Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality luggage

Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality luggage. The new equipment would cost $1,728,125, with an estimated five-year life and no salvage value. The estimated annual operating results with the new equipment are as follows:

Revenue from Sales of New Luggage $800,000

Expenses Other Than Depreciation $306,250

Depreciation (Straight-Line Basis) 345,625 651,875

Increase in Net Income from the New Line 148,125

All revenue from the new luggage line and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. You are to compute the following for the investment in the new equipment to produce the new luggage line:

a. Annual cash flows.

b. Payback period.

c. Return on average investment.

d. Total present value of the expected future annual cash inflows, discounted at an annual rate of 10 percent.

e. Net present value of the proposed investment discounted at 10 percent.

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(Basics of CVP Analysis) Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit

Problem 6-19 Basics of CVP Analysis
Feather Friends, Inc., distributes a high-quality wooden birdhouse that sells for $20 per unit. Variable costs are $8 per unit, and fi xed costs total $180,000 per year.

Required:
Answer the following independent questions:
1. What is the product’s CM ratio?
2. Use the CM ratio to determine the break-even point in sales dollars.
3. Due to an increase in demand, the company estimates that sales will increase by $75,000 during the next year. By how much should net operating income increase (or net loss decrease) assuming that fixed costs do not change?
4. Assume that the operating results for last year were:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400,000
Variable expenses . . . . . . . . . . . . . . . . . . . 160,000
Contribution margin . . . . . . . . . . . . . . . . . . 240,000
Fixed expenses . . . . . . . . . . . . . . . . . . . . . 180,000
Net operating income . . . . . . . . . . . . . . . . $ 60,000
a. Compute the degree of operating leverage at the current level of sales.
b. The president expects sales to increase by 20% next year. By what percentage should net operating income increase?
5. Refer to the original data. Assume that the company sold 18,000 units last year. The sales manager is convinced that a 10% reduction in the selling price, combined with a $30,000 increase in advertising, would cause annual sales in units to increase by one-third. Prepare two contribution format income statements, one showing the results of last year’s operations and one showing the results of operations if these changes are made. Would you recommend that the company do as the sales manager suggests?
6. Refer to the original data. Assume again that the company sold 18,000 units last year. The president does not want to change the selling price. Instead, he wants to increase the sales commission by $1 per unit. He thinks that this move, combined with some increase in advertising, would increase annual sales by 25%. By how much could advertising be increased with profits remaining unchanged? Do not prepare an income statement; use the incremental analysis approach.

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4-31 (Product profitability analysis, unused capacity, traditional activity-based costing) Northpack Inc., has recently expanded its line of backpacks to include high-quality, lightweight hiker backpacks

4-31 (Product profitability analysis, unused capacity, traditional activity-based costing) Northpack Inc., has recently expanded its line of backpacks to include high-quality, lightweight hiker backpacks. This new model uses more expensive material and takes longer to produce. While a basic school backpack can be cut and sewn together in 30 minutes, a hiker backpack takes 45 minutes to cut and sew together. The school model is produced in batches of 1,000 packs, while the hiker model is produced in batches of 100 packs. Each batch of the school model requires 1 hour of inspection time, and each batch of the hiker model requires 2 hours of inspection time. Using direct labor hours to allocate manufacturing support costs (which in this company include ordering and packaging costs), product profitability is analyzed as follows: ITEM SCHOOL BACKPACKS HIKER BACKPACKS Sales 15.00 $30.00 Less: Direct materials 3.00 10.00 Direct labor 5.00 7.50 Manufacturing support 4.00 6.00 Gross margin $3.00 $6.50 Selling and administrative 1.00 2.00 Profit $2.00 $4.50 Sales volume 90,000 6,000 Jens Schmit, the controller at Northpack, believes that activity based costing may be a more accurate way of measuring the costs of the two models. He has traced manufacturing support costs to the following activity pools and determined the practical capacity levels of the associated activity drivers Activity activity Costs Act. Driver Sch. Mod Hiker Mod Cutting Machines 52,000 Machine hours 9,000 1,125 Sewing Machines 163,300 Direct Labor Hours 45,000 4,500 Packaging-order 8,300 Number of Orders 450 200 related Packaging- volume 150,000 Number of items 90,000 6,000 Orders 14,000 Number of orders 450 200 Inspections 8,400 Hours of inspection ? ? Total $396,000 Selling and administrative expenses are $102,000 fixed business-sustaining costs. Customers pay actual shipping charges, which are not included in these figures. a. The method of assigning costs to individual products does not affect the total manufacturing supports costs. Only the amounts assigned to individual products change. Explain why Jens should care about how support costs are assigned to individual products. B Using activity based costing, calculate the cost per unit for each of the two models and analyze their profitability. c. How might managers use the activity based costing information to enhance the company’s profitability? Consider pricing changes and process changes among your suggestions d. Suppose that practical capacity remains as described earlier but that demand for the school model is on 85,000 units, while demand for the hiker model remains at 6,000 units. For the school model, the cutting machine hours are now 8,500 and the number of orders is 425. Calculate the cost per unit for each of the two models and prepare an income statement similar to Exhibit 4-7 but also showing the cost of unused capacity for each activity. What actions might management take to deal with the unused capacity highlighted in your analysis?

Click here for the solution: 4-31 (Product profitability analysis, unused capacity, traditional activity-based costing) Northpack Inc., has recently expanded its line of backpacks to include high-quality, lightweight hiker backpacks