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Decisions

QUESTIONS

1.

Capital budgeting is the process of planning the acquisition or sale of plant assets.

2.

Capital budgeting decisions are risky because: (1) the outcomes are uncertain, (2)

large amounts of money are usually involved, (3) the investment involves a longterm commitment, and (4) the decisions may be difficult or impossible to reverse.

3.

Capital budgeting decisions require careful analysis because they are generally the

most difficult and risky decisions that management faces.

4.

The payback period ignores both the present value of cash flows and all cash flows

after the payback period.

5.

risk that the investment might not be profitable over the long run. As a result of

acquiring assets with shorter payback periods, a company is both less vulnerable to

inaccurate long-term predictions of future cash flows and is less subject to changes

in external factors that might adversely affect the investment project.

6.

If net income is earned evenly throughout each year and straight-line depreciation is

used, the average investment is the original cost plus the salvage value, divided by

2. For this machine, the average investment equals $110,000, computed as

($200,000 + $20,000)/ 2.

7.

When the present value of expected net cash flows, discounted at 10%, exceeds the

amount invested it indicates that the expected rate of return on the investment is

greater than 10 percent. On the other hand, when the present value of expected net

cash flows, discounted at 10%, is less than the amount invested it indicates that the

expected rate of return on the investment is less than 10 percent.

8.

Receiving $100 one year from today is worth less than $100 today because a return

can be earned on a $100 investment during the year. If $100 to be received one year

from today is discounted at 12%, the present value is $100 x 0.8929 = $89.29 (the

present value factor is taken from Table B.1). This means that if $89.29 is invested at

12% for one year, it will be worth $100 at the end of that year. This amount also can

be found by dividing $100 by 1.12.

Solutions Manual, Chapter 25

95

9.

The return on an investment must cover the interest and provide an additional profit

to reward the company for risk. For example, if money can be borrowed at 10%, a

required after-tax return of about 15% is usually acceptable for companies with

average risk projects.

10. Accelerated depreciation produces larger tax deductions and lower tax payments in

the early years of an assets life compared with straight-line depreciation. This is

because the larger depreciation expense for accelerated methods in earlier years

reduces both taxable income and taxes paid in the short run (in the long run there is

no difference except for the time value of money). Therefore, net cash inflows will

be larger in earlier years, which will increase the present value of future cash flows.

11. An out-of-pocket cost requires a current outlay of cash. An opportunity cost is the

potential benefit that is lost by choosing an alternative course of action.

Opportunity costs are not recorded in the accounting records.

12. Sunk costs are irrelevant because they remain the same whether the product is sold

in its present condition or processed further.

13. There are virtually no incremental costs associated with shipping the additional

dozen donuts. The companys employees would not receive any additional

compensation for handling one additional dozen, no ground transportation costs

would be incurred for picking it up at the senders location, additional fuel costs for

transportation would be minuscule, and no additional transportation costs would be

incurred at the destination.

14. Tastykake management could use one of the following common methods to evaluate

the potential oven investment: payback period, accounting rate of return, net

present value, or internal rate of return.

15. The company might be willing to sell the units internationally if (a) the company has

excess capacity, (b) the incremental costs of manufacturing and selling the units are

less than $15 each, which it appears to be at $13 variable cost per unit (c) the

international sales wont reduce domestic sales, and (d) the international buyer is

unwilling to pay more than $15.

96

QUICK STUDIES

Quick Study 25-1 (10 minutes)

1. If all else is equal, Investment A would be preferred over Investment B

because of As shorter payback period.

2. However, if the investments are different, then there are at least four

reasons why Investment B might be preferred over Investment A:

i. The present value of cash flows from Investment B might greatly exceed

the present value of cash flows from Investment A.

ii. Investment B might be expected to have total cash flows significantly in

excess of the total cash flows returned by Investment A.

iii. Risk of Investment B might be much less than the risk of Investment A.

iv. The growth potential of Investment B might be much greater than that

for Investment A.

Payback period of Investment = $18,000 / $6,000 = 3.0 years

Quick Study 25-3 (15 minutes)

Net present value of investment*

Present value of seven $20,000 cash inflows (20,000 x 4.8684)...............

