Matheson electronics has just developed

Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information:

New equipment would have to be acquired to produce the device. The equipment would cost $114,000 and have a six-year useful life. After six years, it would have a salvage value of about $6,000.
Sales in units over the next six years are projected to be as follows:

Year

Sales in Units

1

8,000

2

13,000

3

15,000

4–6

17,000

Production and sales of the device would require working capital of $51,000 to finance accounts receivable, inventories, and day-to-day cash needs. This working capital would be released at the end of the project’s life.
The devices would sell for $45 each; variable costs for production, administration, and sales would be $30 per unit.
Fixed costs for salaries, maintenance, property taxes, insurance, and straight-line depreciation on the equipment would total $177,000 per year. (Depreciation is based on cost less salvage value.)
To gain rapid entry into the market, the company would have to advertise heavily. The advertising costs would be:

Year

Amount of Yearly
Advertising

1–2

$

32,000

3

$

60,000

4–6

$

50,000

The company’s required rate of return is 6%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years.

2-a. Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment.

2-b. Would you recommend that Matheson accept the device as a new product?

Compute the net cash inflow (incremental contribution margin minus incremental fixed expenses) anticipated from sale of the device for each year over the next six years. (Negative amounts should be indicated by a minus sign.)

Year 1

Year 2

Year 3

Year 4-6

Incremental contribution margin

Incrememental fixed expenses

Net cash inflow (outflow)

Using the data computed in (1) above and other data provided in the problem, determine the net present value of the proposed investment. (Negative amounts should be indicated by a minus sign. Round your final answer to the nearest whole dollar amount.)

Net present value

Would you recommend that Matheson accept the device as a new product?

No

Yes

The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The company has enough customer demand to justify producing its full capacity of 4,000 sets per year. Annual cost data at full capacity follow:

Direct labor

$

86,000

Advertising

$

96,000

Factory supervision

$

72,000

Property taxes, factory building

$

19,000

Sales commissions

$

56,000

Insurance, factory

$

7,000

Depreciation, administrative office equipment

$

2,000

Lease cost, factory equipment

$

16,000

Indirect materials, factory

$

20,000

Depreciation, factory building

$

101,000

Administrative office supplies (billing)

$

4,000

Administrative office salaries

$

112,000

Direct materials used (wood, bolts, etc.)

$

432,000

Utilities, factory

$

48,000

Required:

1. Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.)

2. Compute the average product cost of one patio set.
3. Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged?

Enter the dollar amount of each cost item under the appropriate headings. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect.)

Cost Behavior

Period (Selling or Administrative) Cost

Product Cost

Cost Item

Variable

Fixed

Direct

Indirect

Direct labor

Advertising

Factory supervision

Property taxes, factory building

Sales commissions

Insurance, factory

Depreciation, administrative office equipment

Lease cost, factory equipment

Indirect materials, factory

Depreciation, factory building

Administrative office supplies (billing)

Administrative office salaries

Direct materials used (wood, bolts, etc.)

Utilities, factory

Total costs

$

Compute the average product cost of one patio set. (Round your final answer to nearest whole dollar.)

Average product cost

per set

·

Assume that production drops to only 1,000 sets annually. Would you expect the average product cost per set to increase, decrease, or remain unchanged?

Increase

Decrease

Remain unchanged