ACCOUNTING

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Student Name

ACC374 Fall 2012

Section 2

34. (6 points) (Ignore income taxes in this problem.) Rogers Company is studying a

project that would have a ten-year life and would require a $660,000 investment in

equipment that has no salvage value. The project would provide net operating income

each year as follows for the life of the project (Chapter 14):

Sales…………………………………… $500,000

Less cash variable expenses…………… 200,000

Contribution margin…………………… 300,000

Less fixed expenses………………….. :

Fixed cash expenses…………………… $200,000

Depreciation expenses………………… 80,000 280,000

Net operating income…………………. $20,000

The company’s required rate of return is 8%. What is the payback period for this

project?

Show calculations. Round to two decimal places.

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Use the following to answer question 35:

(10 points) (Ignore income taxes in this problem.) Murdock Company has a chance

to make and sell a new plastic five-gallon container. The company estimates that the

net cash flows (sales less cash operating expenses.) arising from manufacture and sale

of the new container would be as follows (numbers in parentheses indicate an

outflow) (Chapter 14):

Years 1-10 $ 85,000 Per year

Year 11 $(20,000)

Year 12 $95,000

Murdock would need to purchase production equipment costing $200,000 now to use

in the manufacture of the new containers. This equipment would have a 12-year life

and a $20,000 salvage value (the $20,000 salvage value is not included in the

$95,000). Murdock Company’s required rate of return is 12%.

35. Requirement A: Should Murdock make the new 5 gallon container?

35. Requirement B: Why or why not?

35. Requirement C: Calculate the net present value of all cash flows associated with

this investment (rounded to the nearest thousand dollars) (Support your answer with

an “investment time line” see example on page 17):

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36. (10 points) Match the following statement with the applicable ratios listed below

(Chapter 16):

_____ A measure of liquidity that shows the net current assets on hand to continue

business operations

_____ A rough measure of how many times a company’s inventory has been

turned into cash during the year

_____ Test of short-term debt-paying without having to rely on inventory or

prepaid assets

_____ A broad measure of profitability

_____ An index of whether a stock is relatively cheap or relatively expensive in

relation to current earnings

_____ the measure of the amount of assets being provided by creditors for each

dollar of assets being provided by the stockholders

A) Times interest earned F) Price-earnings ratio

B) Accounts Receivable turnover G) Working Capital

C) Debt-to-equity ratio H) Dividend yield ratio

D) Inventory turnover I) Gross Margin percentage

E) Quick ratio J) Book Value per Share

37. (8 points) (Ignore income taxes in this problem.) Stutz Company purchased a

machine with an estimated useful life of seven years. The machine will generate

cash inflows of $8,000 each year over the next seven years.

Calculate the purchase price if the machine has no salvage value at the end of seven

years, if Stutz’s discount rate is 12%, and if the net present value of this investment

is $15,000. (Support your answer with an “investment time line” on page 17)

(Chapter 14):

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Use the following to answer questions 38-40:

(24 points) Hatch Hardwood Floors installs oak and other hardwood floors in home and

businesses. The company uses an activity-based costing system for its overhead costs. The

company has provided the following data concerning its annual overhead costs and its activity

based costing system (Chapter 8):

Overhead Costs:

Production overhead…………….$500,000

Office expense…………………..$ 40,000

Total……………………………..$540,000

Distribution of resource consumption:

. Activity Cost Pools .

Installing

Floors

Job

Support

Other Total

Production

Overhead…….……………..

45% 35% 20% 100%

Office

Expense………………………….

10% 60% 30% 100%

The “Other activity cost pool consists of the costs of idle capacity and other costs.

The amount of activity for the year is as follows:

Activity Cost Pool Annual Activity

Installing floors…………………………8,000 squares

Job support………………………………160 jobs

Other…………………………..………Not applicable

Required :

38. Prepare the first-stage allocation of overhead costs to the activity pools by filling in the table

below:

Installing

Floors

Job

Support

Other Total

Production

overhead

Office

expense

Total

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