1. Parker Plumbing has received a special one-time order for 1,500 faucets (units) at $5 per unit. Parker currently produces and sells 7,500 units at $6.00 each. This level represents 75% of its capacity. Production costs for these units are $4.50 per unit, which includes $3 variable cost and $1.50 fixed cost. To produce the special order, a new machine needs to be purchased at a cost of $1,000 with a zero salvage value. Management expects no other changes in costs as a result of the additional production.
If Parker wishes to earn $1,250 on the special order, the size of the order would need to be:
A. 4,500 units. B. 2,250 units. C. 1,125 units. D. 625 units. E. 300 units.
2. Accounting rate of return is the simplest capital budgeting method. It gives managers an estimate of how soon they will recover their initial investment. True or False?
3. In calculating the rate of return on average investment, average investment should be calculated as (beginning book value + ending book value)/2. True or False?