Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
16th Edition
ISBN: 9780134475585
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 23, Problem 23.26E
Goal incongruence and
One of the machines that the patio furniture division uses to manufacture the furniture is rather old, and the manager must decide whether to replace it. The new machine would cost 335,000 and would last 10 years. It would have no salvage value. The old machine is fully
- 1. Should Comfy Corporation replace the machine? Why or why not?
Required
- 2. Assume that “investment” is defined as average net long-term assets (that is, after depreciation) during the year. Compute the project’s ROI for each of its first five years. If the patio furniture manager is interested in maximizing his bonus, would he replace the machine before he retires? Why or why not?
- 3. What can Comfy do to entice the manager to replace the machine before retiring?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Comfy Corporation manufactures furniture in several divisions, including the patio furniture division. The manager of the patio furniture division plans to retire in two years. The manager receives a bonus based on the division’s ROI, which is currently 7%. One of the machines that the patio furniture division uses to manufacture the furniture is rather old, and the manager must decide whether to replace it. The new machine would cost $35,000 and would last 10 years. It would have no salvage value. The old machine is fully depreciated and has no trade-in value. Comfy uses straight-line depreciation for all assets. The new machine, being new and more efficient, would save the company $5,000 per year in cash operating costs. The only difference between cash flow and net income is depreciation. The internal rate of return of the project is approximately 7%. Comfy Corporation’s weighted-average cost of capital is 5%. Comfy is not subject to any income taxes.
Q. Should Comfy Corporation…
Comfy Corporation manufactures furniture in several divisions, including the patio furniture division. The manager of the patio furniture division plans to retire in two years. The manager receives a bonus based on the division’s ROI, which is currently 7%. One of the machines that the patio furniture division uses to manufacture the furniture is rather old, and the manager must decide whether to replace it. The new machine would cost $35,000 and would last 10 years. It would have no salvage value. The old machine is fully depreciated and has no trade-in value. Comfy uses straight-line depreciation for all assets. The new machine, being new and more efficient, would save the company $5,000 per year in cash operating costs. The only difference between cash flow and net income is depreciation. The internal rate of return of the project is approximately 7%. Comfy Corporation’s weighted-average cost of capital is 5%. Comfy is not subject to any income taxes.
Q. Assume that “investment” is…
Comfy Corporation manufactures furniture in several divisions, including the patio furniture division. The manager of the patio furniture division plans to retire in two years. The manager receives a bonus based on the division’s ROI, which is currently 7%. One of the machines that the patio furniture division uses to manufacture the furniture is rather old, and the manager must decide whether to replace it. The new machine would cost $35,000 and would last 10 years. It would have no salvage value. The old machine is fully depreciated and has no trade-in value. Comfy uses straight-line depreciation for all assets. The new machine, being new and more efficient, would save the company $5,000 per year in cash operating costs. The only difference between cash flow and net income is depreciation. The internal rate of return of the project is approximately 7%. Comfy Corporation’s weighted-average cost of capital is 5%. Comfy is not subject to any income taxes.
