A firm evaluates all of its projects by applying the IRR rule. Year Cash Flow 0 –$ 158,000 1 58,000 2 81,000 3 65,000

A firm evaluates all of its projects by applying the IRR rule.

Year	Cash Flow
0	–$	158,000
1		58,000
2		81,000
3		65,000

Requirement 1:

What is the project's IRR? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal rate of return

%

Requirement 2:

If the required return is 15 percent, should the firm accept the project?

No

Explanation:

1:

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is:

0 = – $158,000 + $58,000 / (1 + IRR) + $81,000 / (1 + IRR)2 + $65,000 / (1 + IRR)3

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 13.66%

2:

Since the cash flows are conventional and the IRR is lower than the required return, we would not accept the project.

   

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

CFo	–$158,000
C01	$58,000
F01	1
C02	$81,000
F02	1
C03	$65,000
F03	1
IRR CPT
13.66%

Wiengot Antennas, Inc., produces and sells a unique type of TV antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been provided for the first month of the plant’s operation.

Wiengot Antennas, Inc., produces and sells a unique type of TV antenna. The company has just opened a new plant to manufacture the antenna, and the following cost and revenue data have been provided for the first month of the plant’s operation.

Beginning inventory		0
Units produced		40,000
Units sold		35,000
Selling price per unit		$60
Selling and administrative expenses:
Variable per unit		$2
Fixed (total)	$	560,000
Manufacturing costs
Direct materials cost per unit		$15
Direct labor cost per unit		$7
Variable manufacturing overhead cost per unit		$2
Fixed manufacturing overhead cost (total)	$	640,000

Because the new antenna is unique in design, management is anxious to see how profitable it will be and has asked that an income statement be prepared for the month.

   

Required:

1.	Assume that the company uses absorption costing.

  

a.	Determine the unit product cost. (Omit the "$" sign in your response.)

Unit product cost

$

b.	Prepare an income statement for the month. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Absorption Costing Income Statement
Sales	$
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income (loss)	$

    

2.	Assume that the company uses variable costing.

   

a.	Determine the unit product cost. (Omit the "$" sign in your response.)

Unit product cost

$

b.	Prepare a contribution format income statement for the month. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

    

Variable Costing Income Statement
Sales		$
Variable expenses:
Variable cost of goods sold	$
Variable selling and administrative expenses
Contribution margin
Fixed expenses:
Fixed manufacturing overhead
Fixed selling and administrative expenses
Net operating income (loss)		$

Explanation: 1.
a.
The unit product cost under absorption costing is:
 

Direct materials	$	15
Direct labor		7
Variable manufacturing overhead		2
Fixed manufacturing overhead (640,000 ÷ 40,000 units)		16
Absorption costing unit product cost	$	40

b.

Sales (35,000 units × $60 per unit) = $2,100,000

Cost of goods sold (35,000 units × $40 per unit) = $1,400,000

Selling and administrative expenses (35,000 units × $2 per unit) + $560,000 = $630,000

2.
a.
The unit product cost under variable costing is:
 

Direct materials	$	15
Direct labor		7
Variable manufacturing overhead		2
Variable costing unit product cost	$	24

b.

Sales (35,000 units × $60 per unit) = $2,100,000

Variable cost of goods sold (35,000 units × $24 per unit) = $840,000

Variable selling and administrative expense (35,000 units × $2 per unit) = $70,000

The PVC Company manufactures a high-quality plastic pipe that goes through three processing stages prior to completion.

The PVC Company manufactures a high-quality plastic pipe that goes through three processing stages prior to completion.

Information on work in the first department, Cooking, is given below for May:

Production data:
Pounds in process, May 1: materials       100% complete; conversion 90% complete		60,000
Pounds started into production during May		250,000
Pounds completed and transferred to       the next department		?
Pounds in process, May 31:       materials 60% complete; conversion 40% complete		20,000
Cost data:
Work in process inventory, May 1:
Materials cost	$	59,000
Conversion cost	$	23,400
Cost added during May:
Materials cost	$	306,420
Conversion cost	$	128,580

The company uses the weighted-average method.

Required:

1.	Compute the equivalent units of production.

	Materials	Conversion
Equivalent units of production

2.	Compute the costs per equivalent unit for the month. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	Materials	Conversion
Cost per equivalent unit	$	$

3.	Determine the cost of ending work in process inventory and of the units transferred out to the next department. (Omit the "$" sign in your response.)

