E6.15 (LO 4), AN Service Casas Modernas of Juarez, Mexico, is contemplating a major change in itscost structure. Currently, all of its drafting work is performed by skilled draftsmen. Rafael Jiminez, Casas'owner, is considering replacing the draftsmen with a computerized drafting system. However, beforemaking the change, Rafael would like to know the consequences of the change, since the volume of busi-ness varies significantly from year to year. Shown below are CVP income statements for each alternative.SalesVariable costsContribution marginFixed costsNet incomeManualSystem$1,500,0001,200,000300,000100,000$ 200,000CHAPTER 6 Cost-Volume-Profit Analysis: Additional IssuesComputerizedSystem$1,500,000600,000900,000700,000$ 200,000Compute degree of operating leverageand evaluate impact of alternativecost structures on net income andmargin of safety.Instructionsa. Determine the degree of operating leverage for each alternative.b. Which alternative would produce the higher net income if sales increased by $150,000?c. Using the margin of safety ratio, determine which alternative could sustain the greater decline insales before operating at a loss.

Variable costs are those costs which changes with change in activity level or sales. Contribution…

Answered: E6.15 (LO 4), AN Service Casas Modernas…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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In 1926 Branky scott and his wife GV started a small company in India that pioneered the use of plastics in the manufacturing of marine products. Branky Manufacturing has evolved to produce thousands of products under the Branky Trademark which are sold into the fishing, marine, outdoor, and firefighting industries worldwide. To manage production costs, Branky is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production:- Annual additional tooling costs would be $400,000- Annual inventory would decline by 80 percent from the current level of $4,000,000- Insurance, material handling, and set-up costs which currently total $1,200,000 annually, would decline by 25%- Rework would be reduced by 30 percent. Branky currently incurs $800,000 in annual rework costs.Improved product quality under JIT production would enable Branky to raise the price of its products by $8 per unit. Scotty sells 80,000 units per year.- Branky required…
E8.8 (LO 3), AN Antonio is evaluating some of last year’s manufacturing costs for his business, Work It Out, which creates custom-fit exercise equipment for high-end clients. He is trying to strengthen his own analytical skills by looking at some of the total cost amounts and working backward to make sure he can find the detailed amounts that comprised these totals. Last year’s manufacturing costs are as follows. Total manufacturing costs $580,000 Total applied MOH (based on an MOH rate of $1.80/DL dollar) 270,000 Total cost of goods completed 630,000 Beginning balance in WIP Inventory 56,000 Required a. How much direct labor cost was incurred last year? b. What was the cost of direct materials used? c. What was the ending balance in WIP Inventory last year? d. If FG Inventory had no ending balance but Cost of Goods Sold was $675,000, what was the beginning balance in FG Inventory last year? e. Given the company’s goal to generate a 65% gross margin on these products, how much revenue…
Use the following to answer questions 76-79: (Ignore income taxes in this problem.) Perky Food Corporation produces and sells coffee jelly. Perky currently produces the jelly using a manual operation but is considering the purchase of machinery to automate its operations. Information related to the two operations is as follows: Cost of machinery. Useful life of machinery. Expected salvage value in 12 years. Expected annual revenue (50,000 jars).. Expected annual variable costs. Expected annual fixed costs. ***** B) 12.1% C) 14.5% D) 22.9% Manual Operation $210,000 $42,000 $72,000 Perky's discount rate is 12%. Perky uses the straight-line method of depreciation. 76. What is the net present value of automating operations using the incremental cost approach? Answer: A Level: Medium LO: 6 Automated Operation $420,000 $210,000 $135,000 $30,000 12 years $0 A) $11,940 B) $56,940 C) $(104,106) D) $112,684 Answer: C Level: Medium LO: 1 77. Within what range does the internal rate of return…
Waterways has discovered that a small fitting it now manufactures at a unit cost of $1.00 could be bought elsewhere for $0.81 per unit. Waterways has unit fixed manufacturing costs of $0.20 that cannot be eliminated by buying this unit. Waterways needs 465,000 of these units each year.If Waterways decides to buy rather than produce the small fitting, it can devote the machinery and labor to making a timing unit it now buys from another company. Waterways uses approximately 400 of these units each year. The cost of the unit is $12.33. To aid in the production of this unit, Waterways would need to purchase a new machine at a cost of $2,344, and the unit cost of producing the units would be $9.40. Without considering the possibility of making the timing unit, evaluate whether Waterways should buy or continue to make the small fitting. The company should (make or buy?) the fitting. Incremental cost / (savings) will be
Eastern Auto Parts Company manufactures replacement parts for automobile repair. The company recently installed a flexible manufacturing system, which has significantly changed the production pro-cess. The installation of the new FMS was not anticipated when the current year’s budget and cost struc-ture were developed. The installation of the new equipment was hastened by several major breakdowns in the company’s old production machinery. The new equipment was very expensive, but management expects it to cut the labor time required by a substantial amount. Management also expects the new equipment to allow a reduction in direct-material waste. On the negative side, the FMS requires a more highly skilled labor force to operate it than the company’s old equipment. The following cost variance report was prepared for the month of July, the first full month after the equipment was installed. EASTERN AUTO PARTS COMPANY Cost Variance Report for the Month of July Direct material: Standard cost…
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As a temporary measure, a brewing company is deciding between two used filling machines: the Kram and the Zanni. a. The Kram filler has an initial cost of $85,000; the estimated annual maintenance is $8000. b. The Zanni filler has a purchase price of $42,000, with annual maintenance costs of $8000. The Kram filler has a higher efficiency than the Zanni, and it is expected that savings would amount to $4000 per year if the Kram filler were installed. The filling machine will not be needed after 5 years, and at that time, the salvage value for the Kram filler would be $25,000, while the Zanni would have little or no value. Assuming a MARR of 10%, which filling machine should be purchased?
Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $240,352. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years 1 to 7: Year 1 $390,600 2 400,200 3 410,000 4 425,200 5 432,400 6 435,500 7 436,300 The new sewing machine would be depreciated according to the declining-balance method at a rate of 20%. The salvage value is expected to be $380,500. This new equipment would require maintenance costs of $94,900 at the end of the fifth year. The cost of capital is 9%. Use the net present value method to determine the following: (If net present value is negative then enter with negative sign…
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“In my opinion, we ought to stop making our own drums and accept that outside supplier’s offer,” said Wim Niewindt, managing director of Antilles Refining, N.V., of Aruba. “At a price of $20 per drum, we would be paying $5.45 less than it costs us to manufacture the drums in our own plant. Since we use 80,000 drums a year, that would be an annual cost savings of $436,000.” Antilles Refining’s current cost to manufacture one drum is given below (based on 80,000 drums per year): Direct materials $ 12.00 Direct labor 6.50 Variable overhead 1.50 Fixed overhead ($2.90 general company overhead, $1.80 depreciation, and $0.75 supervision) 5.45 Total cost per drum $ 25.45 A decision about whether to make or buy the drums is especially important at this time because the equipment being used to make the drums is completely worn out and must be replaced. The choices facing the company are: Alternative 1: Rent new equipment and continue to make the drums. The equipment would be…
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