CVP Analysis and Marginal Analysis Paper 9

1

Jennilyn Jasper, whose annual salary as a flight instructor is $40,000, has just inherited $100,000 after taxes. She is considering quitting her job and opening a day-care center. Certificates of deposit at the local bank are currently paying 6%. Jennilyn estimates that she will have to pay $120,000 in salaries to employees per year, $20,000 to rent a building, $9,000 each for furniture and supplies, $80,000 for insurance, and $7,000 for utilities. The two most important cost figures Jennilyn must consider in projecting profitability for her day-care center are, respectively, the explicit and implicit costs of






2

Jennilyn Jasper, whose annual salary as a flight instructor is $40,000, has just inherited $100,000 after taxes. She is considering quitting her job and opening a day-care center. Certificates of deposit at the local bank are currently paying 6%. Jennilyn estimates that she will have to pay $120,000 in salaries to employees per year, $20,000 to rent a building, $9,000 each for furniture and supplies, $80,000 for insurance, and $7,000 for utilities. If Jennilynís projections are accurate and she earns $250,000 in revenue from the business, she will have incurred






3

Two months ago, Hickory Corporation purchased 4,500 pounds of Kaylene at a cost of $15,300. The market for this product has become very strong, with the price jumping to $4.05 per pound. Because of the demand, Hickory can buy or sell Kaylene at this price. Hickory recently received a special order inquiry that would require the use of 4,200 pounds of Kaylene. In deciding whether to accept the order, management must evaluate a number of decision factors. Without regard to income taxes, which one of the following combination of factors correctly depicts relevant and irrelevant decision factors, respectively? Relevant Decision Factor Irrelevant Decision Factor






4

Verla Industries is trying to decide which one of the following two options to pursue. Either option will take effect on January 1st of the next year.
Option One -- Acquire a New Finishing Machine
The cost of the machine is $1,000,000 and will have a useful life of 5 years. Net pre-tax cash flows arising from savings in labor costs will amount to $100,000 per year for 5 years. Depreciation expense will be calculated using the straight-line method for both financial and tax reporting purposes. As an incentive to purchase, Verla will receive a trade-in allowance of $50,000 on its current fully depreciated finishing machine.
Option Two -- Outsource the Finishing Work
Verla can outsource the work to LM, Inc., at a cost of $200,000 per year for 5 years. If it outsources, Verla will scrap its current fully depreciated finishing machine. Verlaís effective income tax rate is 4 %. The weighted-average cost of capital is 10%. When comparing the two options, the $50,000 trade-in allowance would be considered.






5

In differential cost analysis, which one of the following best fits the description of a sunk cost?






6

Capital Company has decided to discontinue a product produced on a machine purchased 4 years ago at a cost of $70,000. The machine has a current book value of $30,000. Due to technologically improved machinery now available in the marketplace the existing machine has no current salvage value. The company is reviewing the various aspects involved in the production of a new product. The engineering staff advised that the existing machine can be used to produce the new product. Other costs involved in the production of the new product will be materials of $20,000 and labor priced at $5,000. Ignoring income taxes, the costs relevant to the decision to produce or not to produce the new product would be






7

In a joint manufacturing process, joint costs incurred prior to a decision as to whether to process the products after the split-off point should be viewed as






8

Profits that are lost by moving an input from one use to another are referred to as






9

In a management decision process, the cost measurement of the benefits sacrificed due to selecting an alternative use of resources is most often referred to as a(n)






10

Allred Company sells its single product for $30 per unit. The contribution margin ratio is 45%, and fixed costs are $10,000 per month. Allred has an effective income tax rate of 40%. If Allred sells 1,000 units in the current month, Allredís variable expenses would be






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