Reference no: EM132826065
Question 1
Waterways Corporation is continuing its budget preparations. Waterways had the following static budget and overhead costs for March 2022.
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WATERWAYS CORPORATION
Manufacturing Overhead Budget (Static) For the Month of March
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WATERWAYS CORPORATION
Manufacturing Overhead Costs
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Budgeted production in units
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117,50
0
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Production in units
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118,500
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|
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Budgeted costs
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Costs
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|
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Indirect materials
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$
5,875
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Indirect materials
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$
5,910
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Indirect labor
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14,100
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Indirect labor
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14,195
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Utilities
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11,750
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Utilities
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11,880
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Maintenance
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8,225
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Maintenance
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8,275
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Salaries
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42,000
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Salaries
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42,000
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Depreciation
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16,800
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Depreciation
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16,800
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Property taxes
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3,000
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Property taxes
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3,000
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Insurance
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1,200
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Insurance
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1,200
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Janitorial
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1,500
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Janitorial
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1,500
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Total budgeted costs
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$104,4 50
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Total costs
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$104,76
0
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Waterways produced 118,500 units in March rather than the budgeted number of units.
Instructions
(a) Prepare a flexible overhead budget based on the following amounts produced. (1) 115,500 units
(2) 116,500 units
(3) 117,500 units
(4) 118,500 units
(5) 119,500 units
(b) Prepare a flexible budget report showing the differences (favorable and unfavorable) in manufacturing overhead costs for the month of March.
(c) Prepare a responsibility report for the manufacturing overhead for March, assuming only variable costs are controllable.
Question 2
Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays.
In 2022 Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.
The following information is available to use in deciding whether to purchase the new backhoes.
| Backhoes |
Old Backhoes
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New |
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Purchase cost when new
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$90,000
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$200,000
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Salvage value now
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$42,000
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|
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Investment in major overhaul needed in next year
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$55,000
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|
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Salvage value in 8 years
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$15,000
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$90,000
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Remaining life
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8 years
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8 years
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Net cash flow generated each year
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$30,425
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$43,900
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Instructions
(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul after one year. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)
(1) Using the net present value method for buying new or keeping the old.
(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.)
(3) Comparing the profitability index for each choice.
(4) Comparing the internal rate of return for each choice to the required 8% discount rate.
(b) Are there any intangible benefits or negatives that would influence this decision?
(c) What decision would you make and why?
Attachment:- Waterways Corporation.rar