Consider the following costs:

Direct materials......................................... $33,000

Depreciation on factory equipment........... $12,000
Factory janitor’s salary.............................. $23,000
Direct labor................................................ $28,000
Utilities for factory.................................... $9,000
Selling expenses........................................ $16,000
Production supervisor’s salary................... $34,000
Administrative expenses........................... $21,000

What is the total amount of manufacturing overhead included above?

$78,000

$139,000

$44,000

$37,000

Depreciation on factory equipment........... $12,000

Factory janitor’s salary.............................. 23,000
Utilities for factory.................................... 9,000
Production supervisor’s salary................... 34,000
Total........................................................... $78,000

Consider the following costs incurred in a recent period:

Direct materials......................................... $33,000

Depreciation on factory equipment........... $12,000
Factory janitor’s salary.............................. $23,000
Direct labor................................................ $28,000
Utilities for factory.................................... $9,000
Selling expenses........................................ $16,000
Production supervisor’s salary................... $34,000
Administrative expenses........................... $21,000

What was the total amount of the period costs listed above for the period?
$78,000

$71,000

$46,000

$37,000
 Selling expenses........................................ $16,000
Administrative expenses............................ 21,000
Total........................................................... $37,000

Forbes Company uses a predetermined overhead rate based on direct labor-hours to apply
manufacturing overhead to jobs. At the beginning of the period, the company estimated
manufacturing overhead would be $18,000 and direct labor-hours would be 15,000.
The actual figures were $19,500 for manufacturing overhead and 16,000 direct labor-
hours. The cost records for the period will show:

overapplied overhead of $300

overapplied overhead of $1,500
underapplied overhead of $1,500
underapplied overhead of $300

Predetermined overhead rate = $18,000 ÷ 15,000 direct labor-hours

= $1.20 per direct labor-hour

Actual manufacturing overhead................................... $19,500

Applied manufacturing overhead (16,000 × $1.20).... 19,200
Manufacturing overhead underapplied....................... $ 300

Wayne Company's beginning and ending inventories for the month of June were as follows:

June 1 June 30
Direct Materials................. $67,000 $62,000
Work in Process................. $145,000 $171,000
Finished Goods.................. $85,000 $78,000

Production data for the month follow:

Direct labor cost incurred................................................ $200,000

Direct labor-hours............................................................ 25,000
Actual manufacturing overhead cost incurred................ $132,000
Direct materials purchases............................................... $165,000

Wayne applies manufacturing overhead cost to jobs based on direct labor-hours, and
the predetermined rate is $5.75 per direct labor-hour. The company does not close
underapplied or overapplied manufacturing overhead to Cost of Goods Sold until the
end of the year. What is the amount of cost of goods manufactured?
$508,750
 $502,000
$585,000
$487,750

Schedule of Cost of Goods Manufactured

Direct materials:
Direct materials inventory, beginning... $ 67,000
Add purchases of raw materials............. 165,000
Total raw materials available................. 232,000
Deduct direct materials inventory,
ending................................................. 62,000
Raw materials used in production............. $170,000
Direct labor................................................ 200,000
Manufacturing overhead applied ($ 5.75
× 25,000)................................................ 143,750
Total manufacturing costs......................... 513,750
Add: Work in process, beginning.............. 145,000
658,750
Deduct: Work in process, ending.............. 171,000
Cost of goods manufactured...................... $487,750

Cavalerio Corporation uses the weighted-average method in its process costing system. This
month, the beginning inventory in the first processing department consisted of 700 units. The
costs and percentage completion of these units in beginning inventory were:

Cost Percent Complete

Materials costs................... $9,100 80%
Conversion costs............... $5,400 25%
A total of 7,200 units were started and 6,400 units were transferred to the second processing
department during the month. The following costs were incurred in the first processing
department during the month:
Materials costs................... $96,700
Conversion costs............... $180,700

The ending inventory was 80% complete with respect to materials and 70% complete with
respect to conversion costs. The cost per equivalent unit for materials for the month in the first
processing department is closest to:

