1The capital budgeting method that calculates the discount r

1-The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the ________.

none of the above

2-

Sarasota Bicycles has been manufacturing its own wheels for its bikes.  The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of 30% of direct labor cost.  The direct materials and direct labor cost per unit to make the wheels are $3.00 and $3.60 respectively.  Normal production is 200,000 wheels per year.

A supplier offers to make the wheels at a price of $8 each.  If the bicycle company accepts this offer, all variable manufacturing costs will be eliminated, but the $84,000 of fixed manufacturing overhead currently being charged to the wheels will have to be absorbed by other products.

Required:

a.   Prepare an incremental analysis for the decision to make or buy the wheels.

b.   Should Sarasota Bicycles buy the wheels from the outside supplier?  Justify your answer.

3-

Crandle Manufacturers Inc. is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:

                              Variable costs:

                                    Direct materials                        $140

                                    Direct labor                                100

                                    Manufacturing support              105

                                    Marketing costs                           55

                              Fixed costs:

                                    Manufacturing support              175

                                    Marketing costs                           65

                              Total costs                                        640

                              Markup (50%)                                  320

                              Targeted selling price                      $960

For Crandle Manufacturers Inc., what is the minimum acceptable price of this special order?

Solution

Solution 1:

The capital budgeting method that calculates the discount rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows is the \"internal rate of return method\"

Hence 3rd option is correct.

Solution 2a:

Solution 2b:

As buying cost of wheel is higher than making cost of Wheel, therefore Sarasota Bicycle should not buy the wheels from outside supplier.

Solution 3:

As company is having excess capacity, therefore minimum acceptable price for special order = Variable cost to regular customer = $140 + $100 + $105 + $55 = $400 per unit