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Notre Dame College MBA 540 Accounting Week 6 Assignment 6-2 Relevant Costing for Managerial Decisions Total points: 50 1. This is a numerical assignment. The maximum points are shown against each problem given below. 2. Show the complete work before you give the final answer. 3. Analytical approach is expected where a question is descriptive in nature. 1. (3 points) your friend open a new business and she asked you to help her to defining the costs for her business. She also wants to know which costs are relevant or irrelevant to her decision. Cost Relevant or Irrelevant? Sunk, Fixed, Variable, or Opportunity? Rent Baker wages Culinary school tuition Berries for pies Painting dining area last year Your friend’s decision not to attend graduate school Required: Identify each cost as relevant or irrelevant. Then identify the type of cost (sunk, fixed, variable, or opportunity). Work and Solution: Cost Relevant or Irrelevant Sunk, Fixed, Variable, or Opportunity? Rent Baker wages Felipe’s culinary school tuition Berries for pies Painting dining area last year Felipe’s decision not to attend graduate school 2. (6 points) Svahn, AB, is a Swedish manufacturer of sailing yachts. The company has assembled the information shown below that pertains to two independent decision-making contexts. Case A: The company chronically has no idle capacity and the old Model B100 machine is the company’s constraint. Management is considering purchasing a Model B300 machine to use in addition to the company’s present Model B100 machine. The old Model B100 machine will continue to be used to capacity as before, with the new Model B300 machine being used to expand production. This will increase the company’s production and sales. The increase in volume will be large enough to require increases in fixed selling expenses and in general administrative overhead, but not in the fixed manufacturing overhead. Case B: The old Model B100 machine is not the company’s constraint, but management is considering replacing it with a new Model B300 machine because of the potential savings in direct materials with the new machine. The Model B100 machine would be sold. This change will have no effect on production or sales, other than some savings in direct materials costs due to less waste. Required: Based on the information provided above indicate in the appropriate column whether each item is relevant or irrelevant to the decision context described in Case A and Case B. Item Case A Case B a. Sales revenue b. Direct materials c. Direct labor d. Variable manufacturing overhead e. Depreciation—Model B100 machine f. Book value—Model B100 machine g. Disposal value—Model B100 machine h. Market value—Model B300 machine (cost) i. Fixed manufacturing overhead (general) j. Variable selling expense k. Fixed selling expense l. General administrative overhead Work and Solution: Item Case A Case B a. Sales revenue b. Direct materials c. Direct labor d. Variable manufacturing overhead e. Depreciation—Model B100 machine f. Book value—Model B100 machine g. Disposal value—Model B100 machine h. Market value—Model B300 machine (cost) i. Fixed manufacturing overhead (general) j. Variable selling expense k. Fixed selling expense l. General administrative overhead 3. (6 points) You are working for a large firm that has asked you to attend a meeting at a university that is 225 miles from your office. You need to be there at 8:00 a.m. on a Monday morning. You can drive your personal car and be reimbursed $0.75 per mile, but you would need to leave home at 5:30 a.m. to get to the event and set up on time. Company policy allows you to spend the night if you must leave town before 6:00 a.m. The hotel across the street from campus charges $150 per night. Instead of driving, you could catch a 6:00 a.m. flight with a round-trip fare of $450. Flying would require you to rent a car for $55 per day, and you would have an airport parking fee of $35 for the day. The company pays a per diem of $50 for incidentals if you spend at least 6 hours out of town. (The per diem would be for one 24-hour period for either flying or driving.) As a manager, you are responsible for recruiting within a budget and want to determine which is more economical. Required: Use the information above provided to answer these questions. 1. What is the total amount of expenses you would include on your expense report if you drive? 1. What is the total amount of expenses you would include on your expense report if you fly? 1. What is the relevant cost of driving? 1. What is the relevant cost of flying? 1. What is the differential cost of flying over driving? 