$12.72
 $13.92

$13.39

$12.24

To solve for ending work in process:

+ Work in process, beginning............................................... 700
+ Units started into production during the month................. 7,200
− Units completed and transferred out during the month..... 6,400
= Work in process, ending.................................................... 1,500

Equivalent units of production

Materials
Transferred to next department.............................................. 6,400
Ending work in process (1,500 units × 80% complete)......... 1,200
Equivalent units of production............................................... 7,600

Cost per Equivalent Unit

Materials
Cost of beginning work in process......................................... $ 9,100
Cost added during the period................................................. 96,700
Total cost (a).......................................................................... $105,800

Equivalent units of production (b)......................................... 7,600

Cost per equivalent unit, (a) ÷ (b).......................................... $13.92

The following production and average cost data for a month's operations have been supplied
by a company that produces a single product.

Production volume........................ 1,000 units 2,000 units

Direct materials............................. $4.00 per unit $4.00 per unit
Direct labor.................................... $3.50 per unit $3.50 per unit
Manufacturing overhead............... $10.00 per unit $6.20 per unit

The total fixed manufacturing cost and variable manufacturing cost per unit are as
follows:
$3,600; $7.50
$3,600; $9.90
$7,600; $7.50
$7,600; $9.90
First, calculate the variable manufacturing cost per unit:

Production Average Total Manufacturing

Volume Cost per Overhead Cost (units
(Units) Unit × average cost per
unit)
High activity level. . 2,000 $6.20 $12,400
Low activity level... 1,000 $10.00 $10,000

Variable manufacturing overhead cost = Change in cost ÷ Change in activity

= ($12,400 − $10,000) ÷ (2,000 – 1,000) = $2.40

Fixed cost element of manufacturing overhead = Total cost − Variable cost element
= $12,400 − ($2.40 × 2,000) = $7,600

Total variable cost per unit = Direct material + Direct labor + Variable manufacturing
overhead = $4.00 + $3.50 + $2.40 = $9.90

There are no fixed direct materials or direct labor, so the total fixed costs would be equal
to the fixed cost portion of manufacturing overhead, or $7,600.

Escareno Corporation has provided its contribution format income statement for June. The
company produces and sells a single product.

Sales (8,400 units)......................... $764,400

Variable expenses.......................... 445,200
Contribution margin...................... 319,200
Fixed expenses.............................. 250,900
Net operating income.................... $ 68,300

If the company sells 8,200 units, its total contribution margin should be closest to:
$301,000
$311,600
$319,200
$66,674

Current contribution margin ÷ Current sales in units = Contribution margin per unit
$319,200 ÷ 8,400 = $38 contribution margin per unit
If 8,200 units are sold, the total contribution margin will be 8,200 × $38, or $311,600.
Creswell Corporation's fixed monthly expenses are $29,000 and its contribution margin ratio is
56%. Assuming that the fixed monthly expenses do not change, what is the best estimate of the
company's net operating income in a month when sales are $95,000?
$12,800
$24,200
$53,200
$66,000

Sales........................................................... $95,000
Variable expenses ($95,000 × 44%).......... 41,800
Contribution margin ($95,000 × 56%)....... 53,200
Fixed expenses........................................... 29,000
Net operating income................................. $24,200

Feldpausch Corporation has provided the following data from its activity-based costing
system:

Activity Cost Pool Total Cost Total Activity

Assembly..................... $1,137,360 84,000 machine-hours
Processing orders......... $28,479 1,100 orders
Inspection.................... $97,155 1,270 inspection-hours

The company makes 470 units of product W26B a year, requiring a total of 660
machine-hours, 50 orders, and 40 inspection-hours per year. The product's direct
materials cost is $40.30 per unit and its direct labor cost is $42.22 per unit. The product
sells for $118.00 per unit. According to the activity-based costing system, the product
margin for product W26B is:
$6,444.70
$4,679.20
$3,384.70
$16,675.60

(a) (b) (a) ÷ (b)

