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Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. They have considered various options and believe that they could reduce the cost of each car if they produce the car batteries instead of purchasing them from their current vendor, Avari Battery Company.

Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. They have considered various options and believe that they could reduce the cost of each car if they produce the car batteries instead of purchasing them from their current vendor, Avari Battery Company.

Managerial Accounting
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter6: Cost-volume-profit Analysis
Section: Chapter Questions
Problem 2E: Identify cost graphs The following cost graphs illustrate various types of cost behavior: For each...
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Elon Motors produces electric automobiles. In recent years, they have been making all components of the cars, excluding the batteries for each vehicle. The company's leadership team has been considering the ways to reduce the cost of producing its cars. They have considered various options and believe that they could reduce the cost of each car if they produce the car batteries instead of purchasing them from their current vendor, Avari Battery Company.

Currently, the cost of each battery is $325 per unit. The company feels that they could greatly reduce the cost if the production team makes each battery. However, to produce these batteries, the company will need to purchase specialized equipment that costs $1,570,000. However, this equipment will have a useful life of 12 years and is expected to have a salvage value of $70,000 at the end of that time.

Currently, the company purchases 3,000 batteries per year, and the company expects that the production will remain the same for the coming 12-year period. To make the batteries, the company expects that they will need to purchase direct materials at a cost of $125 per battery produced. In addition, the company will need to employ three production workers to make the batteries. The workers likely work 2,080 hours per year and make $25 per hour. In addition, health benefits will amount to 20% of the workers' annual wages. In addition, variable manufacturing overhead costs are estimated to be $25 per unit.

Because there is currently unused space in the factory, no additional fixed costs would be incurred if this proposal is accepted. The company's cost of capital (hurdle rate) has been determined to be 10% for all new projects, and the current tax rate of 30% is anticipated to remain unchanged. The pricing for the company's products as well as number of units sold will not be affected by this decision. The straight-line depreciation method would be used if the new equipment is purchased.

Just need part 4 and part 5 please and thank you.
Data: Cost of new equipment Expected life of equipment in years Salvage Value $1,570,000 12 S70,000 Life Production 36,000 Annual production or purchase needs 300 Number of workers needed 3 2,080 Annual hours to be worked per employee Earnings per hour for employees Health Benefits - % of Wages $25.00 20% $125.00 $25.00 Cost of Direct Materials Variable Manufacturing Overhead Costs Unit Cost to Purchase Batteries $325.00 Required rate of return 10% Таx rate 30% Make Purchase Cost to Produce Annual cost of direct material: 375000 Need - Cost direct material for of 3,000 Batteries Annual cost of direct labor for new employees: Wages Health benefits Total wages and benefits 156,000 31,200 187,200 Other variable production costs 75,000 Total annual production costs $637,200 Annual Cost to Purchase Batteries $975,000 Part 1 Cash Flows Over the Life of the Project Before Tax Таx After Tax Item Annual cash savings Amount Effect Amount $337,800 125,000 30% $236,460 $37,500 Tax savings due to depreciation 30% Total after-tax annual cash flow $273,960 Part 2 Payback Period 5.73 Lyears
Transcribed Image Text:Data: Cost of new equipment Expected life of equipment in years Salvage Value $1,570,000 12 S70,000 Life Production 36,000 Annual production or purchase needs 300 Number of workers needed 3 2,080 Annual hours to be worked per employee Earnings per hour for employees Health Benefits - % of Wages $25.00 20% $125.00 $25.00 Cost of Direct Materials Variable Manufacturing Overhead Costs Unit Cost to Purchase Batteries $325.00 Required rate of return 10% Таx rate 30% Make Purchase Cost to Produce Annual cost of direct material: 375000 Need - Cost direct material for of 3,000 Batteries Annual cost of direct labor for new employees: Wages Health benefits Total wages and benefits 156,000 31,200 187,200 Other variable production costs 75,000 Total annual production costs $637,200 Annual Cost to Purchase Batteries $975,000 Part 1 Cash Flows Over the Life of the Project Before Tax Таx After Tax Item Annual cash savings Amount Effect Amount $337,800 125,000 30% $236,460 $37,500 Tax savings due to depreciation 30% Total after-tax annual cash flow $273,960 Part 2 Payback Period 5.73 Lyears
Part 3 Accounting Rate of Return Accounting income as result of decreased costs Annual cash savings Less depreciation Before tax income Tax at Current Rate After tax income Accounting Rate of Return Part 4 Net Present Value Before Tax After Tax PV Present Item Year Amount Tax % Amount Factor Value Cost of machine Annual cash savings Tax savings due to depreciation Disposal value 1-12 1-12 12 Net Present Value Part 5 Internal Rate of Return and Modified Internal Rate of Return After Tax Item Year Amount Cost of machine Year 1 inflow Year 2 inflow Year 3 inflow Year 4 inflow Year 5 inflow 5 Year 6 7nflow 6 Year 7 inflow 7 Year 8 inflow 8 Year 9 inflow 9 Year 10 inflow 10 Year 11 inflow 11 Year 12 inflow 12 Internal Rate of Return Modified Internal Rate of Return Net Present Value 012 34
Transcribed Image Text:Part 3 Accounting Rate of Return Accounting income as result of decreased costs Annual cash savings Less depreciation Before tax income Tax at Current Rate After tax income Accounting Rate of Return Part 4 Net Present Value Before Tax After Tax PV Present Item Year Amount Tax % Amount Factor Value Cost of machine Annual cash savings Tax savings due to depreciation Disposal value 1-12 1-12 12 Net Present Value Part 5 Internal Rate of Return and Modified Internal Rate of Return After Tax Item Year Amount Cost of machine Year 1 inflow Year 2 inflow Year 3 inflow Year 4 inflow Year 5 inflow 5 Year 6 7nflow 6 Year 7 inflow 7 Year 8 inflow 8 Year 9 inflow 9 Year 10 inflow 10 Year 11 inflow 11 Year 12 inflow 12 Internal Rate of Return Modified Internal Rate of Return Net Present Value 012 34
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