Norman Company has an opportunity to produce and sell a revolutionary new smoke detector for homes,...
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Norman Company has an opportunity to produce and sell a revolutionary new smoke detector for homes, and the project would expect to last for 6 years. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential: 1. New equipment would have to be acquired to produce the smoke detector. The equipment would cost $1,200,000 and be usable for 6 years. After 6 years, it would have a resale value at $120,000. Over the 6-year period, annual depreciation would be $180,000. 2. Production and sales of the smoke detector would require a working capital investment of $240,000 to finance account receivable, inventories, and day-to-day cash needs. This working capital will be locked for the whole project duration, and would only be released for use elsewhere after 6 years. 3. An extensive marketing study projects sales in units over the next 6 years as follows: Year 1 2 3 4-6 Sales in Units 8,000 12,000 4. The smoke detectors would sell for $120 each, and total variable costs would be $64 per unit. 5. The company is required to advertise heavily during the early years of sales. The advertising program follows: 1 2 14,000 18,000 Year Annual advertising (S) 240,000 120,000 60,000 40,000 3-4 5-6 6. Annual fixed costs (excluding depreciation indicated in 1. above) for salaries, insurance ete would totaled $220,000 per year. Norman Company has an opportunity to produce and sell a revolutionary new smoke detector for homes, and the project would expect to last for 6 years. To determine whether this would be a profitable venture, the company has gathered the following data on probable costs and market potential: 1. New equipment would have to be acquired to produce the smoke detector. The equipment would cost $1,200,000 and be usable for 6 years. After 6 years, it would have a resale value at $120,000. Over the 6-year period, annual depreciation would be $180,000. 2. Production and sales of the smoke detector would require a working capital investment of $240,000 to finance account receivable, inventories, and day-to-day cash needs. This working capital will be locked for the whole project duration, and would only be released for use elsewhere after 6 years. 3. An extensive marketing study projects sales in units over the next 6 years as follows: Year 1 2 3 4-6 Sales in Units 8,000 12,000 4. The smoke detectors would sell for $120 each, and total variable costs would be $64 per unit. 5. The company is required to advertise heavily during the early years of sales. The advertising program follows: 1 2 14,000 18,000 Year Annual advertising (S) 240,000 120,000 60,000 40,000 3-4 5-6 6. Annual fixed costs (excluding depreciation indicated in 1. above) for salaries, insurance ete would totaled $220,000 per year.
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Answer rating: 100% (QA)
To determine the profitability of the smoke detector venture for Norman Company we need to calculate the annual revenues costs and the net cash flow f... View the full answer
Related Book For
Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
Posted Date:
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