Activity Cost Pool Total Cost Total Activity Activity Rate
Assembly $1,137,360 84,000 machine- $13.54 per
hours machine-hour
Processing Orders 28,479 1,100 orders $25.89 per order
Inspection 97,155 1,270 inspection- $76.50 per
hours inspection-hour

Calculation of Overhead Costs:

(a) (b) (a) × (b)
 Activity Cost Pool Activity Rate Total Activity ABC Cost
Assembly $13.54 per MH 660 MHs $8,936.40
Processing Orders $25.89 per order 50 orders $1,294.50
Inspection $76.50 per IH 40 IHs $3,060.00
Sales.................................................... $55,460.00
Costs:
Direct materials (470 × $40.30)...... $18,941.00
Direct labor (470 × $42.22)............. 19,843.40
Assembly......................................... 8,936.40
Processing....................................... 1,294.50
Inspection........................................ 3,060.00 52,075.30
Product margin.................................... $ 3,384.70

Pitkins Company collects 20% of a month's sales in the month of sale, 70% in the
month following sale, and 6% in the second month following sale. The remainder is
uncollectible. Budgeted sales for the next four months are:

January February March April

Budgeted sales....... $200,000 $300,000 $350,000 $250,000

Cash collections in April are budgeted to be:

$313,000
$320,000
$292,000

April sales ($250,000 × 20%).............. $ 50,000

March sales ($350,000 × 70%)........... 245,000
February sales ($300,000 × 6%)......... 18,000
Total.................................................... $313,000

Depasquale Corporation is working on its direct labor budget for the next two months. Each unit
of output requires 0.41 direct labor-hours. The direct labor rate is $8.10 per direct labor-hour.
The production budget calls for producing 5,000 units in May and 5,400 units in June. If the
direct labor work force is fully adjusted to the total direct labor-hours needed each month, what
would be the total combined direct labor cost for the two months?

$17,933.40
 $17,269.20
$34,538.40

Total direct labor-hours = 0.41 × (5,000 + 5,400) = 4,264

Direct labor cost = 4,264 × $8.10 = $34,538.40

Information on the actual sales and inventory purchases of the Law Company for the first quarter
follow:

Sales Inventory Purchases

January.................. $120,000 $60,000
February................ $100,000 $78,000
March.................... $130,000 $90,000

Collections from Law Company's customers are normally 60% in the month of sale, 30% in the
month following sale, and 8% in the second month following sale. The balance is uncollectible.
Law Company takes full advantage of the 3% discount allowed on purchases paid for by the end
of the following month.

The company expects sales in April of $150,000 and inventory purchases of $100,000. Selling
and administrative expenses for the month of April are expected to be $38,000, of which $15,000
is salaries and $8,000 is depreciation. The remaining selling and administrative expenses are
variable with respect to the amount of sales in dollars. Those selling and administrative expenses
requiring a cash outlay are paid for during the month incurred. Law Company's cash balance on
March 1 was $43,000, and on April 1 was $35,000.

The expected cash collections from customers during April would be:
$150,000
$137,000
$139,000
$117,600

April sales ($150,000 × 60%)............. $ 90,000

March sales ($130,000 × 30%)........... 39,000
February sales ($100,000 × 8%)......... 8,000
Expected cash collections.................... $137,000

Information on the actual sales and inventory purchases of the Law Company for the first quarter
follow:

Sales Inventory Purchases

January.................. $120,000 $60,000
 February................ $100,000 $78,000
March.................... $130,000 $90,000

Collections from Law Company's customers are normally 60% in the month of sale, 30% in the
month following sale, and 8% in the second month following sale. The balance is uncollectible.
Law Company takes full advantage of the 3% discount allowed on purchases paid for by the end
of the following month.

The company expects sales in April of $150,000 and inventory purchases of $100,000. Selling
and administrative expenses for the month of April are expected to be $38,000, of which $15,000
is salaries and $8,000 is depreciation. The remaining selling and administrative expenses are
variable with respect to the amount of sales in dollars. Those selling and administrative expenses
requiring a cash outlay are paid for during the month incurred. Law Company's cash balance on
March 1 was $43,000, and on April 1 was $35,000.

