Reference no: EM132082246

Questions -

Q1. Appropriate Transfer Prices: Opportunity Costs

Plains Peanut Butter Company recently acquired a peanut-processing company that has a normal annual capacity of 3,000,000 pounds and that sold 2,700,000 pounds last year at a price of $2.00 per pound. The purpose of the acquisition is to furnish peanuts for the peanut butter plant, which needs 700,000 pounds of peanuts per year. It has been purchasing peanuts from suppliers at the market price. Production costs per pound of the peanut-processing company are as follows:

Direct materials	$0.50
Direct labor	0.26
Variable overhead	0.11
Fixed overhead at normal capacity	0.21
Total	$1.08

Management is trying to decide what transfer price to use for sales from the newly acquired Peanut Division to the Peanut Butter Division. The manager of the Peanut Division argues that $2.00, the market price, is appropriate. The manager of the Peanut Butter Division argues that the cost price of $1.08 (or perhaps even less) should be used since fixed overhead costs should be recomputed. Any output of the Peanut Division up to 2,700,000 pounds that is not sold to the Peanut Butter Division could be sold to regular customers at $2.00 per pound.

(a) Compute the annual gross profit for the Peanut Division using a transfer price of $2.00.

(b) Compute the annual gross profit for the Peanut Division using a transfer price of $1.08.

Q2. Income Statements Segmented by Territory

Script, Inc., has two product lines. The September income statements of each product line and the company are as follows:

SCRIPT, INC. Product Line and Company Income Statements For Month of September
	Pens	Pencils	Total
Sales	$25,000	$30,000	$55,000
Less variable expenses	(10,000)	(12,000)	(22,000)
Contribution margin	15,000	18,000	33,000
Less direct fixed expenses	(9,000)	(8,000)	(17,000)
Product margin	$6,000	$10,000	$16,000
Less common fixed expenses			(6,000)
Net income			$10,000

Pens and pencils are sold in two territories, Florida and Alabama, as follows:

	Florida	Alabama
Pen sales	$14,000	$11,000
Pencil sales	4,000	26,000
Total sales	$18,000	$37,000

The preceding common fixed expenses are traceable to each territory as follows:

Florida fixed expenses	$2,000
Alabama fixed expenses	3,000
Home office administration fixed expenses	1,000
Total common fixed expenses	$6,000

The direct fixed expenses of pens, $9,000, and of pencils, $8,000, cannot be identified with either territory. The company's accountants were unable to allocate any of the common fixed expenses to the various segments.

Prepare income statements segmented by territory for September, including a column for the entire firm.

Q3. Time Value of Money: Basics

1. An initial investment of $37,260 is to be returned in eight equal annual payments. Determine the amount of each payment if the interest rate is 6 percent.

2. A proposed investment will provide cash flows of $50,000, $8,000, and $5,000 at the end of Years 1, 2, and 3, respectively. Using a discount rate of 16 percent, determine the present value of these cash flows.

3. Find the present value of an investment that will pay $9,000 at the end of Years 10, 11, and 12. Use a discount rate of 10 percent.

Q4. NPV and IRR: Equal Annual Net Cash Inflows

Apache Junction Company is evaluating a capital expenditure proposal that requires an initial investment of $9,460, has predicted cash inflows of $2,000 per year for 16 years, and has no salvage value.

(a) Using a discount rate of 16 percent, determine the net present value of the investment proposal.

(b) Determine the proposal's internal rate of return.

(c) What discount rate would produce a net present value of zero?

Q5. Ranking Investment Proposals:

Payback Period, Accounting Rate of Return, and Net Present Value

Presented is information pertaining to the cash flows of three mutually exclusive investment proposals:

	Proposal X	Proposal Y	Proposal Z
Initial investment	$52,000	$52,000	$52,000
Cash flow from operations
Year 1	50,000	26,000	52,000
Year 2	2,000	26,000
Year 3	27,000	27,000
Disinvestment	0	0	0
Life (years)	3 years	3 years	1 year

(a) Select the best investment proposal using the payback period, the accounting rate of return on initial investment, and the net present value criteria. Assume that the organization's cost of capital is 10 percent.