Q. What can Comfy do to entice…
Chapter 23 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Ch. 23 - Prob. 23.1QCh. 23 - Prob. 23.2QCh. 23 - What factors affecting ROI does the DuPont method...Ch. 23 - RI is not identical to ROI, although both measures...Ch. 23 - Describe EVA.Ch. 23 - Give three definitions of investment used in...Ch. 23 - Distinguish between measuring assets based on...Ch. 23 - Prob. 23.8QCh. 23 - Why is it important to distinguish between the...Ch. 23 - Prob. 23.10Q
Ch. 23 - Managers should be rewarded only on the basis of...Ch. 23 - Explain the role of benchmarking in evaluating...Ch. 23 - Explain the incentive problems that can arise when...Ch. 23 - Prob. 23.14QCh. 23 - Prob. 23.15QCh. 23 - During the current year, a strategic business unit...Ch. 23 - Assuming an increase in price levels over time,...Ch. 23 - If ROI Is used to evaluate a managers performance...Ch. 23 - The Long Haul Trucking Company is developing...Ch. 23 - ABC Inc. desires to maintain a capital structure...Ch. 23 - ROI, comparisons of three companies. (CMA,...Ch. 23 - Prob. 23.22ECh. 23 - ROI and RI. (D. Kleespie, adapted) The Sports...Ch. 23 - ROI and RI with manufacturing costs. Excellent...Ch. 23 - ROI, RI, EVA. Hamilton Corp. is a reinsurance and...Ch. 23 - Goal incongruence and ROI. Comfy Corporation...Ch. 23 - ROI, RI, EVA. Performance Auto Company operates a...Ch. 23 - Capital budgeting, RI. Ryan Alcoa, a new associate...Ch. 23 - Prob. 23.29ECh. 23 - ROI, RI, EVA, and performance evaluation. Cora...Ch. 23 - Prob. 23.31ECh. 23 - Prob. 23.32ECh. 23 - ROI performance measures based on historical cost...Ch. 23 - ROI, measurement alternatives for performance...Ch. 23 - Multinational firms, differing risk, comparison of...Ch. 23 - ROI, Rl, DuPont method, investment decisions,...Ch. 23 - Division managers compensation, levers of control...Ch. 23 - Executive compensation, balanced scorecard. Acme...Ch. 23 - Financial and nonfinancial performance measures,...Ch. 23 - Prob. 23.40PCh. 23 - Prob. 23.41PCh. 23 - RI, EVA, measurement alternatives, goal...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The company is considering hiring an extra worker, whose salary will be $67,000 per year, to ease the problem. Using the extra worker, the company will be able to produce and sell 9,000 more units per year. The selling price per unit is $20. The cost per unit currently is $15.85 as shown: What is the annual financial impact of hiring the extra worker for the bottleneck process?arrow_forwardVariety Artisans has a bottleneck in their production that occurs within the engraving department. Arjun Naipul, the COO, is considering hiring an extra worker, whose salary will be $45,000 per year, to solve the problem. With this extra worker, the company could produce and sell 3,500 more units per year. Currently, the selling price per unit is $18 and the cost per unit is $5.85. Using the information provided, calculate the annual financial impact of hiring the extra worker.arrow_forwardDimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all 30,000 for $240 each. Country Enterprises has approached Dimitri to buy 800 chairs for $210 each. Dimitris normal variable cost is $165 per chair, including $50 per unit in direct labor per chair. Dimitri can produce the special order on an overtime shift, which means that direct labor would be paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and the contract will not disrupt any of Dimitris other operations. What will be the impact on profits of accepting the order?arrow_forward
- Keleher Industries manufactures pet doors and sells them directly to the consumer via their web site. The marketing manager believes that if the company invests in new software, they will increase their sales by 10%. The new software will increase fixed costs by $400 per month. Prepare a forecasted contribution margin income statement for Keleher Industries reflecting the new software cost and associated increase in sales. The previous annual statement is as follows:arrow_forwardArtisan Metalworks has a bottleneck in their production that occurs within the engraving department. Jamal Moore, the COO, is considering hiring an extra worker, whose salary will be $54,000 per year, to solve the problem. With this extra worker, the company could produce and sell 2,900 more units per year. Currently, the selling price per unit is $25.00 and the cost per unit is $7.50. $3.40 1.00 0.40 2.70 $7.50 Direct materials Direct labor Variable overhead Fixed overhead (primarily depreciation of equipment) Total Using the Information provided, calculate the annual financial Impact of hiring the extra worker. Profit $ Increase ✔arrow_forwardNytre Limited sells executive office chairs for a price of $195 each. The contribution margin ratio of the chairs is 60% and the company’s fixed costs for this year are expected to be $80,000. The company has a profit target this year of $85,000 and is considering an improved design which is expected to increase sales. Question 14: If the company decides to use the improved design, direct labour costs will increase by $10 per chair. How many chairs must the company now sell to reach its profit target, given the increased labour costs?arrow_forward