The expected cash disbursements during April for inventory purchases would be:

$100,000

$90,000
$87,300

Expected cash disbursements for April for inventory purchases = March inventory
purchases × (100% − discount percentage for paying by end of month)
= $90,000 × (100% − 3%) = $90,000 × 97% = $87,300

Buckler Company manufactures desks with vinyl tops. The standard material cost for the vinyl
used per Model S desk is $27.00 based on 12 square feet of vinyl at a cost of $2.25 per
square foot. A production run of 1,000 desks in March resulted in usage of 12,600
square feet of vinyl at a cost of $2.00 per square foot, a total cost of $25,200. The
materials quantity variance resulting from the above production run was:
$1,200 unfavorable
$1,350 unfavorable
$1,800 favorable
$3,150 favorable

Standard quantity = Standard quantity per unit × Actual output

= 12 × 1,000 = 12,000
Materials quantity variance = Standard price × (Actual quantity − Standard
quantity) = $2.25 × (12,600 − 12,000) = $1,350 unfavorable

Magno Cereal Corporation uses a standard cost system to collect costs related to the production
of its “crunchy pickle” cereal. The pickle (materials) standards for each batch of cereal produced
are 1.4 pounds of pickles at a standard cost of $3.00 per pound. During the month of August,
Magno purchased 78,000 pounds of pounds at a total cost of $253,500. Magno used all of these
pickles to produce 60,000 batches of cereal. What is Magno's materials quantity variance for the
month of August?
$1,500 unfavorable
$18,000 favorable
$19,500 unfavorable
$54,000 unfavorable

Standard quantity = Standard quantity per unit × Actual output

= 1.4 × 60,000 = 84,000
Materials quantity variance = Standard price × (Actual quantity − Standard
quantity) = $3 × (78,000 − 84,000) = $18,000 favorable

Beakins Company produces a single product. The standard cost card for the product follows:

Direct materials (4 yards @ $5 per yard)................................... $20

Direct labor (1.5 hours @ $10 per hour).................................... $15
Variable manufacturing overhead (1.5 hrs @ $4 per /hour)....... $6

During a recent period the company produced 1,200 units of product. Various costs associated
with the production of these units are given below:

Direct materials purchased (6,000 yards).............. $28,500

Direct materials used in production...................... 5,000yards
Direct labor cost incurred (2,100 hours)................ $17,850
Variable manufacturing overhead cost incurred... $10,080

The company records all variances at the earliest possible point in time. Variable manufacturing
overhead costs are applied to products on the basis of direct labor hours.

The materials price variance for the period is:

$1,250 F
$1,500 F
$1,250 U
$1,500 U

Materials price variance = (Actual quantity purchased × Actual price) − (Actual

quantity purchased × Standard price) = $28,500 − (6,000 × $5) = $1,500 favorable

Beakins Company produces a single product. The standard cost card for the product follows:
 Direct materials (4 yards @ $5 per yard)................................... $20
Direct labor (1.5 hours @ $10 per hour).................................... $15
Variable manufacturing overhead (1.5 hrs @ $4 per /hour)....... $6

During a recent period the company produced 1,200 units of product. Various costs associated
with the production of these units are given below:

Direct materials purchased (6,000 yards).............. $28,500

Direct materials used in production...................... 5,000yards
Direct labor cost incurred (2,100 hours)................ $17,850
Variable manufacturing overhead cost incurred... $10,080

The company records all variances at the earliest possible point in time. Variable manufacturing
overhead costs are applied to products on the basis of direct labor hours.
The materials quantity variance for the period is:

$5,000 F
$1,000 U
$6,000 F

Standard quantity = Standard quantity per unit × Actual output

= 4 × 1,200 = 4,800
Materials quantity variance = Standard price × (Actual quantity − Standard
quantity) = $5 × (5,000 − 4,800) = $1,000 unfavorable

Beakins Company produces a single product. The standard cost card for the product follows:

Direct materials (4 yards @ $5 per yard)................................... $20

Direct labor (1.5 hours @ $10 per hour).................................... $15
Variable manufacturing overhead (1.5 hrs @ $4 per /hour)....... $6

During a recent period the company produced 1,200 units of product. Various costs associated
with the production of these units are given below:

Direct materials purchased (6,000 yards).............. $28,500

Direct materials used in production...................... 5,000yards
Direct labor cost incurred (2,100 hours)................ $17,850
Variable manufacturing overhead cost incurred... $10,080

The company records all variances at the earliest possible point in time. Variable manufacturing
overhead costs are applied to products on the basis of direct labor hours.

