Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Chapter 12, Problem 2MTC
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!”
The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows:
In addition, Allyson met with several of NoFat’s key production managers and discovered the following information:
- 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.
Based solely on financial factors, explain why NoFat should accept or reject PU’s special sales offer.
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InteliSystems manufactures an optical switch that it uses in its final product. InteliSystems incurred the following manufacturing costs when it produced 70,000 units last year as shown in the chart below:
InteliSystems does not yet know how many switches it will need this year; however, another company has offered to sell InteliSystems the switch for $8.50 per unit. If InteliSystems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose; yet none of the fixed costs are avoidable.
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1. Given the same cost structure, should InteliSystems make or buy the switch? Show your analysis.
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Chapter 12 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
Ch. 12 - Prob. 1DQCh. 12 - Explain why the timing and quantity of cash flows...Ch. 12 - The time value of money is ignored by the payback...Ch. 12 - What is the payback period? Compute the payback...Ch. 12 - Name and discuss three possible reasons that the...Ch. 12 - Prob. 6DQCh. 12 - The NPV is the same as the profit of a project...Ch. 12 - Explain the relationship between NPV and a firms...Ch. 12 - Prob. 9DQCh. 12 - What is the role that the required rate of return...
Ch. 12 - Explain how the NPV is used to determine whether a...Ch. 12 - The IRR is the true or actual rate of return being...Ch. 12 - Prob. 13DQCh. 12 - Explain why NPV is generally preferred over IRR...Ch. 12 - Suppose that a firm must choose between two...Ch. 12 - Prob. 1MCQCh. 12 - To make a capital investment decision, a manager...Ch. 12 - Mutually exclusive capital budgeting projects are...Ch. 12 - Prob. 4MCQCh. 12 - An investment of 1,000 produces a net cash inflow...Ch. 12 - The payback period suffers from which of the...Ch. 12 - Prob. 7MCQCh. 12 - An investment of 2,000 provides an average net...Ch. 12 - If the NPV is positive, it signals a. that the...Ch. 12 - Prob. 10MCQCh. 12 - Prob. 11MCQCh. 12 - Using NPV, a project is rejected if it is a. equal...Ch. 12 - If the present value of future cash flows is 4,200...Ch. 12 - Assume that an investment of 1,000 produces a...Ch. 12 - Which of the following is not true regarding the...Ch. 12 - Using IRR, a project is rejected if the IRR a. is...Ch. 12 - Prob. 17MCQCh. 12 - Postaudits of capital projects are useful because...Ch. 12 - For competing projects, NPV is preferred to IRR...Ch. 12 - Assume that there are two competing projects, A...Ch. 12 - Prob. 21BEACh. 12 - Accounting Rate of Return Uchdorf Company invested...Ch. 12 - Net Present Value Snow Inc. has just completed...Ch. 12 - Internal Rate of Return Lisun Company produces a...Ch. 12 - NPV and IRR, Mutually Exclusive Projects Hunt Inc....Ch. 12 - Prob. 26BEBCh. 12 - Accounting Rate of Return Cannon Company invested...Ch. 12 - Net Present Value Talmage Inc. has just completed...Ch. 12 - Internal Rate of Return Richins Company produces...Ch. 12 - NPV and IRR, Mutually Exclusive Projects Techno...Ch. 12 - Prob. 31ECh. 12 - Accounting Rate of Return Each of the following...Ch. 12 - Net Present Value Each of the following scenarios...Ch. 12 - Internal Rate of Return Each of the following...Ch. 12 - Net Present Value and Competing Projects Spiro...Ch. 12 - Payback, Accounting Rate of Return, Net Present...Ch. 12 - Prob. 37ECh. 12 - Net Present Value, Basic Concepts Wise Company is...Ch. 12 - Solving for Unknowns Each of the following...Ch. 12 - Net Present Value versus Internal Rate of Return...Ch. 12 - Basic Net Present Value Analysis Jonathan Butler,...Ch. 12 - Net Present Value Analysis Emery Communications...Ch. 12 - Basic Internal Rate of Return Analysis Julianna...Ch. 12 - Net Present Value, Uncertainty Ondi Airlines is...Ch. 12 - Review of Basic Capital Budgeting Procedures Dr....Ch. 12 - Net Present Value and Competing Alternatives...Ch. 12 - Kildare Medical Center, a for-profit hospital, has...Ch. 12 - Foster Company wants to buy a numerically...Ch. 12 - Cost of Capital, Net Present Value Leakam Companys...Ch. 12 - I know that its the thing to do, insisted Pamela...Ch. 12 - Newmarge Products Inc. is evaluating a new design...Ch. 12 - Prob. 52PCh. 12 - Prob. 53PCh. 12 - Manny Carson, certified management accountant and...Ch. 12 - Prob. 55CCh. 12 - Prob. 1MTCCh. 12 - NoFat manufactures one product, olestra, and sells...Ch. 12 - Prob. 3MTCCh. 12 - NoFat manufactures one product, olestra, and sells...Ch. 12 - NoFat manufactures one product, olestra, and sells...
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- 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, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered 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! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: 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. Assume for this question that NoFat rejected PUs special sales offer because the 2.20 price suggested by PU was too low. In response to the rejection, PU asked NoFat to determine the price at which it would be willing to accept the special sales offer. For its regular sales, NoFat sets prices by marking up variable costs by 10%. If Allyson decides to use NoFats 10% markup pricing method to set the price for PUs special sales offer, a. Calculate the price that NoFat would charge PU for each pound of olestra. b. Calculate the relevant profit that NoFat would earn if it set the special sales price by using its markup pricing method. (Hint: Use the estimate of relevant costs that you calculated in response to Requirement 1b.) c. Explain why NoFat should accept or reject the special sales offer if it uses its markup pricing method to set the special sales price.arrow_forwardNoFat 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, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered 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! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: 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. Assume for this question that Allysons relevant analysis reveals that NoFat would earn a positive relevant profit of 10,000 from the special sale (i.e., the special sales alternative). However, after conducting this traditional, short-term relevant analysis, Allyson wonders whether it might be more profitable over the long term to downsize the company by reducing its manufacturing capacity (i.e., its plant machinery and plant facility). She is aware that downsizing requires a multiyear time horizon because companies usually cannot increase or decrease fixed plant assets every year. Therefore, Allyson has decided to use a 5-year time horizon in her long-term decision analysis. She has identified the following information regarding capacity downsizing (i.e., the downsizing alternative): The plant facility consists of several buildings. If it chooses to downsize its capacity, NoFat can immediately sell one of the buildings to an adjacent business for 30,000. If it chooses to downsize its capacity, NoFats annual lease cost for plant machinery will decrease to 9,000. Therefore, Allyson must choose between these two alternatives: Accept the special sales offer each year and earn a 10,000 relevant profit for each of the next 5 years or reject the special sales offer and downsize as described above. 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. Using an NPV approach to discount future cash flows to present value, a. 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