Please answer the question: 5. Assume that NoFat pays for all costs with cash. Also, assume a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Use an NPV approach to discount future cash flows to present value. To determine NPV, use the Exhibit to locate the present value of $1 to be multiplied by the cash inflow in Year 1. a. Calculate the NPV of accepting the special sale with the assumed positive relevant profit of $10,000 per year (i.e., the special sales alternative). Round your answer to the nearest dollar. ______________? $fill in the blank 12 b. Calculate the NPV of downsizing capacity as previously described (i.e., the downsizing alternative). Round your answer to the nearest dollar. ___________?
Integrative Exercise
Relevant Costing, Cost-Based Pricing, Cost Behavior, and
Special Sales Offer Relevant Analysis
NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFat's controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)—a toxic waste cleanup company—offered to buy 10,000 pounds of olestra from NoFat during December for a price of $2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that "This is another way to use our expensive olestra plant!"
| Variable costs per pound: | ||
| Direct materials | $ 1.00 | |
| Variable manufacturing overhead | 0.75 | |
| Sales commissions | 0.50 | |
| Direct manufacturing labor | 0.25 | |
| Total fixed costs: | ||
| Advertising | $ 3,000 | |
| Customer hotline service | 4,000 | |
| Machine setups | 40,000 | |
| Plant machinery lease | 12,000 |
In addition, Allyson met with several of NoFat's key
- The special order could be produced without incurring any additional marketing or customer service costs.
- NoFat owns the aging plant facility that it uses to manufacture olestra.
- NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year.
- NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra.
- PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the $1,000 cost of the inspection team.
Please answer the question:
5. Assume that NoFat pays for all costs with cash. Also, assume a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Use an NPV approach to discount future cash flows to present value. To determine NPV, use the Exhibit to locate the present value of $1 to be multiplied by the
a. Calculate the NPV of accepting the special sale with the assumed positive relevant profit of $10,000 per year (i.e., the special sales alternative). Round your answer to the nearest dollar. ______________?
$fill in the blank 12
b. Calculate the NPV of downsizing capacity as previously described (i.e., the downsizing alternative). Round your answer to the nearest dollar. ___________?
$fill in the blank 13
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