The labor rate variance for the period is:

 $3,150 U
$2,700 F
$2,700 U
$3,150 F

Labor rate variance = (Actual hours × Actual rate) − (Actual hours × Standard rate)
= $17,850 − (2,100 × $10) = $3,150 favorable

Beakins Company produces a single product. The standard cost card for the product follows:

Direct materials (4 yards @ $5 per yard)................................... $20

Direct labor (1.5 hours @ $10 per hour).................................... $15
Variable manufacturing overhead (1.5 hrs @ $4 per /hour)....... $6

During a recent period the company produced 1,200 units of product. Various costs associated
with the production of these units are given below:

Direct materials purchased (6,000 yards).............. $28,500

Direct materials used in production...................... 5,000yards
Direct labor cost incurred (2,100 hours)................ $17,850
Variable manufacturing overhead cost incurred... $10,080

The company records all variances at the earliest possible point in time. Variable manufacturing
overhead costs are applied to products on the basis of direct labor hours.

The labor efficiency variance for the period is:

$3,000 U
$2,550 U
$2,550 F
$3,000 F

Standard hours = Standard hours per unit × Actual output

= 1.5 × 1,200 = 1,800
Labor efficiency variance = Standard rate × (Actual hours − Standard hours)
= $10 × (2,100 − 1,800) = $3,000 unfavorable

Mongelli Family Inn is a bed and breakfast establishment in a converted 100-year-old

mansion. The Inn's guests appreciate its gourmet breakfasts and individually decorated
rooms. The Inn's overhead budget for the most recent month appears below:

Activity level................................. 90 guests

Variable overhead costs:

 Supplies...................................... $ 234
Laundry...................................... 315
Fixed overhead costs:
Utilities....................................... 220
Salaries and wages..................... 4,290
Depreciation............................... 2,680
Total overhead cost....................... $7,739

The Inn's variable overhead costs are driven by the number of guests.
What would be the total budgeted overhead cost for a month if the activity level
is 99 guests? Assume that the activity levels of 90 guests and 99 guests are within the same
relevant range
$7,793.90
$61,541.00
$8,512.90
$7,739.00

Budgeted number of guests: 90

Activity
Cost Formula (in guests):
(per guest) 99
Overhead Costs
Variable overhead costs:
Supplies ($234 ÷ 90 guests)................... $2.60 $ 257.40
Laundry ($315 ÷ 90 guests).................... 3.50 346.50
Total variable overhead cost...................... $6.10 603.90
Fixed overhead costs:
Utilities................................................... 220.00
Salaries and wages.................................. 4,290.00
Depreciation........................................... 2,680.00
Total fixed overhead cost.......................... 7,190.00
Total budgeted overhead cost.................... $7,793.90

Chmielewski Medical Clinic measures its activity in terms of patient-visits. Last month, the
budgeted level of activity was 1,560 patient-visits and the actual level of activity was
1,530 patient-visits. The clinic's director budgets for variable overhead costs of $1.10
per patient-visit and fixed overhead costs of $19,900 per month. The actual variable
overhead cost last month was $1,400 and the actual fixed overhead cost was $21,720.
In the clinic's flexible budget performance report for last month, what would have been
the variance for the total overhead cost?
$33 F
$1,504 U
$1,537 U
 $283 F

Budgeted number of patient-visits: 1,560

Actual number of patient-visits: 1,530
Actual
Cost Costs Budget
Formula Incurred Based on
(per for 1,530 1,530
patient- patient- patient-
visit) visits visits Variance
Variable overhead costs....... $1.10 $1,400 $1,683 $ 283 F
Fixed overhead costs........... $21,720 $19,900 1,820 U
$1,537 U

