Question

3. Charlie Corporation is considering buying a new donut maker. This machine will replace an old donut maker that still has a useful life of 6 years. The new machine will cost $3,600 a year to operate, as opposed to the old machine, which costs $3,800 per year to operate. Also, because of increased capacity, an additional 20,000 donuts a year can be produced. The company makes a contribution margin of $0.10 per donut. The old machine can be sold for $7,000 and the new machine costs $30,000. The incremental annual net cash inflows provided by the new machine would be (Ignore income taxes.): A) $2,200 B) $200 C) $2,000 D) $5,000

Answer 1

1) Solution: 2,200

Explanation:

Incremental annual contribution margin (20,000 * $0.10)	2,000
Annual operating cost savings ($3,800 - $3,600)	200
Incremental annual net cash inflows	2,200

2) Solution: $0.25

Explanation:

Spending variance: [Flexible budget - Actual results]

$245 F = [Variable cost per direct labor-hour] * [24,100 direct labor-hours] - $5,780

$6,025 = Variable cost per direct labor-hour * 24,100 direct labor-hours

$6,025 / 24,100 = Variable cost per direct labor-hour

$0.25 = Variable cost per direct labor-hour