Reference no: EM132629167
Q1.) You were at a recent presentation at a science venue. The main presenter stated: "The cost-volume-profit chart is really easy to understand. It basically shows that total cost increases at a faster rate than total variable cost with both starting at the point of origin. Also, average variable cost declines as quantity of production increases and average fixed cost increases as quantity of production increases. The production above the breakeven point also leads to losses with a maximum loss of infinity. And finally, as quantity of production declines the total revenue declines at an ever decreasing rate."
Required: Is the presenter correct? Clarify any statements you feel are incorrect with the presenters statements.
Q2.) "I do not care which method I use to evaluate a project for capital budgeting as each method is identical", the music teacher commented. "And I do not have to worry about selecting between each project as there are no limitations."
Required: Comment briefly on the view expressed by the music teacher.
Q3.) Lumpy Soup Limited presently produces road signs and computers for the Brazil and South African markets but is looking to expand to cover a greater international range.
The key planned financial information related to the company's key products for 2024 are as follows:
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Activity
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Road Signs
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Computers
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Selling Price
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$180.00
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$150.00
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Direct Material (per unit)
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$21.00
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$11.00
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Direct Labour (per unit)
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$19.00
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$75.00
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Variable Manufacturing Overhead (per unit)
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$11.00
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$21.00
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Variable Selling Expense (per unit)
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$26.00
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$9.00
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Fixed Manufacturing Overhead (total)
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$2,140,000
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$400,000
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Fixed Administrative Overhead (total)
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$560,000
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$600,000
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Fixed Marketing Overhead(total)
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$900,000
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$1,850,000
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The company has a sales mix ratio of 30% to 70%. The company has estimated that in 2024 they will produce and sell 140,000 total units.
Required:
1) Calculate the contribution margin per unit and the contribution ratio for Lumpy Soup Limited based on production and sales estimates for 2024 and based on the sales mix of 30% to 70%.
2) Calculate the total number of units that are required to be sold in 2024 in order for Lumpy Soup Limited to breakeven given the 30% to 70% mix ratio.
3) Calculate the total sales revenue Lumpy Soup Limited would achieve at the breakeven quantity given the 30% to 70% sales mix ratio and projected production and sales estimates for 2024.
4) Assume in 2024 the minimum net income Lumpy Soup Limited wishes to achieve is $9,000,000. Given the sales mix ratio of 30% to 70%, what is the revenue Lumpy Soup Limited would generate to ensure achieve the desired minimum net income and the number of road signs and computers to be sold?
Q4.) Rubber and Duck Limited is an international producer of fine luxury bags. The company is based in the country of Quack on the continent of Bills.
The company is approaching the end of its financial year, and the board of directors are seeking to decide on the capital budget for the forthcoming year, and the capital expenditure items the company may invest into.
The chief financial officer (CFO) has presented the board with the following list of four major capital expenditure projects for consideration with the initial outlay and projected annual after-tax cash flows for each project.
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Project B
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Project V
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Project R
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Project E
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Initial Outlay
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$71,000.00
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$56,000.00
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$48,000.00
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$104,000.00
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Life of Project
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3 Years
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4 Years
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3 Years
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5 Years
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Annual After-Tax Cash Flow
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|
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Year 1
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$35,000.00
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$18,000.00
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$39,000.00
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$46,000.00
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Year 2
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$41,000.00
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$29,000.00
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$12,000.00
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$26,000.00
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Year 3
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$11,000.00
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$15,000.00
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$25,000.00
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$25,000.00
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Year 4
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$38,000.00
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$29,000.00
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Year 5
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|
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$27,000.00
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The cost of capital is 7.50%.
Required:
(1) Calculate the discounted payback period for Project V. The company requires a minimum accounting payback period of 2.90 years. Would Project V be accepted (ignore all other projects)?
(2) Calculate the profitability index value for Project B. Would Project B be accepted (ignore all other projects)?
(3) Assume that the company has a capital budget of $118,000 for the forthcoming year. Also, assume that the company can only select from Project B and Project R; ignore the other projects. Project B and Project R are independent of each other. Calculate the NPV of each and select the project (or projects) the company should select. Justify your answer.
(4) Assume company wish to select between Project R and Project E. Both projects are mutually exclusive. Based on appropriate calculation techniques, which project would be selected. Show all calculations.
Q5.) "This test is going to be easy," the student commented. "All I need to know is accrual-based accounting and cash-based accounting are the same. And as the income statement and cash flow statement the same it be easy"
Required: Is the student correct? If not, then describe and explain key differences.