2) What is the cost of goods manufactured per unit for new component in 2012?



3) What is the incremental after-tax net income for the business line associated with new component in 2012? .



4) What is the net-present value of introducing the new component from the firm's perspective? .(Please indicate negative with a dash "-")



5) Is it in the best interest of the firm to take the project?



6) What is the net present value of introducing the new component from Sven's perspective? (Please indicate a negative with a dash "-") Remember that Sven is paid a bonus of 10% of after-tax net income and Sven is interested only in his cash compensation over 2012 and 2013.

Also, assume that Sven's discount rate is 12% and his total compensation declines by 10% of after-tax net income if the net income is negative.



7) Is it in the best interest of Sven to take the project?



8) Would Sven take the project if he was required to produce only the units that would be sold? That is, would the NPV of the project from Sven's perspective be positive if production was equal to sales?



9) What would happen to the NPV of the project from the perspective of Vandelay Industries if they leased the equipment for $85,000 a year making those lease payments at the end of each year? (Assume all other facts remain the same).



10) What would happen to the net income over the two-year life of the project from the perspective of Vandelay Industries if they leased the equipment for $85,000 a year making those lease payments at the end of each year?

Transcribed Image Text:

Sven Nys is a divisional manager of Vandelay Industries. Sven is considering introducing a new business to the existing product line. Introducing the new component would require the purchase of new equipment. The equipment would cost $170,000, last for 2 years, and have zero salvage value at the end of the two years. The new product will also require hiring a new employee at an annual wage of $30,000/year. This employee manufactures the new component. Sven estimates that other fixed overhead associated with the new component will be $95,000 a year. The new component consumes $20/unit of direct materials. The production volume, sales, and marketing costs for this new component in each of the two years that the new component would be produced are as follows: Year Production (units) Sales (units) Selling Price/u Marketing Cost 2012 1,800 1,200 $150 $10,000 2013 1,700 2,300 $150 $10.000 Vandelay Industries uses full absorption costing for both financial reporting and tax purposes. Fixed overhead is allocated on the basis of units produced. Vandelay Industries uses straight-line depreciation for all production machinery. Vandelay Industries uses the LIFO (last in, first out) inventory method. Vandelay Industries uses a 12% discount rate for all net present value calculations and faces a tax rate of 30%. The company must pay for the machine in cash upon delivery. For purposes of the analysis, assume that all other expenses associated with producing the new component will be paid in cash at the end of the year in which they occur. Also, assume that all sales of the new component will be received in cash at the end of the year in which they occur. Assume that all units produced in the year are complete and the ending balance of WIP (work-in-process) is 0. Sven's compensation is a base salary (regardless of whether the firm takes the project) plus a bonus of 10% of after-tax net income, which is paid in cash at the end of the year. Ignore the bonus when calculating the after-tax net income below. Sven Nys is a divisional manager of Vandelay Industries. Sven is considering introducing a new business to the existing product line. Introducing the new component would require the purchase of new equipment. The equipment would cost $170,000, last for 2 years, and have zero salvage value at the end of the two years. The new product will also require hiring a new employee at an annual wage of $30,000/year. This employee manufactures the new component. Sven estimates that other fixed overhead associated with the new component will be $95,000 a year. The new component consumes $20/unit of direct materials. The production volume, sales, and marketing costs for this new component in each of the two years that the new component would be produced are as follows: Year Production (units) Sales (units) Selling Price/u Marketing Cost 2012 1,800 1,200 $150 $10,000 2013 1,700 2,300 $150 $10.000 Vandelay Industries uses full absorption costing for both financial reporting and tax purposes. Fixed overhead is allocated on the basis of units produced. Vandelay Industries uses straight-line depreciation for all production machinery. Vandelay Industries uses the LIFO (last in, first out) inventory method. Vandelay Industries uses a 12% discount rate for all net present value calculations and faces a tax rate of 30%. The company must pay for the machine in cash upon delivery. For purposes of the analysis, assume that all other expenses associated with producing the new component will be paid in cash at the end of the year in which they occur. Also, assume that all sales of the new component will be received in cash at the end of the year in which they occur. Assume that all units produced in the year are complete and the ending balance of WIP (work-in-process) is 0. Sven's compensation is a base salary (regardless of whether the firm takes the project) plus a bonus of 10% of after-tax net income, which is paid in cash at the end of the year. Ignore the bonus when calculating the after-tax net income below.

Answer rating: 100% (QA)

2 The cost of goods manufactured per unit for the new component in 2012 can be calculated as follows Direct materials per unit 20 Direct labor per unit 300001800 units 1667 Variable overhead per unit ... View the full answer