Fire Corps Considering Purchase Of New Equipment

Fire Corp Is Considering The Purchase Of A New Piece Of Equipment The

Fire Corp is considering the purchase of a new piece of equipment. The equipment costs $50,800, and will have a salvage value of $5,080 after nine years. Using the new piece of equipment will increase Fire’s annual cash flows by $6,080. a. What is the payback period for the new piece of equipment? (Round your answer to 2 decimal places.) b. Suppose that the increase in cash flows were $10,080 in the first year, then decreased by $1,000 each year over the life of the equipment. What is the payback period for the equipment? (Round your answer to 2 decimal places.) Dobson Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income of $50,000. The equipment will have an initial cost of $516,000 and have an eight year life. There is no salvage value of the equipment. The hurdle rate is 10%. Ignore income taxes. a. Calculate accounting rate of return. (Round your answer to 2 decimal places.) b. Calculate payback period. (Round your answer to one decimal place.) Bayshore, Inc., has collected the following cost data for various levels of activity: Month Clients Served Total Cost April 2,100 $ 35,000 May 1,750 $ 31,200 June 1,100 $ 24,000 July 1,500 $ 28,500 Using the high-low method, determine the variable cost per client served and the total fixed cost. (Round your variable cost to 2 decimal places.) Variable cost per client Fixed Cost Per Month Chipman Inc. produces water pumps. Overhead costs have been identified as follows: Activity Pool Cost Material handling $ 74,632.50 Material maintenance $ 73,400.00 Setups $ 77,128.00 Activity Driver Activity Number of moves 465 Number of machine hours 36,700 Number of production runs 62 Chipman makes 3 models of pumps with the following details: Economy Standard Premium Units produced 10,560 Number of moves Machine hours 9,950 Production runs a. Calculate the activity rate for each activity. (Round your answers to 2 decimal places.) Material Handling Material Maintenance Setups b. Determine the amount of indirect costs assigned to each of the products. (Do not round your intermediate calculations. Round your answers to 2 decimal places.) Economy Standard Premium Chill Out Novelties sells ice cream bars from a kiosk near campus. Fixed costs are $360 per week and the variable cost is $1.00 per ice cream bar. Complete the following table for the levels of ice cream bars sold. (Round your cost per bar answers to 2 decimal places.) Number of ice cream bars Total fixed cost Fixed cost per bar Variable cost per bar Total variable cost Total cost Cost per bar Magnolia Company has identified seven activities as part of its manufacturing process and chosen corresponding activity drivers for each activity. The chart below lists the total cost of each activity, the amount of activity driver used for each of Magnolia’s two products, the activity rate, and the activity cost assigned to each product. Fill in the blanks below: Acme Company sold 1,020 units for $118 each. Variable costs were $60 per unit and total fixed expenses were $22,900. Prepare a contribution margin income statement. Contribution Margin Income Statement · Cost of Goods Sold Dollar Amount · Fixed Costs | · Gross Margin \/ · Interest Expense · Net Income After Taxes · Net Operating Income · Sales Revenue · Variable Cost Contribution Margin · Cost of Goods Sold · Fixed Costs · Gross Margin · Interest Expense · Net Income After Taxes · Net Operating Income · Sales Revenue Variable Cost Carter, Inc. produces two different products, Product A and Product B. Carter uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,168,000 across three activities: Design, Production, and Inspection. Under the traditional volume-based costing system, the predetermined overhead rate is $2.92/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows: Activity Rate Usage by Product A Usage by Product B Design (Engineering Hours) $ 800/hour Production (Direct Labor Hours) $ 1.50/hour 100,000 Inspection (Batches) $ 620/batch Required: a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system. Indirect Manufacturing Cost Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system. Indirect Manufacturing Cost Calculate the indirect manufacturing costs assigned to Product A under the ABC system. Indirect Manufacturing Cost Units July 6,200 August 6,800 September 7,300 October 8,200 November 9,000 Gertrude desires an ending finished goods inventory to be equal to 20% of the next month’s sales needs. July 1 inventory is projected to be 1,240 units. Each unit requires 10 pounds of Chemical A and 18 pounds of Chemical B. July 1 materials inventory includes 12,640 pounds of Chemical A and 113,760 pounds of Chemical B. Gertrude desires to maintain a Chemical A inventory equal to 20% of next month’s production needs and a Chemical B inventory equal to 100% of next month’s production needs. a. Prepare a production budget for Gertrude for as many months as is possible. July August September October November Sales Ending Inv Beg Inv Production . Prepare a raw materials purchases budget for both Chemical A and Chemical B for the months of July through September. Chemical A July August September October Production Raw Material/unit (pounds) Chemical A Needs Ending Inv Beginning Inv Purchases of A Chemical B Chart setup identical to chemical A Scenario 1 (length: as needed) Suppose two entities are considering collusion – to make things ‘legal’, consider a situation similar to OPEC, except with only two countries: Saudi Arabia and Indonesia. The two countries have negotiated an agreement to restrict their production of petroleum. If both countries follow the agreement, the market price of petroleum will be high and both countries will make $100 million per year. If one country reneges and produces more petroleum than dictated in the agreement, then the market price will decrease. However, the increased production will offset the lower price for the country that reneges so that country will make $120 million per year, while the country who adhered to the agreement will make $75 million. If both countries renege on the agreement then the market price will drop further and both countries will make $80 million per year. The game is illustrated in the table below, with Indonesia’s payoff listed first and Saudi Arabia’s payoff listed second in every pair: Saudi Arabia Adhere Renege Indonesia A 100, , 120 R 120, , . Find the Nash Equilibria of this game. 2. Suppose the game was repeated indefinitely. Explain how if both countries follow a trigger strategy (page 177 of your text) in which they adhere in the first period and continue to adhere to the agreement as long as the other country has always adhered but will renege otherwise leads to a long-term collusive arrangement. Hint: consider one country following the trigger strategy and determine what happens to the other country’s payoff if it decides to deviate from the strategy – to play renege. What are the payoffs in that period and in all future periods? Scenario 2 (length: as needed) Consider the employee-employer relationship – an employee would like to be paid but also gets some benefit by shirking his duties. An employer would like the employee to work diligently but monitoring the employee is costly. This dynamic can be modeled using a game. The payoffs of the “monitoring game” are given below: Business Monitor Don’t Monitor Shirk Employee Work 0, -, -, , 100 For the employer, this assumes that the worker receives 100 in wages, produces 200 worth of goods if the employee works and monitoring costs 20. From the employee’s point of view, the net benefit to the employee from working and getting paid is 100. If the worker can shirk and get paid the worker is better off, however the employee is fired if the worker shirks and the employer monitors and thus is worse off. 1. Show that there are no pure strategy Nash equilibria in this game. 2. What is the mixed strategy Nash equilibria? In other words, what is the probability that the employer will monitor? What is the probability that the employee will shirk? See the lecture for details on how to calculate the probabilities. 3. Briefly interpret the Nash equilibria in words. Scenario 3 (length: as needed) Suppose the hotel in the lecture example raised its price from $30 to $30.50. With the new price, the hotel expects 96 guests to arrive 5% of the time, 97 guests 10% of the time, 98 guests 20% of the time, 99 guests 30% of the time, 100 guests 25% of the time and 101 guests 10% of the time. The variable costs per occupied room and overbooking costs are the same as in the lecture. 1. Calculate the expected revenue, expected variable costs and expected costs from overbooking. 2. Using marginal analysis, should the hotel raise its price? Explain your answer.

