Question

1. Bronson Ltd produces financial calculators. The production capacity is 35,000 calculators, and the company is currently operating at 80% capacity. Variable manufacturing costs are $12 per unit. Fixed manufacturing costs are $420,000. The calculators are normally sold to Computek Ltd at $28 each. Bronson has an offer from Office Equipment Ltd (a foreign wholesaler) to purchase an additional 6,000 calculators at $14 per unit. The delivery costs for this order would be $13,000. What is the available capacity of Bronson Ltd before accepting this order?

   	a.	28 000 units
   	b.	7 000 units
   	c.	35 000 units
   	d.	6 000 units
   	e.	Cannot be determined with the data provided

2. Carlon Ltd currently manufactures 10,000 compressors per year in one of its production lines. The variable costs per unit are $50 and the total fixed costs of this production line are $250,000 per year.

   Robson Ltd has contacted Carlon Ltd with an offer to sell to it 10,000 compressors for $48 each. If the compressors are purchased from Carlon Ltd a cost of $16,000 per year would be incurred for quality control. Assume the fixed costs are unavoidable. Should Carlon Ltd make or buy the compressors? Why?

   	a.	Buy, because profit would increase by $4,000
   	b.	Make, because if buy the compressors, the fixed cost increased by $16,000
   	c.	Make, because if buy the compressors, there is no reduction in the current fixed costs
   	d.	Buy, because the current fixed costs will be reduced by $16,000
   	e.	Make, because if buy the compressors, profit would decrease by $4,000

3. Which of the following statements regarding the Internal rate of Return (IRR) is TRUE:

   	a.	If the internal rate of return is lower than the discount rate the payback period is lower than the required payback period
   	b.	A preferred investment is the investment in which the discount rate is higher than the internal rate of return
   	c.	If the internal rate of return is higher than the discount rate the net present value is negative
   	d.	None of the options is correct
   	e.	If the internal rate of return is the discount rate the net present value is equal to zero

Answer 1

Available capacity = 35000*20% = 7000 units

i.e. b

Benefit of buying = Avoidable cost of making – Purchase cost – Additional cost of buying

= 50*10,000 – 10,000*48-16,000

= $4,000

The answer is

a.

Buy, because profit would increase by $4,000

The answer is e.

If the internal rate of return is the discount rate the net present value is equal to zero

If IRR is higher than discount rate, NPV will be positive

A preferred investment is one for which discount rate is lower than the IRR