The bouncy house Inc. sells flotation devices for windsurfers. The shop currently sells 40,000 units a month for $16 each, has variable costs of $12 per unit, and fixed costs of $150,000. The bouncy house is considering increasing the price of its units to $18 per unit. This will not affect costs, but demand is expected to drop 10%. Should The bouncy house increase the price of its product?
1. Yes; profit will increase $56,000.
2. Yes, profit will increase $10,000.
3. No, profit will decrease $10,000.
4. No, profit will decrease $56,000.
Cosmopolitan Manufacturing makes designer home decorating items. The company is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net cash flows of $136,300. The equipment will have an initial cost of $470,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $8,000, what is the annual net income? Ignore income taxes.
1. $128,300
2. $43,900
3. $228,700
4. $144,300
Peter Pan Costume Shop provides theatrical and holiday costumes
for the community. The shop is considering the purchase of a new
piece of equipment, which would have an initial cost of $530,000, a
7-year life, and $150,000 salvage value. The increase in cash flow
each year of the equipment's life would be as follows:
| Year 1 | $ |
109,000 |
| Year 2 | $ |
101,000 |
| Year 3 | $ |
99,000 |
| Year 4 | $ |
88,000 |
| Year 5 | $ |
85,000 |
| Year 6 | $ |
80,000 |
| Year 7 | $ |
74,000 |
What is the payback period?
1. 5.14 years
2. 5.60 years
3. 5.63 years
4. 5.81 years
Ques1
| Units sold | 40,000 | 36,000 |
| Sales | 640,000 | 648,000 |
| Less: variable cost | 480,000 | 432,000 |
| Contribution | 160,000 | 216,000 |
| Less: Fixed cost | 150,000 | 150,000 |
| Profit | 10,000 | 66,000 |
Profit has increase by 56,000 [66,000 - 10,000]
Ques 2
| Annual cash flow [136,300 x 5] | 681,500 |
| Add: Salvage value | 8,000 |
| Less: Initial investment | (470,000) |
| Total benefit | 219,500 |
| Benefit p.a. [219,500/ 5] | 43,900 |
Ques 3
| Year | Cash flow | Cumulative cash flow |
| 1 | 109,000 | 109,000 |
| 2 | 101,000 | 210,000 |
| 3 | 99,000 | 309,000 |
| 4 | 88,000 | 397,000 |
| 5 | 85,000 | 482,000 |
| 6 | 80,000 | 562,000 |
| 7 | 74,000 | 636,000 |
Payback period = 5years + [(530,000 - 482,000)/ 80,000]
= 5.60years
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