You have been appointed manager of an operating division of The Bluth Company, a producer of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You have been appointed manager of an operating division of The Bluth Company, a producer of frozen bananas. On January 1 of this year, you invested $1 million in new banana freezing equipment. At that time, your expected income statement for this year was as follows: Sales revenues 1,800,000 Operating costs: Variable (cash expenditures) Fixed (cash expenditures) Equipment depreciation Other depreciation 225,000 750,000 200,000 125,000 Total operating costs 1,300,000 500,000 Operating profit (before tax) On November 15 of this year, a sales representative for the Sitwell Company approaches you. Sitwell wants to rent to your division a new banana freezing machine that would be installed on December 31 for an annual rental charge of $300,000, and would be available for use on January 1st of next year. The new equipment would enable you to increase your division's annual revenue by 10 percent. The more efficient machine would decrease fixed cash expenditures by 5 percent. You will have to write off the cost of the current banana freezing equipment this year because it has no salvage value. Equipment depreciation shown in the income statement is for the current banana freezing equipment. Ignore taxes and any effects on operations on the day of installation of the new machine. Assume that the data given in your expected income statement are the actual amounts for this year and next year if the current equipment is kept. Also, assume that the variable cost per unit does not change. Required: a) What is the difference in this year's divisional operating profit if the new machine is rented and installed on December 31 of this year? For this question, please assume that any write-offs from retiring the old machine are recognized in this year (on Dec. 31), and are not deferred until next year. Also, please assume that any depreciation that would have been incurred this year from the old machine is avoided, should it be replaced. b) What would be the effect on next year's divisional operating profit if the new machine is rented and installed on December 31 of this year? c) Would you rent the new machine? Please consider both an income and cash flow perspective. You have been appointed manager of an operating division of The Bluth Company, a producer of frozen bananas. On January 1 of this year, you invested $1 million in new banana freezing equipment. At that time, your expected income statement for this year was as follows: Sales revenues 1,800,000 Operating costs: Variable (cash expenditures) Fixed (cash expenditures) Equipment depreciation Other depreciation 225,000 750,000 200,000 125,000 Total operating costs 1,300,000 500,000 Operating profit (before tax) On November 15 of this year, a sales representative for the Sitwell Company approaches you. Sitwell wants to rent to your division a new banana freezing machine that would be installed on December 31 for an annual rental charge of $300,000, and would be available for use on January 1st of next year. The new equipment would enable you to increase your division's annual revenue by 10 percent. The more efficient machine would decrease fixed cash expenditures by 5 percent. You will have to write off the cost of the current banana freezing equipment this year because it has no salvage value. Equipment depreciation shown in the income statement is for the current banana freezing equipment. Ignore taxes and any effects on operations on the day of installation of the new machine. Assume that the data given in your expected income statement are the actual amounts for this year and next year if the current equipment is kept. Also, assume that the variable cost per unit does not change. Required: a) What is the difference in this year's divisional operating profit if the new machine is rented and installed on December 31 of this year? For this question, please assume that any write-offs from retiring the old machine are recognized in this year (on Dec. 31), and are not deferred until next year. Also, please assume that any depreciation that would have been incurred this year from the old machine is avoided, should it be replaced. b) What would be the effect on next year's divisional operating profit if the new machine is rented and installed on December 31 of this year? c) Would you rent the new machine? Please consider both an income and cash flow perspective.
Expert Answer:
Answer rating: 100% (QA)
To calculate the difference in this years divisional operating profit if the new machine is rented and installed on December 31 of this year we need to compare the operating profit with and without th... View the full answer
Related Book For
Modern Advanced Accounting In Canada
ISBN: 9781259066481
7th Edition
Authors: Hilton Murray, Herauf Darrell
Posted Date:
Students also viewed these accounting questions
-
You were appointed the manager of Drive Systems Division (DSD) at Tunes2Go, a manufacturer of portable music devices using the latest developments in hard drive technology, on December 15 last year....
-
You were appointed the manager of Storage Solutions Section (S3) at Milbank Technologies, a manufacturer of mobile computing parts and accessories late last year. S3 manufactures a drive assembly for...
-
You were appointed the manager of Storage Solutions Section (S3) at Milbank Technologies, a manufacturer of mobile computing parts and accessories late last year. S3 manufactures a drive assembly for...
-
Blackmon Company provides locator services to the city transportation departments. Blackmons service involves installing a dedicated hardware transmitter in each city bus. This transmitter provides...
-
What is a convertible currency? What problems arise when a multinational company operates in a country whose currency is not convertible?
-
A flow of moist air at 45oC, 10% relative humidity with a flow rate of 0.2 kg/s dry air is mixed with a flow of moist air at 25oC, and absolute humidity of w = 0.018 with a rate of 0.3 kg/s dry air....
-
Why can damage to one side of the cerebrum affect the functioning of the opposite side of the body?
-
The Olson Machine Company manufactures small and large milling machines. Selling prices of these machines range from $35,000 to $200,000. During the five-month period from August 1, 2007 through...
-
1) You have to propose a Blockchain project which is zakat management system . project that the group is going to develop 2) You must state in the Introduction the: a. The problems that exists in the...
-
Here is a simplified diagram of a RF front end (power and control signals are not shown). 1. What kind of a system is it? What are the RF measurements you would use to characterize it and compare it...
-
Give me the tricks to remember vitamins, sources, and their diseases?
-
On May 31 of the current year, the assets and liabilities of Riser, Inc. are as follows: Cash $14,800; Accounts Receivable, $6,950; Supplies, $500; Equipment, $11,550; Accounts Payable, $8,850. What...
-
(a) Discuss how the number of batteries in series affects the current in the circuit. Describe the evidence that supports this conclusion. (b) Discuss how the number of bulbs in series affects the...
-
On 1/1/2015, Choco paid $150,000 to acquire 40% of the voting common stock of Cookie. Following is the financial information about Cookie. Book value of assets $450,000 Book value of liabilities...
-
The following information is available for Sylte, Inc. for the year ended December 31, 2016: Materials Inventory, January 177,350 Materials Inventory, December 3195,550 Work in Process Inventory,...
-
Apply that same markup percentage to determine what selling price the company would set for its new optimizing service. How many customers will need to purchase this service from Splish for the...
-
1. Assume processing times follow a normal distribution with a mean 99 min and standard deviation 11 min. Using the Empirical Rule, what percent of processing times take 88 minutes or less? Question...
-
The purpose of this case is to come up with a contingency plan[s] in order to sustain the program Move With Me, a program that serves thousands of community members throughout Lower Manhattan. The...
-
The July 31, Year 3, balance sheets of two companies that are parties to a business combination are as follows: In addition to the property, plant, and equipment identified above, Red Corp....
-
When a company sells equipment that had previously been remeasured to fair value under the revaluation model of IAS 16, it transfers the revaluation surplus from accumulated other comprehensive...
-
Long Life Enterprises was a well-established Toronto-based company engaged in the importation and wholesale marketing of specialty grocery items originating in various countries of the western...
-
Novo Nordisk is a Denmark-based biopharmaceutical company with a focus on diabetes drugs. The company provides detailed disclosure of revenue along geographic, business segment, and product lines....
-
Use the data in Example 1 on Novo Nordisk to answer the following questions: i. Xiaoping Wu is an equity analyst covering European pharmaceutical companies for his clients in China. Wu projects that...
-
Walgreens and Rite Aid are two of the largest retail drugstore chains in the United States. For both companies, around two-thirds of their sales are from prescription pharmaceuticals, with the...
Study smarter with the SolutionInn App