Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 12, Problem 2MTC
NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFat’s controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)—a toxic waste cleanup company—offered to buy 10,000 pounds of olestra from NoFat during December for a price of $2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that “This is another way to use our expensive olestra plant!”
The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows:
In addition, Allyson met with several of NoFat’s key production managers and discovered the following information:
- The special order could be produced without incurring any additional marketing or customer service costs.
- NoFat owns the aging plant facility that it uses to manufacture olestra.
- NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year.
- NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra.
- PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the $1,000 cost of the inspection team.
Based solely on financial factors, explain why NoFat should accept or reject PU’s special sales offer.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
A firm manufactures and sells high quality business printers and ink toners. Each printer sells for $650 and each toner for $100. The average user keeps the printer for 5 years and consumes 4 toners every year. In response to a recent significant drop in printer sales (which will reduce future toner sales as well) the firm wants to lower the printer price to $500. Assume that income from toner sales occurs at year-end and the firm’s cost of capital is 10%. How much of an increase is needed in the toner price to cover the loss in printer price?
Orange Computer decides to sell a new line of foldable smartphones. The phones will sell for
$965 per unit with variable cost of $487 per device. The company has spent $840,000 for a
marketing study that determined the company will sell 94,000 new generation foldable handsets
per year for seven years. The marketing study also determined that the company will lose sales of
9,300 units per year of its prior generation, but larger screen sized handsets. The prior
generation, larger screen handsets sell for $1,395 and have variable costs that are 51.25% of the
selling price. The company will also increase sales of its companion watch by 12,200 per year. The
watch sells for $396 and has variable costs of $183 of total selling price. The fixed cost for the
company each year is $15,750,000. The company has already spent $1,600,000 on research and
development for the new gadgets. The plant and equipment required will cost $59,100,000 and
will be depreciated on a straight-line basis to zero.…
Orange Computer decides to sell a new line of foldable smartphones. The phones will sell for $965 per unit with variable cost of $487 per device. The company has spent $840,000 for a marketing study that determined the company will sell 94,000 new generation
foldable handsets per year for seven years. The marketing study also determined that the company will lose sales of 9,300 units per year of its prior generation, but larger screen sized handsets. The prior generation, larger screen handsets sell for $1,395 and have
variable costs that are 51.25% of the selling price. The company will also increase sales of Its companion watch by 12,200 per year. The watch sells for $396 and has variable costs of $183 of total selling price. The fixed cost for the company each year is $15,750,000. The
company has already spent $1,600,000 on research and development for the new gadgets. The plant and equipment required will cost $59,100,000 and will be depreciated on a straight-line basis to zero.…
Chapter 12 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
Ch. 12 - Prob. 1DQCh. 12 - Explain why the timing and quantity of cash flows...Ch. 12 - The time value of money is ignored by the payback...Ch. 12 - What is the payback period? Compute the payback...Ch. 12 - Name and discuss three possible reasons that the...Ch. 12 - Prob. 6DQCh. 12 - The NPV is the same as the profit of a project...Ch. 12 - Explain the relationship between NPV and a firms...Ch. 12 - Prob. 9DQCh. 12 - What is the role that the required rate of return...
