Nikul Hill Milling is currently reviewing a proposed project that aims to determine the feasibility of expandingits product line. The company's sales projections for the new product line are 8,000 units, with amargin of error of plus or minus 2 percent. It is expected that each unit will incur a variable cost of $11,while the fixed costs for the project are estimated to be approximately $287,000. The estimates forboth fixed and variable costs are accurate within a range of plus or minus 5 percent, as per thecompany's projections. The project's depreciation expense is expected to be $68,000, and the taxrate is set at 32 percent. Assuming that the product will be sold at the estimated price of $64 per unit,with an error margin of plus or minus 3 percent. What would be the operating cash flow under thebest-case scenario?A. $107,146B. $148,475OC. $168,630D. $144,150OE. $174,220

Calculating Operating Cash Flow under Best-Case ScenarioHere's how to find the operating cash flow…

Answered: Hill Milling is currently reviewing a…

Excel Applications for Accounting Principles

4th Edition

ISBN:9781111581565

Author:Gaylord N. Smith

Publisher:Gaylord N. Smith

ChapterMB: Model-building Problems

Section: Chapter Questions

Problem 18M

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Nico Parts, Inc., produces electronic products with short life cycles (of less than two years). Development has to be rapid, and the profitability of the products is tied strongly to the ability to find designs that will keep production and logistics costs low. Recently, management has also decided that post-purchase costs are important in design decisions. Last month, a proposal for a new product was presented to management. The total market was projected at 200,000 units (for the two-year period). The proposed selling price was 130 per unit. At this price, market share was expected to be 25 percent. The manufacturing and logistics costs were estimated to be 120 per unit. Upon reviewing the projected figures, Brian Metcalf, president of Nico, called in his chief design engineer, Mark Williams, and his marketing manager, Cathy McCourt. The following conversation was recorded: BRIAN: Mark, as you know, we agreed that a profit of 15 per unit is needed for this new product. Also, as I look at the projected market share, 25 percent isnt acceptable. Total profits need to be increased. Cathy, what suggestions do you have? CATHY: Simple. Decrease the selling price to 125 and we expand our market share to 35 percent. To increase total profits, however, we need some cost reductions as well. BRIAN: Youre right. However, keep in mind that I do not want to earn a profit that is less than 15 per unit. MARK: Does that 15 per unit factor in preproduction costs? You know we have already spent 100,000 on developing this product. To lower costs will require more expenditure on development. BRIAN: Good point. No, the projected cost of 120 does not include the 100,000 we have already spent. I do want a design that will provide a 15-per-unit profit, including consideration of preproduction costs. CATHY: I might mention that post-purchase costs are important as well. The current design will impose about 10 per unit for using, maintaining, and disposing our product. Thats about the same as our competitors. If we can reduce that cost to about 5 per unit by designing a better product, we could probably capture about 50 percent of the market. I have just completed a marketing survey at Marks request and have found out that the current design has two features not valued by potential customers. These two features have a projected cost of 6 per unit. However, the price consumers are willing to pay for the product is the same with or without the features. Required: 1. Calculate the target cost associated with the initial 25 percent market share. Does the initial design meet this target? Now calculate the total life-cycle profit that the current (initial) design offers (including preproduction costs). 2. Assume that the two features that are apparently not valued by consumers will be eliminated. Also assume that the selling price is lowered to 125. a. Calculate the target cost for the 125 price and 35 percent market share. b. How much more cost reduction is needed? c. What are the total life-cycle profits now projected for the new product? d. Describe the three general approaches that Nico can take to reduce the projected cost to this new target. Of the three approaches, which is likely to produce the most reduction? 3. Suppose that the Engineering Department has two new designs: Design A and Design B. Both designs eliminate the two nonvalued features. Both designs also reduce production and logistics costs by an additional 8 per unit. Design A, however, leaves post-purchase costs at 10 per unit, while Design B reduces post-purchase costs to 4 per unit. Developing and testing Design A costs an additional 150,000, while Design B costs an additional 300,000. Assuming a price of 125, calculate the total life-cycle profits under each design. Which would you choose? Explain. What if the design you chose cost an additional 500,000 instead of 150,000 or 300,000? Would this have changed your decision? 4. Refer to Requirement 3. For every extra dollar spent on preproduction activities, how much benefit was generated? What does this say about the importance of knowing the linkages between preproduction activities and later activities?
Emerald Island Company is considering building a manufacturing plant in County Kerry. Predicting sales of 100,000 units, Emerald Isle estimates the following expenses: An Irish firm that specializes in marketing will be engaged to sell the manufactured product and will receive a commission of 10% of the sales price. None of the U.S. home office expense will be allocated to the Irish facility. Required: 1. If the unit sales price is 2, how many units must be sold to break even? (Hint: First compute the variable cost per unit.) 2. Calculate the margin of safety ratio. 3. Calculate the contribution margin ratio.
Boxer Production, Inc., is in the process of considering a flexible manufacturing system that will help the company react more swiftly to customer needs. The controller, Mick Morrell, estimated that the system will have a 10-year life and a required return of 10% with a net present value of negative $500,000. Nevertheless, he acknowledges that he did not quantify the potential sales increases that might result from this improvement on the issue of on-time delivery, because it was too difficult to quantify. If there is a general agreement that qualitative factors may offer an additional net cash flow of $150,000 per year, how should Boxer proceed with this Investment?
