Reference no: EM13993500

1. Austin LTD. Manufactures a component that is used in the fans it produces.  A supplier has offered to supply the component for $25 per part.  The annual requirements of Austin are 20,000 components.  Austin's cost detail of manufacturing the component is as follows:

per unit
direct materials	$9
direct labor	$5
variable overhead	$1
depreciation of equipment	$3
supervisor's salary	$2
general factory overhead	$10
total	$30

It was determined that the special equipment has no resale value and cannot be used for another process.  The factory overhead is an allocation and would be unaffected by the decision.  The costs above are based on the same 20,000 units that the supplier would supply.

Should Austin continue to manufacture the component or purchase it from the outside supplier?

Be sure to support your work with numbers.

2. The financial information for Jamison drug store by business line is as follows:

	total	drugs	cosmetics	housewares
sales	$250,000	$125,000	$75,000	$50,000
variable expenses	$105,000	$50,000	$25,000	$30,000
contribution margin	$145,000	$75,000	$50,000	$20,000
fixed expenses
salaries	$50,000	$29,500	$12,500	$8,000
advertising	$15,000	$1,000	$7,500	$6,500
utilities	$2,000	$500	$500	$1,000
depreciation	$5,000	$1,000	$2,000	$2,000
rent	$20,000	$10,000	$6,000	$4,000
insurance	$3,000	$2,000	$500	$500
general administrative	$30,000	$15,000	$9,000	$6,000
total	$125,000	$59,000	$38,000	$28,000
net income/ loss	$20,000	$16,000	$12,000	-$8,000

It was determined that the associated salaries, advertising and insurance would all be eliminated if Jamison drops the housewares segment.  The utilities, depreciation, rent and general and administrative fees are all allocations.

Jamison is currently deciding whether the company would benefit overall if the housewares business line was dropped completely, since it is losing money consistently each month.  Using what you know about avoidable and unavoidable costs, advise Jamison as their outside consultant as to which is the better business decision.  (Support your work with numbers.)

3. Under a special licensing arrangement, Swinyard Company has an opportunity to market a new product for a 5 year period.  The product would be purchased from the manufacturer and Swinyard would be responsible for promotion and distribution costs.

cost of equipment needed	$60,000
working capital needed	$100,000
overhaul of equipment in 4 years	$5,000
salvage value of equipment in 5 years	$10,000
annual revenues and costs
sales revenues	$200,000
cost of goods sold	$125,000
other operating costs	$35,000

At the end of the 5 year period, the working capital would be released for investment elsewhere.  Swinyard uses a 14% discount rate. 

a. Calculate the NPV of the investment. (support your work with numbers)

b. Calculate the IRR of the investment (support your work with numbers)

c. Would you recommend investment in this project?

4. Eber Wares is a division of a major corporation. The following data are for the latest year of operations:

Sales	$30,000,000
Net operating income	$1,170,000
Average operating assets	$8,000,000
The company's minimum required rate of return	18%

Required: (be sure to show your work).

i. What is the division's margin?

ii. What is the division's turnover?

iii. What is the division's return on investment (ROI)?

iv. What is the division's residual income?

5. Division A of Friedman Inc. transfers its product to Division B or sells it to outside firms.   Division B can either buy the item internally from Division A or externally at a cost of $73 each.  Division A has just completed its annual cost update as follows: 

Direct material $25.00 

Direct labor   18.00

Variable manufacturing overhead     6.00

Fixed manufacturing overhead     3.50

Variable selling expenses     4.00

Fixed selling and administrative expenses     8.50  

Total costs $65.00 

Division A is operating at 60 percent of its 400,000 unit capacity.

Required:

1. What is the minimum transfer price Division A should charge for internal transfers? (Minimum transfer price)
2. What is the maximum price Division B would be willing to pay? (Maximum price)