WORKING MCGLATHERY. 1. The constraint at Mcglathery Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

UE BI CR

Selling price per unit $335.20 $228.48 $199.23

Variable cost per unit $259.22 $173.04 $159.57

Minutes on the constraint 7.70 4.50 5.70

Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource? (Round your intermediate calculations and final answer to 2 decimal places.)

$39.66 per unit

$75.98 per unit

$6.96 per minute

$12.32 per minute

2. Austin Wool Products purchases raw wool and processes it into yarn. The spindles of yarn can then be sold directly to stores or they can be used by Austin Wool Products to make afghans. Each afghan requires one spindle of yarn. Current cost and revenue data for the spindles of yarn and for the afghans are as follows:

Data for one spindle of yarn:

Selling price $17

Variable production cost $13

Fixed production cost (based on 3,200 spindles of yarn produced) $7

Data for one afghan:

Selling price $35

Production cost per spindle of yarn $20

Variable production cost to process the yarn into an afghan $19

Avoidable fixed production cost to process the yarn into an afghan

(based on 3,200 afghans produced) $15

Each month 3,200 spindles of yarn are produced that can either be sold outright or processed into afghans.

If Austin chooses to produce 3,200 afghans each month, the change in the monthly net operating income as compared to selling 3,200 spindles of yarn is:

$12,800 increase

$-51,200 increase

$-51,200 decrease

$12,800 decrease

3. The Tingey Company has 400 obsolete microcomputers that are carried in inventory at a total cost of $576,000. If these microcomputers are upgraded at a total cost of $130,000, they can be sold for a total of $190,000. As an alternative, the microcomputers can be sold in their present condition for $40,000.

Suppose the selling price of the upgraded computers has not been set. At what selling price per unit would the company be as well off upgrading the computers as if it just sold the computers in their present condition?

$65

$308

$425

$140

4. Talboe Company makes wheels which it uses in the production of children’s wagons. Talboe’s costs to produce 130,000 wheels annually are as follows:

Direct material $ 26,000

Direct labor 39,000

Variable manufacturing overhead 19,500

Fixed manufacturing overhead 61,000

Total $145,500

An outside supplier has offered to sell Talboe similar wheels for $0.80 per wheel. If the wheels are purchased from the outside supplier, $16,000 of annual fixed manufacturing overhead would be avoided and the facilities now being used to make the wheels would be rented to another company for $42,500 per year.

If Talboe chooses to buy the wheel from the outside supplier, then the change in annual net operating income is a:

$39,000 increase

$3,500 decrease

$26,000 increase

$38,500 increase

5. The Varone Company makes a single product called a Hom. The company has the capacity to produce 40,000 Homs per year. Per unit costs to produce and sell one Hom at that activity level are:

Direct materials $29

Direct labor $19

Variable manufacturing overhead $14

Fixed manufacturing overhead $16

Variable selling expense $10

Fixed selling expense $9

The regular selling price for one Hom is $90. A special order has been received at Varone from the Fairview Company to purchase 7,700 Homs next year at 20% off the regular selling price. If this special order were accepted, the variable selling expense would be reduced by 30%. However, Varone would have to purchase a specialized machine to engrave the Fairview name on each Hom in the special order. This machine would cost $11,700 and it would have no use after the special order was filled. The total fixed costs, both manufacturing and selling, are constant within the relevant range of 30,000 to 40,000 Homs per year. Assume direct labor is a variable cost.

If Varone can expect to sell 32,000 Homs next year through regular channels and the special order is accepted at 20% off the regular selling price, the effect on net operating income next year due to accepting this order would be a:

$11,400 increase

$51,700 increase

$77,000 increase

$24,300 decrease

6. The constraint at Dalbey Corporation is time on a particular machine. The company makes three products that use this machine. Data concerning those products appear below:

FE MB WP

Selling price per unit $256.00 $361.80 $177.40

Variable cost per unit $190.00 $273.88 $131.44

Minutes on the constraint 4.80 6.60 3.60

Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of this constrained resource? (Round your intermediate calculations and final answer to 2 decimal places.)

$13.75 per minute

$12.77 per minute

$87.92 per unit

$45.96 per unit

7. An automated turning machine is the current constraint at Naik Corporation. Three products use this constrained resource. Data concerning those products appear below:

KU OP YY

Selling price per unit $104.78 $527.98 $557.92

Variable cost per unit $ 81.88 $429.55 $419.85

Minutes on the constraint 2.50 11.60 11.80

Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. (Round your intermediate calculations to 2 decimal places.)

OP, KU, YY

YY, KU, OP

YY, OP, KU

KU, YY, OP

8. The management of Freshwater Corporation is considering dropping product C11B. Data from the company’s accounting system appear below:

Sales $919,000

Variable expenses $403,500

Fixed manufacturing expenses $333,000

Fixed selling and administrative expenses $240,000

All fixed expenses of the company are fully allocated to products in the company’s accounting system. Further investigation has revealed that $205,500 of the fixed manufacturing expenses and $116,500 of the fixed selling and administrative expenses are avoidable if product C11B is discontinued.

What would be the effect on the company’s overall net operating income if product C11B were dropped?

Overall net operating income would increase by $193,500.

Overall net operating income would increase by $57,500.

Overall net operating income would decrease by $57,500.

Overall net operating income would decrease by $193,500.

9. Sohr Corporation processes sugar beets that it purchases from farmers. Sugar beets are processed in batches. A batch of sugar beets costs $41 to buy from farmers and $12 to crush in the company’s plant. Two intermediate products, beet fiber and beet juice, emerge from the crushing process. The beet fiber can be sold as is for $17 or processed further for $16 to make the end product industrial fiber that is sold for $51. The beet juice can be sold as is for $34 or processed further for $20 to make the end product refined sugar that is sold for $51.