Gandy Company has 5,000 obsolete desk lamps that are carried in inventory at a manufacturing
cost of $50,000. If the lamps are reworked for $20,000, they could be sold for $35,000.
Alternatively, the lamps could be sold for $8,000 for scrap. In a decision model analyzing these
alternatives, the sunk cost would be:
$8,000
$15,000

$50,000

Rice Corporation currently operates two divisions which had operating results last year as
follows:

West Troy
Division Division
Sales.......................................................... $600,000 $300,000
Variable costs............................................ 310,000 200,000
Contribution margin.................................. 290,000 100,000
Traceable fixed costs................................. 110,000 70,000
Allocated common corporate costs........... 90,000 45,000
Net operating income (loss)....................... $ 90,000 ($ 15,000)

Since the Troy Division also sustained an operating loss in the prior year, Rice's
president is considering the elimination of this division. Troy Division's traceable fixed
costs could be avoided if the division were eliminated. The total common corporate
costs would be unaffected by the decision. If the Troy Division had been eliminated at
the beginning of last year, Rice Corporation's operating income for last year would
have been:
 $15,000 higher
$30,000 lower
$45,000 lower
$60,000 higher

Troy Division:
Contribution margin.......................................................... $100,000
Less: traceable fixed costs................................................. 70,000
Segment margin of Troy Division..................................... $ 30,000

Rice Corporation’s operating income would have been $30,000 less without the segment
margin contributed by the Troy Division.

The following information relates to next year's projected operating results of the Children's
Division of Grunge Clothing Corporation:

Contribution margin........... $200,000

Fixed expenses................... 500,000
Net operating loss.............. ($300,000)

If Children's Division is dropped, half of the fixed costs above can be eliminated. What
will be the effect on Grunge's profit next year if Children's Division is dropped instead
of being kept?
$50,000 increase
$250,000 increase
$250,000 decrease
$550,000 increase

Keep the Drop the

Division Division Difference
Contribution margin...................... $200,000 $ 0 ($200,000)
Fixed expenses............................... 500,000 250,000 250,000
Net operating income (loss)........... ($300,000) ($250,000) ($ 50,000)

Net operating income would increase by $50,000 if the Children’s Division were
dropped. Therefore, the division should be dropped.

Supler Company produces a part used in the manufacture of one of its products. The
unit product cost is $18, computed as
follows:
Direct materials……………………………….. $8

Direct labor……………………………………. 4

Variable manufacturing overhead…………. 1

Fixed manufacturing overhead……………… 5

Unit product cost……………………………… $18

An outside supplier has offered to provide the annual requirement of 4,000 of the parts
for only $14 each. It is estimated that 60 percent of the fixed overhead cost above could
be eliminated if the parts are purchased from the outside supplier. Based on these data,
the per-unit dollar advantage or disadvantage of purchasing from the outside supplier
would be:

$1 disadvantage
$1 advantage
$2 advantage
$4 disadvantage

Relevant cost per unit:

Direct materials................................................ $ 8
Direct labor...................................................... 4
Variable manufacturing overhead................... 1
Fixed manufacturing overhead ($5 × 0.60)..... 3
Relevant manufacturing cost........................... $16

Net advantage (disadvantage):

Relevant manufacturing cost savings......... $16
Less: cost from outside supplier................ 14
Net advantage............................................. $ 2

Landor Appliance Company makes and sells electric fans. Each fan regularly sells for $42.
The following cost data per fan is based on a full capacity of 150,000 fans produced
each period.

Direct materials............................................................... $8
Direct labor..................................................................... $9
Manufacturing overhead
(70% variable and 30% unavoidable fixed)................ $10
 A special order has been received by Landor for a sale of 25,000 fans to an overseas
customer. The only selling costs that would be incurred on this order would be $4 per
fan for shipping. Landor is now selling 120,000 fans through regular channels each
period. What should Landor use as a minimum selling price per fan in negotiating a
price for this special order?
$28

$27

$31

$24

Direct materials................................................. $ 8
Direct labor........................................................ 9
Variable manufacturing overhead ($10 × 0.70) 7
Variable selling cost.......................................... 4
Minimum selling price...................................... $28

If the net present value of a project is zero based on a discount rate of 16%, then the internal rate
of return is:
equal to 16%.
less than 16%.
greater than 16%.
cannot be determined from this data.

