5. (TCO 7) North Company produces a small part that it uses in the production of its Product H. The company's unit product cost for the part, based on a production of 100,000 parts per year, is as follows:
.................................................Per part ....................Total
Direct Materials............................ $7.00...........$700,000
Direct Labor ..................................6.00............$600,000
Variable Manufacturing Overhead 2.00...........$200,000
Plus:
Fixed manufacturing Overhead, (Traceable or avoidable) $300,000 TOTAL, equal to $3 per unit
Fixed manufacturing Overhead, (Common---not traceable to any product. Will stay even if no product is manufactured) allocated on basis of labor-hours 6.00) $600,000 Total
Unit Product Cost........................... $24.00 (7 + 6 + 2, variable of $15. Plus, Fixed 3+ 6=9, total)
An outside supplier has offered to supply parts to the North Company for only $21.25 per part. (It appears to the President of the company that he could save $2.75 per unit.)
100% of the traceable or avoidable fixed manufacturing cost is supervisor salaries and other costs that can be ELIMINATED if the parts are purchased. The decision to buy the parts from the outside supplier would have no effect on the common fixed costs of the company, and the space being used to produce the parts would otherwise be idle. Ignore the impact of income taxes in your calculation.
How much would profits increase or decrease as a result of purchasing the parts from the
outside supplier rather than making them inside the company? (Points : 25)
Question 6. 6. (TCO 9) Harry Corp buys equipment for $222,474 that will last for 10 years. The equipment will generate cash flows of $41,000 per year and will have no salvage value at the end of its life. Ignore taxes. Use 12% required rate of return.
(a) What is the Present Value (PV) of this investment (at 12%)?
(b) What is the NET Present Value (NPV) of this investment? If you need 12% should you buy the equipment?
(c) What is the Internal Rate of Return (IRR) of this investment?
(d) What is the payback period?
Question 7. 7. (TCO 10) Tanya Corp sells its products on both credit and cash basis. Monthly sales are sold 20% for cash, 80% for credit. Credit sales are collected 65% in the month of sale and 35% the following month. Sales for the first quarter are BUDGETED as follows: January $200,000; February $300,000; March $300,000.
Compute cash collections Budgeted for February. How much cash was collected in the month? (Points : 25)