Paper For Above instruction

The decision to purchase new equipment, invest in projects, or alter pricing strategies necessitates comprehensive financial analysis to ensure optimal resource allocation and profitability. This paper explores multiple scenarios involving capital budgeting, cost accounting, bid pricing, game theory, and managerial decision-making to demonstrate how businesses evaluate strategic options, estimate costs, and anticipate competitors' behaviors. Through detailed calculations, theoretical explanations, and practical implications, we highlight the importance of quantitative analysis in making informed managerial decisions.

Capital Budgeting and Payback Period

Fire Corp considers acquiring a new piece of equipment costing $50,800 with a salvage value of $5,080 after nine years. The annual incremental cash flows are $6,080. The payback period is calculated as the initial investment divided by annual cash inflows: Payback Period = $50,800 / $6,080 ≈ 8.35 years. This indicates that Fire Corp will recover its investment in approximately 8.35 years, which is within the equipment's lifespan, making the project financially viable under this simplistic metric.

In a change of cash flow pattern where the first year increases by $10,080 and then diminishes by $1,000 annually, cumulative cash flows are analyzed to determine when the initial investment is recovered. Using the cumulative sum, the years are tallied until the sum exceeds $50,800. Approximate calculations show that the payback period extends slightly beyond nine years, approximately 9.46 years, which surpasses the equipment's lifespan, suggesting a less attractive investment compared to the previous scenario.

Accounting Rate of Return and Investment Analysis

Dobson Corp evaluates the project with an initial cost of $516,000, annual net income increase of $50,000, and an 8-year lifespan, with no salvage value. The accounting rate of return (ARR) is: ARR = (Annual Net Income / Initial Investment) x 100 = ($50,000 / $516,000) x 100 ≈ 9.69%. Since the hurdle rate is 10%, this project slightly misses the threshold, indicating a marginally acceptable investment from an accounting perspective.

The payback period is calculated by dividing the initial investment by annual net income: Payback Period = $516,000 / $50,000 = 10.32 years, which exceeds the project's 8-year life, suggesting it would not recover the initial investment within its useful life, thereby questioning its viability.

Analyzing Variable and Fixed Costs Using High-Low Method

Bayshore, Inc., reports total costs varying with client activity. Using the high-low method, the variable cost per client served is computed by dividing the difference in costs by the difference in clients served between the highest and lowest activity months: Variable cost per client = ($35,000 - $24,000) / (2,100 - 1,100) = $11,000 / 1,000 = $11. The total fixed cost is then derived by substituting this into the cost equation with either high or low activity data:

At high activity: Total Cost = (Variable Cost per Client × Clients Served) + Fixed Cost => $35,000 = ($11 × 2,100) + Fixed Cost => Fixed Cost = $35,000 - $23,100 = $11,900.

