Question

A company buys a machine for $68,000 that has an expected life of 8 years and no salvage value. The company anticipates a yearly net income of $3,250 after taxes of 36%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?

3.44%.

4.78%.

9.56%.

6.12%.

38.24%.

Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:

Answer 1

Annual net income = 3,250

Investment = 68,000

Accounting rate of return = Annual net income / Investment

= 3,250 / 68,000

= 4.78%

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Revenues = 10,000 bags of Premium Green * 8 per bag + 3,000 bags of Green Deluxe * 6 per bag

= 98,000

Initial costs = Variable costs + Fixed costs

= (10,000 * 1.8) + 10,000

= 28,000

Additional processing cost = 2,000

Total costs = Intial costs + Furthr processing costs

= 28,000 + 2,000 = 30,000

Total groos profit = Revenues - Total costs

= 98,000 - 30,000

= 68,000