Management tools to evaluate investments.

Question

Scarce resource; discontinued product lines; negative contribution marginThe officers of Bardwell Company are reviewing the profitability of the company’s four products and the potential effects of several proposals for varying the product mix. The following is an excerpt from the income statement and other data. Total Product P Product Q Product R Product S Sales $62,600 $10,000 $18,000 $12,600 $22,000 Cost of goods sold (44,274) (4,750) (7,056) (13,968) (18,500) Gross profit $18,326 $5,250 $10,944 $(1,368) $3,500 Operating expenses (12,004) (1,990) (2,968) (2,826) (4,220) Income before taxes 6,322 $3,260 $7,976 $(4,194) $(720) Units sold 1,000 1,200 1,800 2,000 Sales price per unit $10.00 $15.00 $7.00 $11.00 Variable cost of goods sold 2.50 3.00 6.50 6.00 Variable operating expenses 1.17 1.25 1.00 1.20 Each of the following proposals is to be considered independently of the other proposals. Consider only the product changes stated in each…

Answer 1

Question

Chapter 24, Problem 7BTN

1.

To determine

To identify: Management tools to evaluate investments.

2.

To determine

To identify: Information needed to use the above tools.

Explanation:

Given below is the information required to use the above management tools:

S Company would require the details of investment made in manufacturing unit and warehousing center.

Details of cash outflows and cash inflows.

Hence, information required to use the above management tools.

3.

To identify: Advantages and disadvantage of management tools listed above.

Explanation:

Given below are the advantages and disadvantages of the above management tools:

Net present value method:

Advantage:

NPV takes into consideration time value of money and helps in determining whether a particular investment will be advantageous for the A Company or not.

Disadvantage:

It is more complicated to understand and is not expressed in terms of percentage

Accounting Rate of Return (ARR):

Advantage:

ARR assists in comparison between different alternatives and thus will help in selecting the alternative with best financial return.

Disadvantage:

The main disadvantage of this method is that it does not consider the time factor and ignores the external factor which affects the profitability of the Company.

Payback period:

Advantage:

It will help the A Company to determine how speedily it can recover its investment.

Disadvantage:

Payback period does not take into consideration time value of money.

Hence, mentioned above are the advantages and disadvantage of listed management tools.

3.

To determine

To identify: Advantages and disadvantage of management tools listed above.

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