Question

# TB MC Qu. 07-108 The Talbot Corporation makes wheels that it… The Talbot Corporation makes wheels...

TB MC Qu. 07-108 The Talbot Corporation makes wheels that it…

The Talbot Corporation makes wheels that it uses in the production of bicycles. Talbot's costs to produce 220,000 wheels annually are:

 Direct materials \$44,000 Direct labor \$66,000 Variable manufacturing overhead \$33,000 Fixed manufacturing overhead \$82,000

An outside supplier has offered to sell Talbot similar wheels for \$0.80 per wheel. If the wheels are purchased from the outside supplier, \$37,000 of annual fixed overhead could be avoided and the facilities now being used could be rented to another company for \$93,400 per year. Direct labor is a variable cost.

If Talbot chooses to buy the wheel from the outside supplier, then annual net operating income would:

Noreen 4e Recheck 2017-16-03

decrease by \$12,000

increase by \$44,000

increase by \$81,400

increase by \$37,600

(Ignore income taxes in this problem.) Lajeunesse Corporation uses a discount rate of 16% in its capital budgeting. Partial analysis of an investment in automated equipment with a useful life of 8 years has thus far yielded a net present value of \$(98,250). This analysis did not include any estimates of the intangible benefits of automating this process nor did it include any estimate of the salvage value of the equipment.

Click here to view Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using tables.

Ignoring any salvage value, to the nearest whole dollar how large would the additional cash flow per year from the intangible benefits have to be to make the investment in the automated equipment financially attractive?

rev: 12_19_2017_QC_CS-112654

\$22,617

\$6,246

\$14,565

\$98,250

Ans.

Total costs avoided when purchased from outside

= Direct Material + Direct Labor + Variable Manufacturing Overhead

= \$44,000 + \$66,000 + \$33,000 = \$143,000

Other savings = Reduction in Fixed Cost + Rental Income = \$37,000 + \$93,400 =\$ 130,400

Therefore, total savings = \$143,000 + \$130,400 =\$ 273,400

Total cost of purchasing from outside supplier = \$0.80 * 220,000 = \$176,000

Therefore, increase in operating income = \$273,400 - \$176,000 = \$ 97,400

Correct ans is increase by \$ 97,400.

This option is not given in question so all the options are not correct.

2.

Minimum annual cash flows from the intangible benefits

= Net present value to be offset ÷ Present value factor

= \$98,250 / 4.344 = \$ 22,617

Discounting Factor = PVAF ( 16% , 8 ) = 4.344

So the correct option is A.

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