  $29,820 F   429.93 tonnes Q  V $270  $200.64 (b)  six-day operation: MCR  1  199.56 V  1  0.2609 Q 270  seven-day operation: 200.64 V MCR  1   1   0.2569 Q 270 (c)  Average total cost per tonne = $25, 200  $199.56  $215.12 / tonne (270)(6)  Net profit margin before taxes = Sales – Costs = $270 – $215.12 = $54.88/tonne (d)  Sunday profit margin = $270  [ $420  $192  $15.12]  $61.32  0 270 Yes, it could be economical for the mill to operate on Sunday. The incremental profit margin for the seven-day operation is less than the six-day operation. Although Sunday operation is not as profitable due to the increased labour and fixed cost, the overall MCR is still positive. Copyright © 2012 Pearson Canada Inc., Toronto, Ontario.