Ch. 12 - Explain how the NPV is used to determine whether a...Ch. 12 - The IRR is the true or actual rate of return being...Ch. 12 - Prob. 13DQCh. 12 - Explain why NPV is generally preferred over IRR...Ch. 12 - Suppose that a firm must choose between two...Ch. 12 - Prob. 1MCQCh. 12 - To make a capital investment decision, a manager...Ch. 12 - Mutually exclusive capital budgeting projects are...Ch. 12 - Prob. 4MCQCh. 12 - An investment of 1,000 produces a net cash inflow...Ch. 12 - The payback period suffers from which of the...Ch. 12 - Prob. 7MCQCh. 12 - An investment of 2,000 provides an average net...Ch. 12 - If the NPV is positive, it signals a. that the...Ch. 12 - Prob. 10MCQCh. 12 - Prob. 11MCQCh. 12 - Using NPV, a project is rejected if it is a. equal...Ch. 12 - If the present value of future cash flows is 4,200...Ch. 12 - Assume that an investment of 1,000 produces a...Ch. 12 - Which of the following is not true regarding the...Ch. 12 - Using IRR, a project is rejected if the IRR a. is...Ch. 12 - Prob. 17MCQCh. 12 - Postaudits of capital projects are useful because...Ch. 12 - For competing projects, NPV is preferred to IRR...Ch. 12 - Assume that there are two competing projects, A...Ch. 12 - Prob. 21BEACh. 12 - Accounting Rate of Return Uchdorf Company invested...Ch. 12 - Net Present Value Snow Inc. has just completed...Ch. 12 - Internal Rate of Return Lisun Company produces a...Ch. 12 - NPV and IRR, Mutually Exclusive Projects Hunt Inc....Ch. 12 - Prob. 26BEBCh. 12 - Accounting Rate of Return Cannon Company invested...Ch. 12 - Net Present Value Talmage Inc. has just completed...Ch. 12 - Internal Rate of Return Richins Company produces...Ch. 12 - NPV and IRR, Mutually Exclusive Projects Techno...Ch. 12 - Prob. 31ECh. 12 - Accounting Rate of Return Each of the following...Ch. 12 - Net Present Value Each of the following scenarios...Ch. 12 - Internal Rate of Return Each of the following...Ch. 12 - Net Present Value and Competing Projects Spiro...Ch. 12 - Payback, Accounting Rate of Return, Net Present...Ch. 12 - Prob. 37ECh. 12 - Net Present Value, Basic Concepts Wise Company is...Ch. 12 - Solving for Unknowns Each of the following...Ch. 12 - Net Present Value versus Internal Rate of Return...Ch. 12 - Basic Net Present Value Analysis Jonathan Butler,...Ch. 12 - Net Present Value Analysis Emery Communications...Ch. 12 - Basic Internal Rate of Return Analysis Julianna...Ch. 12 - Net Present Value, Uncertainty Ondi Airlines is...Ch. 12 - Review of Basic Capital Budgeting Procedures Dr....Ch. 12 - Net Present Value and Competing Alternatives...Ch. 12 - Kildare Medical Center, a for-profit hospital, has...Ch. 12 - Foster Company wants to buy a numerically...Ch. 12 - Cost of Capital, Net Present Value Leakam Companys...Ch. 12 - I know that its the thing to do, insisted Pamela...Ch. 12 - Newmarge Products Inc. is evaluating a new design...Ch. 12 - Prob. 52PCh. 12 - Prob. 53PCh. 12 - Manny Carson, certified management accountant and...Ch. 12 - Prob. 55CCh. 12 - Prob. 1MTCCh. 12 - NoFat manufactures one product, olestra, and sells...Ch. 12 - Prob. 3MTCCh. 12 - NoFat manufactures one product, olestra, and sells...Ch. 12 - NoFat manufactures one product, olestra, and sells...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- NoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Assume for this question that NoFat rejected PUs special sales offer because the 2.20 price suggested by PU was too low. In response to the rejection, PU asked NoFat to determine the price at which it would be willing to accept the special sales offer. For its regular sales, NoFat sets prices by marking up variable costs by 10%. If Allyson decides to use NoFats 10% markup pricing method to set the price for PUs special sales offer, a. Calculate the price that NoFat would charge PU for each pound of olestra. b. Calculate the relevant profit that NoFat would earn if it set the special sales price by using its markup pricing method. (Hint: Use the estimate of relevant costs that you calculated in response to Requirement 1b.) c. Explain why NoFat should accept or reject the special sales offer if it uses its markup pricing method to set the special sales price.arrow_forwardNoFat manufactures one product, olestra, and sells it to large potato chip manufacturers as the key ingredient in nonfat snack foods, including Ruffles, Lays, Doritos, and Tostitos brand products. For each of the past 3 years, sales of olestra have been far less than the expected annual volume of 125,000 pounds. Therefore, the company has ended each year with significant unused capacity. Due to a short shelf life, NoFat must sell every pound of olestra that it produces each year. As a result, NoFats controller, Allyson Ashley, has decided to seek out potential special sales offers from other companies. One company, Patterson Union (PU)a toxic waste cleanup companyoffered to buy 10,000 pounds of olestra from NoFat during December for a price of 2.20 per pound. PU discovered through its research that olestra has proven to be very effective in cleaning up toxic waste locations designated as Superfund Sites by the U.S. Environmental Protection Agency. Allyson was excited, noting that This is another way to use our expensive olestra plant! The annual costs incurred by NoFat to produce and sell 