Question

1. Chang Industries has 2,000 defective units of product that have already cost $14 each to produce. A salvage company will purchase the defective units as they are for $7 each. Chang's production manager reports that the defects can be corrected for $15 per unit, enabling them to be sold at their regular market price of $21. Chang should:

1. Scrap the units.
2. Sell the units to the salvage company for $7 per unit.
3. Sell the units as they are because repairing them will cause their total cost to exceed their selling price.
4. Sell 1,000 units to the salvage company and repair the remainder.
5. Correct the defects and sell the units at the regular price.

2) Brilliant Inc. reported the following results from the sale of 24,000 units of IT-54:

Sales $528,000

Variable manufacturing costs 288,000

Fixed manufacturing costs 120,000

Variable selling costs  @$2 per unit: 48,000

Extra Company has offered to purchase 3,000 IT-54s at $16 each. Brilliant has no available capacity, and the president is in favor of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is opposed because the "full cost" of production is $17. Which of the following correctly notes the change in income if the special order is accepted?

1. 12,000 decrease
2. 3,000 increase
3. None of the answers is correct
4. 12,000 increase
5. 3,000 decrease

Krate Inc. is considering a $600,000 investment in new equipment that is anticipated to produce the following net cash inflows:

Year                                         Net Cash Inflows

1. 20,000
2. 50,000
3. 110,000
4. 80,000
5. 120,000

If cash flows occur evenly throughout the year, the equipment’s payback period is

1. 4 years, 2 months
2. 4 years, 3 months
3. Some other period of time not noted
4. 4 years, 4 months
5. 5 years

Answer 1

1. Manufacturing cost of product $14 is non relevant as it is a sunk cost which is already incurred.

Chang should:-

b. Sell the units to the salvage company for $7 per unit

If the company will repair the product and sell at their regular market price then profit will be $6 ($21-$15)

So, it is better to sell to salvage in $7

2. So, the company has accepted the offer, the change in income will be d. $12,000 increase

Explanation:-

Fixed manufacturing costs is non relevant for this offer because it will remain same whether this offer is accepted or not.

Variable selling costs will not be incurred for this offer, so it is also a non relevant costs.

Plant manager is wrong because $17 is not the cost of production for this offer.

Cost of production for this offer is $12 ($288,000/24,000)

So, there is an increase in income by $12,000

Profit = $16 - $12 = $4 per unit

Total profit = $4 * 3,000 units = $12,000

3. Payback period means that period in which the investment is recovered back.

In this case answer will be option c. Some other period of time not noted.

Net cash inflows which are provided is $380,000. So, the investment of $600,000 is not recovered in these 5 years.