RET Inc. currently has two products, low and high priced stoves. REX Inc. has decided to sell a new line of medium- priced stoves. Sales revenues for the new line of stoves are estimated at $600 a year. Variable costs are 60% of sales. The project is expected to last 10 years. Also, non - variable costs are $200 per year. The company has spent $100 in research and a marketing study that determined the company will have synergy gains/sales of $200 a year from sales of its existing high-priced stoves. The production variable cost of these sales is $100 a year. The plant and equipment required for producing the new line of stoves costs $300 and will be depreciated down to zero over 30 years using straight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $50 at the end of 10 years. The new stoves will also require today an increase in net working capital of $20 that will be returned at the end of the project. The tax rate is 20 percent and the cost of capital is 10%.

RET Inc. currently has two products, low and high priced stoves. REX Inc. has decided to sell a new line of medium- priced stoves. Sales revenues for the new line of stoves are estimated at $600 a year. Variable costs are 60% of sales. The project is expected to last 10 years. Also, non - variable costs are $200 per year. The company has spent $100 in research and a marketing study that determined the company will have synergy gains/sales of $200 a year from sales of its existing high-priced stoves. The production variable cost of these sales is $100 a year. The plant and equipment required for producing the new line of stoves costs $300 and will be depreciated down to zero over 30 years using straight-line depreciation. It is expected that the plant and equipment can be sold (salvage value) for $50 at the end of 10 years. The new stoves will also require today an increase in net working capital of $20 that will be returned at the end of the project. The tax rate is 20 percent and the cost of capital is 10%.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter11: Strategic Cost Management

Section: Chapter Questions

Problem 29P: Nico Parts, Inc., produces electronic products with short life cycles (of less than two years)....

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