	Materials	Conversion	Total
Cost of ending work in process inventory	$	$	$
Cost of units completed and transferred out	$	$	$

4.	Prepare a cost reconciliation report for the month. (Omit the "$" sign in your response.)

Cost Reconciliation
Costs to be accounted for:
Cost of beginning work in process inventory	$
Costs added to production during the period
Total cost to be accounted for	$
Costs accounted for as follows:
Cost of ending work in process inventory	$
Cost of units completed and transferred out
Total cost accounted for	$

Explanation:

Weighted-Average Method

1.

Equivalent units of production

	Materials	Conversion
Transferred to next department*	290,000	290,000
Ending work in process:
Materials: 20,000 units × 60% complete	12,000
Conversion: 20,000 units × 40% complete		8,000
Equivalent units of production	302,000	298,000

*Units transferred to the next department = Units in beginning work in process + Units started into production − Units in ending work in process = 60,000 + 250,000 − 20,000 = 290,000

2.

Cost per equivalent unit

	Materials		Conversion
Cost of beginning work in process	$	59,000	$	23,400
Cost added during the period		306,420		128,580
Total cost (a)	$	365,420	$	151,980
Equivalent units of production (b)		302,000		298,000
Cost per equivalent unit, (a) ÷ (b)	$	1.21	$	0.51

3.

Cost of ending work in process inventory and units transferred out

	Materials		Conversion		Total
Ending work in process inventory:
Equivalent units of production      (materials: 20,000 units × 60% complete;       conversion: 20,000 units × 40% complete)		12,000		8,000
Cost per equivalent unit	$	1.21	$	0.51
Cost of ending work in process inventory	$	14,520	$	4,080	$	18,600
Units completed and transferred out:
Units transferred to the next department		290,000		290,000
Cost per equivalent unit	$	1.21	$	0.51
Cost of units completed and transferred out	$	350,900	$	147,900	$	498,800

4.

Cost of beginning work in process inventory ($59,000 + $23,400) = $82,400

Costs added to production during the period ($306,420 + $128,580) = $435,000

Seattle Cat is the wholesale distributor of a small recreational catamaran sailboat. Management has

Seattle Cat is the wholesale distributor of a small recreational catamaran sailboat. Management has prepared the following summary data to use in its annual budgeting process:

Budgeted unit sales	380
Selling price per unit	$ 1,850
Cost per unit	$ 1,425
Variable selling and administrative expenses (per unit)	$ 85
Fixed selling and administrative expenses (per year)	$ 105,000
Interest expense for the year	$ 11,000

Required:

Prepare the company’s budgeted income statement using an absorption income statement format shown below. (Input all amounts as positive values. Omit the "$" sign in your response.)

Seattle Cat Budgeted Income Statement
Sales	$ 703,000
Cost of goods sold	541,500
Gross margin	161,500
Selling and administrative expenses	137,300
Net operating income (loss)	24,200
Interest expense	11,000
Net income (loss)	$ 13,200

Micro Products, Inc., has developed a very powerful electronic calculator. Each calculator requires

Micro Products, Inc., has developed a very powerful electronic calculator. Each calculator requires three small “chips” that cost $2 each and are purchased from an overseas supplier. Micro Products has prepared a production budget for the calculator by quarters for Year 2 and for the first quarter of Year 3, as shown below:

  

	Year 2					Year 3
	First	Second	Third	Fourth		First
Budgeted production, in calculators	60,000	90,000	150,000	100,000		80,000

  

The chip used in production of the calculator is sometimes hard to get, so it is necessary to carry large inventories as a precaution against stockouts. For this reason, the inventory of chips at the end of a quarter must equal 20% of the following quarter’s production needs. A total of 36,000 chips will be on hand to start the first quarter of Year 2.

   

Required:

Prepare a direct materials budget for chips, by quarter and in total, for Year 2. (Do not round intermediate calculations. Input all amounts as positive values. Omit the "$" sign in your response.)

   

Micro Products, Inc. Direct Materials Budget - Year 2
	Quarter
	First	Second	Third	Fourth	Year
Required production in calculators	60,000	90,000	150,000	100,000	400,000
Number of chips per calculator	×  3	×  3	×  3	×  3	×  3
Production needs—chips	180,000	270,000	450,000	300,000	1,200,000
Add : Ending inventory	54,000	90,000	60,000	48,000	48,000
Total needs	234,000	360,000	510,000	348,000	1,248,000
Deduct : Beginning inventory	36,000	54,000	90,000	60,000	36,000
Required purchases—chips	198,000	306,000	420,000	288,000	1,212,000
Total cost of purchases	$ 396,000	$ 612,000	$ 840,000	$ 576,000	$ 2,424,000