- J. Smythe, Incorporated, manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,200, including a set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and 2,200 sets per year for the next five years, respectively. Variable costs will amount to 40 percent of sales and fixed costs are $1,810,000 per year. The new tables will require inventory amounting to 6 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of 200 tables per year of the oak tables the company produces. These tables sell for $3,500 and have variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $19,000,000.…arrow_forwardJ. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $6,200, including a set of eight chairs. The company feels that sales will be 1,900, 2,050, 2,600, 2,450, and 2,200 sets per year for the next five years, respectively. Variable costs will amount to 40 percent of sales and fixed costs are $1,810,000 per year. The new tables will require inventory amounting to 6 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of 200 tables per year of the oak tables the company produces. These tables sell for $3,500 and have variable costs of 35 percent of sales. The inventory for this oak table is also 6 percent of sales. The sales of the oak table will continue indefinitely. J. Smythe currently has excess production capacity. If the company buys the necessary equipment today, it will cost $19,000,000. However, the…arrow_forwardHemisphere Electric Coop (HEC) is planning to outsource its 51-person information technology (IT) department to Dyonyx. HEC believes this move will allow it to have access to cutting edge technologies and skill sets that would be cost prohibitive to build on its own. If it is assumed that the loaded cost of an IT employee is $100,000 per year, and that HEC will save 25% of this cost through outsourcing, what is the present worth of the savings to HEC for a 5-year contract at an interest rate of 0.5% per month? Assume the same number of contract employees is needed as are currently employed.arrow_forward
- Mr. Jones also considers improving the production efficiency of his company. He realizes if he rents a new equipment, the production costs will be reduced. He then gathers the following information:The new equipment can be rented at a cost of $60,000 a year. To operate the new equipment, the company also needs to hire a supervisor whose annual salary is $40,000. The equipment will reduce the direct materials cost and direct labor cost by 50%. Currently, direct materials, director labor, and variable manufacturing overhead cost $2, $2, and $1, respectively. Mr. Jones further finds that the use of new equipment has no impact on the company’s fixed manufacturing overhead. Q:Mr. Jones is not sure whether it is worthwhile to rent the new equipment. Mr. Kaye shows his prediction of the next three years’ sales. In Year 4, Year 5, and Year 6, the predicted sales units are 40,000, 50,000, and 60,000, respectively. Please make your recommendations to Mr. Jones, in which year should the company…arrow_forwardJ. Smythe, Inc., manufactures fine furniture. The company is deciding whether to introduce a new mahogany dining room table set. The set will sell for $7,600, including a set of eight chairs. The company feels that sales will be 2,050, 2,200, 2,750, 2,600, and 2,350 sets per year for the next five years, respectively. Variable costs will amount to 49 percent of sales and fixed costs are $1.94 million per year. The new dining room table sets will require inventory amounting to 7 percent of sales, produced and stockpiled in the year prior to sales. It is believed that the addition of the new table will cause a loss of sales of 450 dining room table sets per year of the oak tables the company produces. These tables sell for $4,900 and have variable costs of 44 percent of sales. The inventory for this oak table is also 7 percent of sales. The company believes that sales of the oak table will be discontinued after three years. J. Smythe currently has excess production capacity. If the…arrow_forwardClockWatchers is about to introduce a new employee monitoring tool and has determined that it will charge $100 per unit. The company must decide whether or not to purchase a high-capacity manufacturing machine. If the high-capacity machine is selected, then the cash fixed costs will be $5,000 per year, with variable costs of $50 per unit and depreciation and amortisation expenses of $2,000. Otherwise the fixed costs will be $2,000, with variable costs of $75 per unit and depreciation and amortisation expenses of $500. If EBIT Break-even is how the company evaluates its projects, then above what level of expected sales should ClockWatchers choose the high fixed cost alternative? 60 units 90 units120 units 180 unitsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Principles of Accounting Volume 2AccountingISBN:9781947172609Author:OpenStaxPublisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Cost-Volume-Profit (CVP) Analysis and Break-Even Analysis Step-by-Step, by Mike Werner; Author: Accounting Step by Step;https://www.youtube.com/watch?v=D0MOfse9OWk;License: Standard Youtube License