Question

Soar Incorporated is considering eliminating its mountain bike division, which reported an operating loss for the recent year of $9,000. The division sales for the year were $1,056,000 and the variable costs were $866,000. The fixed costs of the division were $199,000. If the mountain bike division is dropped, 30% of the fixed costs allocated to that division could be eliminated. The impact on operating income for eliminating this business segment would be:

Multiple Choice

$59,700 decrease

$130,300 decrease

$50,700 decrease

$190,000 increase

$190,000 decrease

3.

Granfield Company has a piece of manufacturing equipment with a book value of $41,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $22,200. Granfield can purchase a new machine for $122,000 and receive $22,200 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $19,200 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

Multiple Choice

$23,000 increase

$76,800 decrease

$18,800 decrease

$52,700 increase

$23,000 decrease

4.

When computing payback period, the year in which a capital investment is made is year 1.

True or False

5.

The payback period reflects the amount of time for the investment to generate enough net cash flow to return the cash initially invested to purchase it.

True or False

Answer #1

**Answer(3):**

Cost to buy the new machine = (122000)

Cash received for trading in old machine = 22200

Reduction in variable manufacturing cost = 76800

(19200*4)

**Increase / Decrease in Net Income = (23000)**

**Decrease in Net Income is $23000 hence option "5"is
correct.**

**Answer(4): False.**

The year in which a capital investment is made is year 0 (zero).

**Answer(5): True,**

Payback period is the time that is required to recover the initial cost of an investment. Shorter payback period is good for the company.

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