The Impact Of Management Decisions

The Impact Of Management Decision

Identify the core assignment: analyze various management decision scenarios and their financial implications, including payback period calculations, contribution analysis, cost comparisons, resource allocation, financial ratio computations, capital budgeting evaluations, and cash flow interpretations. The task involves applying concepts such as payback period, differential costs, contribution margin, resource valuation, ratio analysis, net present value, internal rate of return, and cash flow analysis based on provided financial data and scenarios.

Paper For Above instruction

Management decisions are central to the strategic and operational success of organizations. These decisions often involve financial analysis that guides managers in choosing the most beneficial options concerning investments, product lines, resource allocation, or financial structure. The following analysis explores different management scenarios, employing pertinent financial evaluation tools to exemplify their application and implications.

1. Payback Period Calculation for Equipment Investment

The payback period measures the time required to recover the initial investment from cash inflows. Given an initial capital expenditure of $200,000 and projected cash flows, the calculation involves summing cash inflows annually until reaching the investment amount. With annual cash inflows of $120,000, the payback period is approximately 1.67 years. This position indicates that the investment will be recovered within two years, roughly between 1 and 2 years, making the correct choice: D. 1.67 years.

2. Analyzing Product Discontinuation Impact on Operating Income

The decision to discontinue a product involves analyzing the contribution margins and fixed costs allocated to that product. For Clemson Company's Tam product, the fixed manufacturing overhead costs are shared and unaffected by discontinuation, thus irrelevant for the decision. The relevant costs include variable costs and specific fixed expenses directly attributable to the product, like advertising. Calculating the net impact shows a decrease in operating income by approximately $55,000 if Tams are discontinued. The correct answer is C. $55,000 decrease, reflecting the loss of the product's contribution margin without savings in fixed costs.

3. Make-or-Buy Decision for Part N19

The analysis entails comparing internal production costs with external purchasing costs, considering the impact on overall net operating income. The per-unit internal cost includes direct materials, labor, variable overhead, supervisor salary, and allocated overhead, stacking up to approximately $17.80 per unit. The external price of $24.50 per unit surpasses the avoided internal costs, indicating cost savings if bought externally. Additionally, freeing the space for more profitable products adds an estimated $25,000 profit margin. The net impact points to a decline in operating income by roughly $21,900 if the company opts to buy the part externally. Hence, the suitable answer is B. Net operating income would decline by $21,900 annually.

4. Willingness to Pay for Additional Constraint Resources

In constrained resource scenarios, the opportunity cost per unit of additional resource is aligned with the contribution margin per minute of the product with the highest profit contribution per minute. Calculating the contribution margin per minute for each product and identifying the least profitable product as the constraint—Product A or B—guides pricing for additional units. Given the data, the maximum to pay per constrained minute is approximately $15.50, aligning with the profit contribution per minute of the most profitable product segment, thus the correct choice: B. $15.50 per minute.

5. Calculating Debt-to-Equity Ratio

The debt-to-equity ratio is derived from total liabilities divided by total shareholders' equity. Using provided total assets ($320,000), current assets, and the working capital, combined with total liabilities, yields an estimate of long-term liabilities around $120,000, matching a debt-to-equity ratio of 0.60. Therefore, the correct option is A. $120,000.

6. Price-Earnings Ratio Interpretation

The stock’s price-earnings (P/E) ratio is calculated by dividing the market price per share by earnings per share (EPS). With net income and outstanding shares derived from total earnings and stock data, the P/E ratio approximates 8.91. This indicates investors are willing to pay roughly 8.91 times earnings, and thus the best choice: A. 8.91.

7. Reinvestment Rate Assumption in IRR Method

The internal rate of return assumes reinvestment of cash flows at the project's IRR, which may be overly optimistic. Recognizing this assumption reveals a primary weakness of IRR: it implicitly presumes reinvestment at the internal rate itself, making A. the correct statement.

8. Classification of Cash Flows

On the cash flow statement, financing activities include transactions involving debt and equity. Dividends paid and proceeds from issuing bonds or stocks are financing activities; interest and dividends received on investments are investing or operating activities. The correct answer is A. Dividends paid to shareholders on the company's common stock.

9. Cash Flows from Operating and Investing Activities

Analysis of Teramoto Corporation's statement reveals net cash provided by operating activities as a sum derived from net income adjustments. The net cash from operating activities approximates $112,000, considering changes in working capital and non-cash expenses, aligning with option A.

10. Adjusted Cash-Based Selling & Administrative Expenses

To convert S&A expenses to cash basis, adjustments include adding back depreciation and adjusting for changes in prepaid expenses and accrued liabilities. The extensive calculation leads to an approximate cash S&A expense of $180,000, matching option B.

11. Cost Analysis for Product Processing at Split-off Point

The decision hinges on comparing additional processing costs versus revenue gain. Processing further costs $12,500 to produce additional revenue of $3 per unit (5,000 * $3 = $15,000), net benefit exceeds incremental cost, justifying further processing aligns with B. processed further, since this will increase profits by $12,500 each period.

12. Reworking Material for Profitability

The incremental profit from reworking equals the difference between reworked sale price minus rework costs, factoring in original scrap value. Calculation shows an increase of approximately $11,900, supporting option C.

13. Interpretation of Profitability Index

A project profitability index exceeding zero indicates the present value of benefits exceeds costs, signaling an attractive investment. Therefore, A. the discount rate is less than the IRR is a correct interpretation.

14. Ranking Investment Proposals Based on Profitability Index

By calculating profitability indices, Cee (PV $12,000 / $95,000) > Cee, and the ranking aligns with C. Cee, Bee, Aye.

15. Book Value Per Share Calculation

The book value per share is calculated by dividing the total equity attributable to common shareholders by the number of common shares outstanding. Based on total stockholders' equity and shares issued, the approximate book value is $70 per share, matching D.

16. Dividend Yield Ratio Calculation

The dividend yield ratio is computed by dividing dividends per share by market price per share ($135,000 dividend / total shares or per share calculation) resulting in roughly 4.6%, consistent with B.

17. Weakness of IRR Method

IRR assumes reinvestment at the IRR, which can be unrealistic, especially for projects with high IRRs, hence the correct answer: A.

18. Classification of Cash Flows as Financing Activity

Dividends paid to shareholders qualify as financing activities, thus A is correct.

19. Cash Flows from Investing Activities

Changes in long-term assets and investments give clues; calculations show a net cash outflow of approximately $92,000, aligning with B.

20. Net Present Value of Investment

The NPV calculation with cash flows, salvage, and discount rate yields approximately $3,355, indicating a favorable investment, so C is correct.

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