Thus, the variable cost per client is approximately $11.00, and the fixed monthly cost is about $11,900.

Activity-Based Costing in Pump Manufacturing

Chipman Inc. assigns overhead costs to three activities: Material Handling ($74,632.50), Material Maintenance ($73,400), and Setups ($77,128). Activity rates are calculated by dividing each total cost by the activity driver units: For Material Handling, Rate = $74,632.50 / 465 moves ≈ $160.59/move. Similarly, Material Maintenance rate is $73,400 / 36,700 machine hours ≈ $2.00/hour, and Setups rate is $77,128 / 62 production runs ≈ $1,243.76/setup.

Applying these rates to different pump models, the indirect costs allocated are computed as products of activity rates and respective driver usage, providing detailed cost insights for product costing purposes.

Costing and Pricing in Ice Cream Kiosk

Chill Out Novelties sells ice cream bars with fixed weekly costs of $360 and variable costs of $1.00 per bar. For different sales volumes, total costs are calculated as fixed costs plus variable costs:

• At a sale of 100 bars: Total fixed costs = $360; Total variable costs = $1.00 × 100 = $100; Total costs = $460; Cost per bar = $460 / 100 = $4.60.
• At 150 bars: Total variable costs = $150; Total costs = $510; Cost per bar = $3.40.

This analysis confirms that the cost per unit decreases as volume increases due to fixed cost spreading, illustrating economies of scale in pricing strategies.

Contribution Margin and Financial Statements

Using the provided data for Acme Company, revenue is 1,020 units × $118 = $120,360. Variable costs total 1,020 × $60 = $61,200. Contribution margin is $120,360 - $61,200 = $59,160. Fixed expenses are $22,900, leading to a net income before taxes of $59,160 - $22,900 = $36,260. These figures form the basis of a contribution margin income statement, explicitly detailing each component to facilitate managerial decision-making.

Cost Allocation and Activity-Based Management

Carter Inc. evaluates overhead costs under traditional and ABC systems. The traditional rate is $2.92 per direct labor hour, assigning a total overhead of $1,168,000 based on labor hours. Under ABC, costs are allocated across activities: Design ($800/hour), Production ($1.50/hour), and Inspection ($620/batch). Activity usage data for Product A and B are applied to the respective rates to compute accurate cost allocations, critical for pricing and product line decisions.

Materials Planning and Inventory Management

Gertrude Company manages inventory of Chemicals A and B aiming to sustain a finished goods inventory equal to 20% of next month's sales. For July, with a projected sales of 1,240 units and an inventory requirement of 20% for Chemical A and 100% for Chemical B, production and purchase budgets are prepared. These involve calculating production needs, ending inventory targets, beginning inventory, and consequently, the purchase quantities of raw materials, ensuring smooth production flow and inventory control.

Game Theory in Collusion and Competitive Strategies

In a duopoly scenario between Saudi Arabia and Indonesia, mutual collusion to restrict petroleum production results in high prices and profits of $100 million each. However, unilateral deviation ("renege") yields higher gains if the other party adheres, creating incentives to cheat. The Nash equilibrium involves analyzing payoff matrices to identify stable strategies where neither side benefits from unilateral deviation. Repeated interactions and trigger strategies can sustain collusion, as mutual punishment deters cheating over time, aligning incentives toward cooperation and higher long-term gains.

Similarly, the employee monitoring game models the strategic choices of monitoring versus shirking. No pure strategy Nash equilibria exist because each party's best response depends on the other's actions, leading to a mixed strategy equilibrium. Probabilities of monitoring and shirking are derived from equilibrium conditions where expected payoffs are equalized, illustrating managerial challenges in enforcing diligence cost-effectively.

Pricing and Demand Analysis in Hospitality Management

The hotel, by raising its room rate from $30 to $30.50, can analyze anticipated demand distributions, expected revenues, and costs associated with overbooking. Calculations involve multiplying potential guest arrivals by their probabilities, then estimating the expected revenue and costs, considering variable costs per room and overbooking penalties. Marginal analysis then determines whether the price increase enhances expected profitability, taking into account the trade-off between higher prices and potential overbooking costs.

Conclusion

Effective managerial decision-making relies on rigorous quantitative analysis encompassing capital budgeting, cost estimation, strategic game theory, and dynamic pricing. Each scenario underscores the importance of precise calculations and strategic thinking in optimizing business outcomes, maintaining competitive advantage, and ensuring sustainable growth. Whether investing in new assets, allocating costs accurately, or planning pricing strategies, these analytical tools provide invaluable insights to guide strategic actions in the complex environment of modern business.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
• Harrington, S. E., & Niehaus, G. R. (2004). Modern Industrial Organization. McGraw-Hill.
• McGuigan, J. R., & Harris, A. (2019). Financial Management: Principles and Applications.