Continuing Case Problem: Titan Pipe, Inc. Part C Titan Pipe uses very stringent standard costs in evaluating its manufacturing efficiency. However, Scott Balmer, the cost accountant and budget analyst, believes that these standards are not "ideal" at this point but the management is working toward that as a performance goal. (For simplicity, we assume only one product was manufactured in 2018 by Titan Pipe). The company has used the following standard in 2018 Direct material: 3 pounds per unit a $4 per pound-$12 per unit Direct labor: 2 hours per unit $8 per hour - $16 per unit Variable manufacturing overhead: 2 hours per unit @ $5 per hour- $10 per unit Titan Pipe's planning budget was prepared based on the standard costs assuming that 850 units of its product can be sold at the unit price of $70 in 2018. In addition, marketing & admin costs (variable) are assumed to be 15% of sales revenue and the manufacturing fixed costs are $10,780 in the planning budget Actual production figures for 2018 are given below 600 units Direct material purchased and used (3,000 pounds)......... $11,400 Variable manufacturing overhead cost incurred..... . . . . . . . . $5,720 The company applies variable manufacturing overhead to products on the basis of standard direct labor- hours. Please find (i) activity variance, (ii) revenue (or sales price) variance, (iii) spending variance of Mishawaka company's revenue and cost items In addition, please calculate (iv) price variance and (v) quantity variance included in the manufacturing cost's spending variance. In your answers, please clearly identify whether the variance is favorable (F) or unfavorable (U) for Mishawaka's profitability. Titan Pipe Inc. Profit Variance Analysis Actual Manufacturing Variance MKT & Admin Variance Quantity Price (Rate) (Efficiency) Flexible Budget Activity Variance Revenue Variance Planning Budget 2 Variance Variance Sales Volume (units) Sales Revenue Less 600 850 $ 51,000 Variable Costs Direct Material 11,400 nding Var Price Var Quantity Var Direct Labor nding Var 9,240 Price Var Quantity Var Variable Overhead 5,720 Spending Var. Price Var Quantity Var Spending Var Marketing&Admin Total Variable Costs 10,200 56,300 14,440 Contribution Margin Less Fixed Costs Manufacturing 9,500 ending Var 10,780 Operating Profit 4,940 Titan Pipe puts much emphasis on cash flow when it plans for capital investments. Considering the current market condition, the company chose the company's discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Titan Pipe then uses different methods to determine the best decisions for making capital outlays In May 2019, the company is considering buying five new steel pipe machines to replace the machines it now has. The new machines are faster, cost less to run, provide for more accurate measurement, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old machines are working just fine, but they do require considerable maintenance. The machine operators are very familiar with the old machines and would need to learn some new skills to use the new machines The following information is available to use in deciding whether to purchase the new steel pipe machines: Old Machines New Machines Purchase cost (when new) Salvage value (now) Investment in major overhaul need in year 255,000 Salvage value (in 8 years) Remaining life Net cash flow generated each year $ 90,000 200,000 S 42,000 S 15,000 8 years $30,425 S43,900 years Evaluate in the following ways whether to purchase the new equipment or to use after overhauling the old machines (Hint: For the old machines, initial investment is the overhaul costs in year 2. For the new machines, subtract the salvage value (now) of old machine from new machines' purchase costs) (vi) Using the net present value method for buying new or keeping old machines Please show timeline and expected cash flow for each year Cash Inflow Cash Outflow Net Cash Flow Year 0 Year1 Year 2 (Now) Year 7 Year 8 Year 6 Year 5 Year 4 Year 3 NPV-? (vii) Using the payback method for each choice (Hint: For the old machine, evaluate the payback of an overhaul) (vii Comparing the profitability index for each choice. V111 (ix) Compare the internal rate of return for each choice to the required 8% discount rate