1. What other factors should you consider in your decision between driving and flying? Work and Solution: 4. (5 Points) Quest Nutrition Chocolate Chip Cookie Company makes various types of protein bars. Tosi Plant Based Protein Bars Company has approached Quest Nutrition Chocolate Chip Cookie company with a proposal to sell the company its top selling protein bar at a price of $27,500 for 20,000 protein bars. The costs shown are associated with production of 20,000 protein bars currently. Direct Material $14,000 Direct Labor 6,000 Manufacturing Overhead 8,000 Total $28,000 The manufacturing overhead consists of $3,000 of variable costs with the balance being allocated to fixed costs. Required: Calculate and explain if Quest Nutrition Chocolate Chip Cookie company Should make or buy the protein bars? Work and Solution: 5. (5 points) The Trek bicycle Company manufactures three types of bicycles—a dirt bike, a mountain bike, and a racing bike. Due to their residential location, they operate with one 8-hour shift, 5 days per week, 50 weeks a year. Balancing the bikes is the bottleneck. The information about production time and costs for these three bicycles are: Dirt Mountain Racing Hours of produce 3 2 1.5 Selling price $800 $600 $400 Direct Material $200 $150 $100 Direct Labor $150 $100 $75 Variable Overhead $50 $25 $25 Fixed Overhead $25 $25 $25 Required: A. How many of each bicycle should be produced to maximize profits? B. What qualitative factors would you need to consider? Work and Solution: 6. (5 points) he management of Under Corporation, an architectural design firm, is considering an investment with the following cash flows: Year Investment Cash Inflow 1 $ 78,000 $ 5,000 2 $ 5,000 $ 10,000 3 $ 12,000 4 $ 15,000 5 $ 18,000 6 $ 16,000 7 $ 14,000 8 $ 12,000 9 $ 11,000 10 $ 11,000 Required: 1. Determine the payback period of the investment. 2. Would the payback period be affected if the cash inflow in the last year were several times as large? Work and Solution: Hint: 1.The payback period is determined as follows: Year Investment Cash Inflow Unrecovered Investment 1 $ 78,000 $ 5,000 2 $ 5,000 $ 10,000 3 $ 12,000 4 $ 15,000 5 $ 18,000 6 $ 16,000 7 $ 14,000 8 $ 12,000 9 $ 11,000 10 $ 11,000 7. (8 Points) Project Y cost $8,000 and will generate net cash inflows of $1,500 in year one, $2,000 in year two, $2,500 in year three, $3,000 in year four and $2,000 in year five. Required: Compute the NPV using 8% as the discount rate? Work and Solution: 8. (10 Points) Pompeii’s Pizza has a delivery car that it uses for pizza deliveries. The transmission needs to be replaced and there are several other repairs that need to be done. The car is nearing the end of its life, so the options are to either overhaul the car or replace it with a new car. Pompeii’s has put together the following budgetary items: Old Car New car Purchase cost for the new car $31,000 Transmission and other repairs $8,500 Annual cash operating cost 12,500 10,000 Fair market value now 5,000 Fair market values in five years 500 5,000 If Pompeii’s replaces the transmission of the pizza delivery vehicle, they expect to be able to use the vehicle for another 5 years. If they sell the old vehicle and purchase a new vehicle, they will use that vehicle for 5 years and then trade it in for another new pizza delivery vehicle. If they trade for the new delivery vehicle, their operating expenses will decrease because the new vehicle is more gas efficient and the maintenance on a new car is less. This project is analyzed using a discount rate of 12%. Required: a) Calculate NPV of Cash Outflows for Transmission and other major repairs of the old car. b) Calculate NPV of Cash Purchase of New Vehicle. c) What should Pompeii’s do? Work and Solution: 9. (2 points) Project A costs $5,000 and will generate annual after-tax net cash inflows of $1,800 for five years. Required: What is the NPV using 8% as the discount rate? Work and Solution: Notre Dame College MBA 540 Accounting Week 6 Assignment 6 - 2 Relevant Costing for Managerial Decisions Total points: 50 1. This is a numerical assignment. The maximum points are shown against each problem given below. 2. Show the complete work before you give the final answer. 3. Analytical approach is expected where a question is descriptive in nature. 1. ( 3 points ) your friend open a new business and she asked you to help her to defining the costs for h er business. Sh e also wants to know which costs are relevant or irrelevant to h er decision. Cost Relevant or Irrelevant? Sunk, Fixed, Variable, or Opportunity? Rent Baker wages C ulinary school tuition Berries for pies Painting dining area last year Your friend’s decision not to attend graduate school Required : Identify each cost as relevant or irrelevant. Then identify the type of cost (sunk, fixed, variable, or opportunity). Work and Solution : Cost Relevant or Irrelevant Sunk, Fixed, Variable, or Opportunity? Rent Baker wages Felipe’s culinary school tuition Berries for pies Painting dining area last year Felipe’s decision not to attend graduate school Notre Dame College MBA 540 Accounting Week 6 Assignment 6-2 Relevant Costing for Managerial Decisions Total points: 50 1. This is a numerical assignment. The maximum points are shown against each problem given below. 2. Show the complete work before you give the final answer. 3. Analytical approach is expected where a question is descriptive in nature. 1. (3 points) your friend open a new business and she asked you to help her to defining the costs for her business. She also wants to know which costs are relevant or irrelevant to her decision. Cost Relevant or Irrelevant? Sunk, Fixed, Variable, or Opportunity? Rent Baker wages Culinary school tuition Berries for pies Painting dining area last year Your friend’s decision not to attend graduate school Required: Identify each cost as relevant or irrelevant. Then identify the type of cost (sunk, fixed, variable, or opportunity). Work and Solution: Cost Relevant or Irrelevant Sunk, Fixed, Variable, or Opportunity? Rent Baker wages Felipe’s culinary school tuition Berries for pies Painting dining area last year Felipe’s decision not to attend graduate school