100,000 pounds of olestra are as follows: In addition, Allyson met with several of NoFats key production managers and discovered the following information: The special order could be produced without incurring any additional marketing or customer service costs. NoFat owns the aging plant facility that it uses to manufacture olestra. NoFat incurs costs to set up and clean its machines for each production run, or batch, of olestra that it produces. The total setup costs shown in the previous table represent the production of 20 batches during the year. NoFat leases its plant machinery. The lease agreement is negotiated and signed on the first day of each year. NoFat currently leases enough machinery to produce 125,000 pounds of olestra. PU requires that an independent quality team inspects any facility from which it makes purchases. The terms of the special sales offer would require NoFat to bear the 1,000 cost of the inspection team. Assume for this question that Allysons relevant analysis reveals that NoFat would earn a positive relevant profit of 10,000 from the special sale (i.e., the special sales alternative). However, after conducting this traditional, short-term relevant analysis, Allyson wonders whether it might be more profitable over the long term to downsize the company by reducing its manufacturing capacity (i.e., its plant machinery and plant facility). She is aware that downsizing requires a multiyear time horizon because companies usually cannot increase or decrease fixed plant assets every year. Therefore, Allyson has decided to use a 5-year time horizon in her long-term decision analysis. She has identified the following information regarding capacity downsizing (i.e., the downsizing alternative): The plant facility consists of several buildings. If it chooses to downsize its capacity, NoFat can immediately sell one of the buildings to an adjacent business for 30,000. If it chooses to downsize its capacity, NoFats annual lease cost for plant machinery will decrease to 9,000. Therefore, Allyson must choose between these two alternatives: Accept the special sales offer each year and earn a 10,000 relevant profit for each of the next 5 years or reject the special sales offer and downsize as described above. Assume that NoFat pays for all costs with cash. Also, assume a 10% discount rate, a 5-year time horizon, and all cash flows occur at the end of the year. Using an NPV approach to discount future cash flows to present value, a. Calculate the NPV of accepting the special sale with the assumed positive relevant profit of 10,000 per year (i.e., the special sales alternative). b. Calculate the NPV of downsizing capacity as previously described (i.e., the downsizing alternative). c. Based on the NPV of Requirements 5a and 5b, identify and explain which of these two alternatives is best for NoFat to pursue in the long term.arrow_forwardMcGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $895 per set and have a variable cost of $431 per set. The company has spent $200,000 for a marketing study that determined the company will sell 80,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,600 sets per year of its high-priced clubs. The high-priced clubs sell at $1,325 and have variable costs of $645. The company will also increase sales of its cheap clubs by 10,800 sets per year. The cheap clubs sell for $340 and have variable costs of $141 per set. The fixed costs each year will be $14,350,000. The company has also spent $1,500,000 on research and development for the new clubs. The plant and equipment required will cost $43,700,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,625,000 that will be returned at the end of the project. The tax rate is 25…arrow_forward
- McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $915 per set and have a variable cost of $447 per set. The company has spent $240,000 for a marketing study that determined the company will sell 84,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 8,800 sets per year of its high-priced clubs. The high-priced clubs sell at $1,345 and have variable costs of $665. The company will also increase sales of its cheap clubs by 11,200 sets per year. The cheap clubs sell for $356 and have variable costs of $153 per set. The fixed costs each year will be $14,750,000. The company has also spent $1,900,000 on research and development for the new clubs. The plant and equipment required will cost $48,100,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $3,825,000 that will be returned at the end of the project. The tax rate is 24…arrow_forwardInteliSystems manufactures an optical switch that it uses in its final product. InteliSystems incurred the following manufacturing costs when it produced 70,000 units last year as shown in the chart below: InteliSystems does not yet know how many switches it will need this year; however, another company has offered to sell InteliSystems the switch for $8.50 per unit. If InteliSystems buys the switch from the outside supplier, the manufacturing facilities that will be idle cannot be used for any other purpose; yet none of the fixed costs are avoidable. Requirements 1. Given the same cost structure, should InteliSystems make or buy the switch? Show your analysis. 