Shelby Industries has a capacity to produce 45.000 oak shelves per year and is currently selling 40,000 shelves for $32 each. Martin Hardwoods has approached Shelby about buying 1,200 shelves for a new project and is willing to pay $26 each. The shelves can be packaged in bulk; this saves Shelby $1.50 per shelf compared to the normal packaging cost. Shelves have a unit variable cost of $27 with fixed costs of $350,000. Because the shelves dont require packaging, the unit variable costs for the special order will drop from $27 per shelf to $25.50 per shelf. Shelby has enough idle capacity to accept the contract. What is the minimum price per shelf that Shelby should accept for this special order?
Flanders Manufacturing is considering purchasing a new machine that will reduce variable costs per part produced by $0.15. The machine will increase fixed costs by $18,250 per year. The information they will use to consider these changes is shown here.
Dimitri Designs has capacity to produce 30,000 desk chairs per year and is currently selling all 30,000 for $240 each. Country Enterprises has approached Dimitri to buy 800 chairs for $210 each. Dimitris normal variable cost is $165 per chair, including $50 per unit in direct labor per chair. Dimitri can produce the special order on an overtime shift, which means that direct labor would be paid overtime at 150% of the normal pay rate. The annual fixed costs will be unaffected by the special order and the contract will not disrupt any of Dimitris other operations. What will be the impact on profits of accepting the order?
Schylar Pharmaceuticals, Inc., plans to sell 130,000 units of antibiotic at an average price of 22 each in the coming year. Total variable costs equal 1,086,800. Total fixed costs equal 8,000,000. (Round all ratios to four significant digits, and round all dollar amounts to the nearest dollar.) Required: 1. What is the contribution margin per unit? What is the contribution margin ratio? 2. Calculate the sales revenue needed to break even. 3. Calculate the sales revenue needed to achieve a target profit of 245,000. 4. What if the average price per unit increased to 23.50? Recalculate: a. Contribution margin per unit b. Contribution margin ratio (rounded to four decimal places) c. Sales revenue needed to break even d. Sales revenue needed to achieve a target profit of 245,000
Lander Parts, Inc., produces various automobile parts. In one plant, Lander has a manufacturing cell with the theoretical capability to produce 450,000 fuel pumps per quarter. The conversion cost per quarter is 9,000,000. There are 150,000 production hours available within the cell per quarter. Required: 1. Compute the theoretical velocity (per hour) and the theoretical cycle time (minutes per unit produced). 2. Compute the ideal amount of conversion cost that will be assigned per subassembly. 3. Suppose the actual time required to produce a fuel pump is 40 minutes. Compute the amount of conversion cost actually assigned to each unit produced. What happens to product cost if the time to produce a unit is decreased to 25 minutes? How can a firm encourage managers to reduce cycle time? Finally, discuss how this approach to assigning conversion cost can improve delivery time. 4. Assuming the actual time to produce one fuel pump is 40 minutes, calculate MCE. How much non-value-added time is being used? How much is it costing per unit? 5. Cycle time, velocity, MCE, conversion cost per unit (theoretical conversion rate actual conversion time), and non-value-added costs are all measures of performance for the cell process. Discuss the incentives provided by these measures.
Hatch Manufacturing produces multiple machine parts. The theoretical cycle time for one of its products is 65 minutes per unit. The budgeted conversion costs for the manufacturing cell dedicated to the product are 12,960,000 per year. The total labor minutes available are 1,440,000. During the year, the cell was able to produce 0.6 units of the product per hour. Suppose also that production incentives exist to minimize unit product costs. Required: 1. Compute the theoretical conversion cost per unit. 2. Compute the applied conversion cost per minute (the amount of conversion cost actually assigned to the product). 3. Discuss how this approach to assigning conversion cost can improve delivery time performance. Explain how conversion cost acts as a performance driver for on-time deliveries.
Thaler Company bought 26,000 of raw materials a year ago in anticipation of producing 5,000 units of a deluxe version of its product to be priced at 75 each. Now the price of the deluxe version has dropped to 35 each, and Thaler is now deciding whether to produce 1,500 units of the deluxe version at a cost of 48,000 or to scrap the project. What is the opportunity cost of this decision? a. 175,000 b. 375,000 c. 48,000 d. 26,000
The J.R. Ryland Computer Company is considering a plant expansion to enable the company to begin production of a new computer product. The companys president must determine whether to make the expansion a medium- or large-scale project. Demand for the new product is uncertain, which for planning purposes may be low demand, medium demand, or high demand. The probability estimates for demand are 0.20, 0.50, and 0.30, respectively. Letting x and y indicate the annual profit in thousands of dollars, the firms planners developed the following profit forecasts for the medium-and large-scale expansion projects. a. Compute the expected value for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of maximizing the expected profit? b. Compute the variance for the profit associated with the two expansion alternatives. Which decision is preferred for the objective of minimizing the risk or uncertainty?
At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The company is considering hiring an extra worker, whose salary will be $67,000 per year, to ease the problem. Using the extra worker, the company will be able to produce and sell 9,000 more units per year. The selling price per unit is $20. The cost per unit currently is $15.85 as shown: What is the annual financial impact of hiring the extra worker for the bottleneck process?

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