Problem 1: Skanda, Inc. sells clothing, shoes, and accessories at a suburban location in Boston. Here is information for the year ended June 30, 2009:
|
|
Clothing
|
Shoes
|
Accessories
|
|
Departmental Sales
|
$850,000
|
$320,000
|
$230,000
|
|
Subtract: Departmental Costs
|
|
|
|
|
Variable Costs
|
$510,000
|
$256,000
|
$ 126,500
|
|
Fixed Costs
|
290,000
|
70,000
|
42,000
|
|
Total Costs
|
$800,000
|
$326,000
|
$168,500
|
|
Departmental Operating Income (Loss)
|
$ 50,000
|
$ (6,000)
|
$ 61,500
|
Management is considering closing the shoe operation because of its operating loss
Required:
Assume that the Fixed Costs listed under Departmental Costs include $105,000 of company-wide fixed costs that are not traceable to any of the individual departments. These common fixed costs have been allocated to the departments as follows: $63,750 was allocated to the Clothing department, $24,000 to the Shoes department, and $17,250 to the Accessories department. Based on these new assumptions:
a. Prepare a segmented income statement for Skanda, Inc.
b. Would closing the Shoes Department improve the company’s net income? Explain.
Problem 2: Skanda operates a manufacturing process that generates two joint products, ThingOne and ThingTwo. The budget forecast for the upcoming period is as follows:
|
Product
|
Quantity Produced
|
Allocated Joint Cost
|
Allocated Joint Cost
per Unit
|
|
ThingOne
|
5,000 gallons
|
$100,000
|
$20
|
|
ThingTwo
|
1,000 gallons
|
20,000
|
20
|
The selling price for ThingTwo was $30 per gallon last period, but due to recent changes in the market, Waco forecasts that the selling price will be only $7.50 per gallon next period. Waco’s managers have determined that Waco has the following three choices:
• Sell ThingTwo for $7.50 per gallon.
• Process ThingTwo into a different product, ThingThree. It costs an additional $2.00 per gallon to process ThingTwo into ThingThree, but ThingThree sells for $9.00 per gallon.
• Discard ThingTwo instead of selling it or processing it. There is no disposal cost.
Required:
What should Waco’s management do? Explain your reasoning.
Problem 3: Skanda is planning to buy injection molding machinery costing $160,000. The machinery has an expected useful life of 5 years, and it will be depreciated using the straight-line method, assuming a $20,000 expected salvage value. Skanda requires a minimum rate of return of 8%, and they have made the following forecasts pertaining to the operation of this machinery:
|
Year
|
Estimated Annual Operating Cash Inflows
|
Estimated Annual Operating Cash Outflows
|
Annual Depreciation
|
|
1
|
$ 40,000
|
$8,000
|
$28,000
|
|
2
|
$50,000
|
$18,000
|
$28,000
|
|
3
|
$75,000
|
$22,000
|
$28,000
|
|
4
|
$105,000
|
$35,000
|
$28,000
|
|
5
|
$110,000
|
$50,000
|
$28,000
|
Assume a tax rate of 34% on all taxable income.
Required:
1. Determine the Payback Period for this proposal.
2. Determine the NPV for this proposal, assuming an 8% required rate of return.
3. Determine the IRR for this proposal.
4. Do you recommend that Skanda proceed with this proposal? Why or why not?