Ignore income taxes in this problem.) Given the following data:

Cost of equipment............. $55,750

Annual cash inflows.......... $10,000
Internal rate of return......... 16%

The life of the equipment must be

it is impossible to determine from the data given

15 years
12.5 years
5.75 years

The internal rate of return factor is 5.575, or $55,750 ÷ $10,000. In the table for the Present
Value of an Annuity of $1 in Arrears, the factor of 5.575 can be found in the 16%
column in the 15th row; 15 then represents the life of the equipment.
(Ignore income taxes in this problem.) Nevus Tattoo Parlor is considering a capital budgeting
project. This project will initially require a $25,000 investment in equipment and a $3,000
working capital investment. The useful life of this project is 5 years with an expected salvage
value of zero on the equipment. The working capital will be released at the end of the 5 years.
The new system is expected to generate net cash inflows of $9,000 per year in each of the 5
years. Nevus' discount rate is 14%. The net present value of this project is closest to:
$(3,088)

$4,454

Year(s) Amount 14% Factor PV

Initial investment............... Now ($25,000) 1.000 ($25,000)
Working capital needed..... Now ($3,000) 1.000 ( 3,000)
Annual cost savings........... 1-5 $9,000 3.433 30,897
Working capital released.... 5 $3,000 0.519 1,557
Net present value................ $ 4,454

(Ignore income taxes in this problem.) Dowlen, Inc., is considering the purchase of a machine
that would cost $150,000 and would last for 6 years. At the end of 6 years, the machine would
have a salvage value of $23,000. The machine would reduce labor and other costs by $36,000
per year. Additional working capital of $6,000 would be needed immediately. All of this
working capital would be recovered at the end of the life of the machine. The company requires a
minimum pretax return of 12% on all investment projects. The net present value of the proposed
project is closest to:
$9,657
-$2,004
$6,699
$13,223

Year(s) Amount 12% Factor PV

($150,000
Initial investment............... Now ) 1.000 ($150,000)
Working capital needed..... Now ($6,000) 1.000 (6,000)
Annual cost savings........... 1-6 $36,000 4.111 147,996
Working capital released.... 6 $6,000 0.507 3,042
Salvage value..................... 6 $23,000 0.507 11,661
Net present value................ $ 6,699

(Ignore income taxes in this problem.) Golab Roofing is considering the purchase of a crane
that would cost $69,846, would have a useful life of 6 years, and would have no
 salvage value. The use of the crane would result in labor savings of $21,000 per year.
The internal rate of return on the investment in the crane is closest to:
18%
20%
19%
17%

Factor of the internal rate of return

= Investment required ÷ Net annual cash inflow = $69,846 ÷ $21,000 = 3.326
The factor of 3.326 for 6 years represents an internal rate of return of 20%.

(Ignore income taxes in this problem.) Slomkowski Corporation is contemplating purchasing

equipment that would increase sales revenues by $298,000 per year and cash operating expenses
by $143,000 per year. The equipment would cost $712,000 and have a 8 year life with no salvage
value. The annual depreciation would be $89,000. The simple rate of return on the investment is
closest to:
9.3%
21.8%
22.1%
12.5%

The simple rate of return is computed as follows:

Cost of machine, net of salvage value (a)........... $712,000

Useful life (b)...................................................... 8 years
Annual depreciation (a) ÷ (b).............................. $89,000

Annual incremental revenue ($298,000 −

$143,000)......................................................... $155,000
Less annual depreciation..................................... 89,000
Annual incremental net operating income.......... $ 66,000

Simple rate of return = Annual incremental net operating income ÷ Initial investment =
$66,000 ÷ $712,000 = 9.3%