2. Now, assume that InteliSystems can avoid $105,000 of fixed costs a year by outsourcing production. In addition, because sales are increasing, InteliSystems needs 75,000 switches a year rather than 70,000 switches. What should the company do now? 3. Given the last scenario, what is the most InteliSystems would be willing to…arrow_forwardHyperion, Inc. currently sells its latest high-speed colour printer, the Hyper 500, for $371. It plans to lower the price to $318 next year. Its cost of goods sold for the Hyper 500 is $212 per unit, and this year's sales are expected to be 21,000 units. a. Suppose that, if Hyperion drops the price to $318 immediately, it can increase this year's sales by 27% to 26,670 units. What would be the incremental impact on this year's EBIT of such a price drop? b. Suppose that, for each printer sold, Hyperion expects additional sales of $78 per year on ink cartridges for the three years, and Hyperion has a gross profit margin of 61% on ink cartridges. What is the incremental impact on EBIT for the next three years of a price drop this year?arrow_forward
- Crane, Inc., sells two types of water pitchers, plastic and glass. Plastic pitchers cost the company $30 and are sold for $40. Glass pitchers cost $26 and are sold for $47. All other costs are fixed at $280,800 per year. Current sales plans call for 14,000 plastic pitchers and 28,000 glass pitchers to be sold in the coming year. How many pitchers of each type must be sold to break even in the coming year? (Use contribution margin per unit to calculate breakeven units.)arrow_forwardMcGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $965 per set and have a variable cost of $487 per set. The company has spent $340,000 for a marketing study that determined the company will sell 94,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 9,300 sets per year of its high-priced clubs. The high-priced clubs sell at $1,395 and have variable costs of $715. The company will also increase sales of its cheap clubs by 12,200 sets per year. The cheap clubs sell for $396 and have variable costs of $183 per set. The fixed costs each year will be $15,750,000. The company has also spent $2,900,000 on research and development for the new clubs. The plant and equipment required will cost $59,100,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $4,325,000 that will be returned at the end of the project. The tax rate is 24…arrow_forwardJumbo Company uses 1,100 units of an particular item each year. Carrying the item in inventory costs $200 per unit per year. It costs $150 for each order of the chemical. The firm uses the item at a constant rate each year. Calculate the Economic Order Quantity. And assume that Jumbo Company operates 250 days per year. Also assume that its total usage is 1,100 units per year. There is a lead time of 2 days and Jumbo desires to keep a safety stock of 4 units. Calculate the reorder point.arrow_forward
- Waterways is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 50 units per day at a cost of $6.60 per unit, whereas other similar machines are producing twice that much. The units sell for $9.10. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $67,900 and have a 2-year life. Given the information above, what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns? Replacing the machine will result in a of S Waterways keep the old maarrow_forwardMcGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $815 per set and have a variable cost of $375 per set. The company has spent $240,000 for a marketing study that determined the company will sell 67,600 sets per year for seven years. The marketing study also determined that the company will lose sales of 11,800 sets of its high-priced clubs. The high-priced clubs sell at $1,185 and have variable costs of $645. The company will also increase sales of its cheap clubs by 13,800 sets. The cheap clubs sell for $405 and have variable costs of $195 per set. The fixed costs each year will be $10,250,000. The company has also spent $1,900,000 on research and development for the new clubs. The plant and equipment required will cost $38,200,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $2,600,000 that will be returned at the end of the project. The tax rate is 24 percent, and the cost of…arrow_forwardWaterways is considering the replacement of an antiquated machine that has been slowing down production because of breakdowns and added maintenance. The operations manager estimates that this machine still has 2 more years of possible use. The machine produces an average of 50 units per day at a cost of $6.50 per unit, whereas other similar machines are producing twice that much. The units sell for $8.30. Sales are equal to production on these units, and production runs for 260 days each year. The replacement machine would cost $49,800 and have a 2-year life. Given the information above, what are the consequences of Waterways replacing the machine that is slowing down production because of breakdowns? Replacing the machine will result in a net loss of $ . Waterways should keep the old machinarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Cost-Volume-Profit (CVP) Analysis and Break-Even Analysis Step-by-Step, by Mike Werner; Author: Accounting Step by Step;https://www.youtube.com/watch?v=D0MOfse9OWk;License: Standard Youtube License