How much profit (loss) does the company make by processing the intermediate product beet juice into refined sugar rather than selling it as is?

$(33)

$(3)

$(61)

$(20

10. Sibble Corporation is considering the purchase of a machine that would cost $300,000 and would last for 5 years. At the end of 5 years, the machine would have a salvage value of $40,000. By reducing labor and other operating costs, the machine would provide annual cost savings of $70,000. The company requires a minimum pretax return of 12% on all investment projects. (Ignore income taxes.)

Click here to view Exhibit 13B-1 and Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

The net present value of the proposed project is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

−$24,970

−$70,330

−$7,650

−$47,650

11. Charley has a typing service. He estimates that a new computer will result in increased cash inflow $2,800 in Year 1, $3,200 in Year 2 and $3,900 in Year 3. (Ignore income taxes.)

Click here to view Exhibit 13B-1 to determine the appropriate discount factor(s) using tables.

If Charley’s required rate of return is 11%, the most that Charley would be willing to pay for the new computer would be: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

$8,102

$7,972

$5,398

$7,921

12. The Valentine Company has decided to buy a machine costing $27,872. Estimated cash savings from using the new machine amount to $6,500 per year. The machine will have no salvage value at the end of its useful life of seven years. (Ignore income taxes.)

Click here to view Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

If Valentine’s required rate of return is 11%, the machine’s internal rate of return is closest to: (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate.)

8%

12%

14%

10%

13. Deibel Corporation is considering a project that would require an investment of $71,000. No other cash outflows would be involved. The present value of the cash inflows would be $95,140. The profitability index of the project is closest to: (Ignore income taxes.) (Round your answer to 2 decimal places.)

0.25

0.34

0.66

1.34

14. The Higgins Company has just purchased a piece of equipment at a cost of $310,000. This equipment will reduce operating costs by $50,000 each year for the next twelve years. This equipment replaces old equipment which was sold for $10,000 cash. The new equipment has a payback period of: (Ignore income taxes.) (Round your answer to 1 decimal place.)

6.0 years

6.2 years

18.0 years

12.0 years

15. Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes.)

Investment required in equipment $440,000

Annual cash inflows $77,000

Salvage value $0

Life of the investment 20 years

Discount rate 13%

The payback period for the investment is closest to: (Round your answer to 1 decimal place.)

0.2 years

3.7 years

5.7 years

1.0 years

16.

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes.)

Investment required in equipment $630,000

Annual cash inflows $64,000

Salvage value $0

Life of the investment 15 years

Discount rate 6%

The simple rate of return on the investment is closest to: (Round your answer to the closest interest rate.)

8%

5%

3%

4%

17. Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes.)

Investment required in equipment $470,000

Annual cash inflows $77,000

Salvage value $0

Life of the investment 20 years

Discount rate 14%

Click here to view Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

The net present value on this investment is closest to: (Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount.)

$77,000

$39,971

$73,750

$470,000

18. Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes.)

Investment required in equipment $640,000

Annual cash inflows $86,000

Salvage value $0

Life of the investment 20 years

Discount rate 9%

Click here to view Exhibit 13B-2 to determine the appropriate discount factor(s) using tables.

The internal rate of return on the investment is closest to: (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate.)

8%

10%

12%

14%

19. Gull Inc. is considering the acquisition of equipment that costs $500,000 and has a useful life of 6 years with no salvage value. The incremental net cash flows that would be generated by the equipment are: (Ignore income taxes.)

Incremental net

cash flows

Year 1 $133,000

Year 2 $160,000

Year 3 $144,000

Year 4 $153,000

Year 5 $143,000

Year 6 $123,000

The payback period of this investment is closest to: (Round your intermediate and final answers to 1 decimal place.)

5.3 years

3.8 years

3.2 years

3.4 years

20. The management of Melchiori Corporation is considering the purchase of a machine that would cost $310,000, would last for 6 years, and would have no salvage value. The machine would reduce labor and other costs by $111,000 per year. The company requires a minimum pretax return of 14% on all investment projects. (Ignore income taxes.)

Click here to view Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

The present value of the annual cost savings of $111,000 is closest to: (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount.)

$170,448

$431,679

$666,000

$1,011,462

21 The Finney Company is reviewing the possibility of remodeling one of its showrooms and buying some new equipment to improve sales operations. The remodeling would cost $250,000 now and the useful life of the project is 13 years. Additional working capital needed immediately for this project would be $65,000; the working capital would be released for use elsewhere at the end of the 13-year period. The equipment and other materials used in the project would have a salvage value of $45,000 in 13 years. Finney’s discount rate is 17%. (Ignore income taxes.)

The immediate cash outflow required for this project would be: (Round discount factor(s) to 3 decimal places and final answer to the nearest dollar amount.)

$(315,000)

$(250,000)

$(295,000)

$(185,000)

22. Blaine Corporation is considering replacing a technologically obsolete machine with a new state-of-the-art numerically controlled machine. The new machine would cost $240,000 and would have a fifteen-year useful life. Unfortunately, the new machine would have no salvage value. The new machine would cost $38,000 per year to operate and maintain, but would save $77,000 per year in labor and other costs. The old machine can be sold now for scrap for $24,000. What is the simple rate of return on the new machine? (Ignore income taxes.) (Round your answer to 2 decimal places.)

9.58%

32.08%

10.65%

21.30%