$ 97,368

Present value of $12,000 at end of seven years (12,000 x 0.5132)........... 6,158

Present value of cash inflows.....................................................................103,526

Less immediate cash outflow......................................................................100,000

Net present value..........................................................................................

$ 3,526

*Present value factors from tables at the end of Appendix B:

4.8684 = Present value of an annuity of 1, where n = 7, i = 10% (from Table B.3)

0.5132 = Present value of 1, where n = 7, i = 10% (from Table B.1)

Accounting rate of return = $1,300 / [($30,000 + 4,000)/2] = 7.65%

Solutions Manual, Chapter 25

97

X

Contribution margin per unit...................................................

$10.00

Production hours per unit....................................................... 1/2

Contribution margin per production hour..............................

$20.00

Y

$ 8.00

1/3

$24.00

Sales Mix Analysis: Since Memory Lane can sell all it can produce of both

products, it should allocate all of its production capacity to Product Y. This is

because Y yields a $24 contribution margin per production hour (versus $20 for X).

Incremental cost analysis

Costs of purchasing

Cost to purchase Product B....................................................$5.00

Revenue loss from reduced price ($9 - $8)............................ 1.00

Total cost................................................................................... 6.00

Savings of purchasing

Costs eliminated if Product B purchased ($5 of $6)............. 5.00

Net incremental cost of purchasing Product B.....................$1.00

Analysis: Mo-Kan Co. should continue to manufacture and sell Product A.

Quick Study 25-7 (15 minutes)

Year

Cash flows

Present value

of 1 at 10%

Present value of

cash flows

Cumulative

present value of

cash flows

$(100,000)

1.0000

$(100,000)

$(100,000)

35,000

0.9091

31,819

(68,181)

35,000

0.8264

28,924

( 39,257)

35,000

0.7513

26,296

( 12,961)

35.000

0.6830

23,905

10,944

35,000

0.6209

21,732

32,676

The break-even time point occurs in the 7th month of the 4th year [computed

as ($12,961 / $23,905) x 12 = 6.5 months]. Therefore, a reasonable estimate

would be approximately 3.5 years (or 3 7/12 years) for break-even time.

McGraw-Hill Companies, Inc., 2005

98

EXERCISES

Exercise 25-1 (20 minutes)

a.

Payback period =

Cost of investment

Annual net cash flow

$260,000

= $125,000 = 2.08 years

where

Annual after-tax income.............................................

$ 75,000

Plus depreciation*.......................................................

50,000

Annual net cash flow..................................................

$125,000

*Annual depreciation =

$260,000 - $10,000

5

= $50,000

b.

Payback period =

Cost of investment

$190,000

Annual net cash flow = $50,000

= 3.8 years

where

Annual after-tax income.............................................

$ 30,000

Plus depreciation*.......................................................

20,000

Annual net cash flow..................................................

$ 50,000

*Annual depreciation =

$190,000 - $10,000

9

= $20,000

Annual Net

Cash Flows

Year 1.............................

$30,000

Year 2.............................

20,000

Year 3.............................

30,000

Year 4.............................

60,000

Year 5.............................

19,000

Cumulative

Cash Flows

$ 30,000

50,000

80,000

140,000

159,000

Paid back in years 1-3...................... 80,000

Paid back in year 4........................... $10,000

Continued on next page.

Solutions Manual, Chapter 25

99

Part of year =

Net cash flow in year 4

$10,000

= $60,000

= 0.167

Exercise 25-3 (30 minutes)

COMPUTATION OF ANNUAL DEPRECIATION EXPENSE

Annual Depr.

Beginning

(40% of

Accum. Depr.

Year

Book Value

Book Value)

at Year-End

1

$300,000

$120,000

$ 120,000

2

180,000

72,000

192,000

3

108,000

43,200

235,200

4

64,800

14,800

250,000

5

50,000

0

250,000

Ending

Book Value

$180,000

108,000

64,800

50,000

50,000

Year 1

Year 2

Year 3

Year 4

Year 5

Net

Income

$ 20,000

50,000

100,000

75,000

200,000

Net Cash

Flow

$ 140,000

122,000

143,200

89,800

200,000

Depreciation

$120,000

72,000

43,200

14,800

0

Cost of machine.....................................

Paid back in years 1 and 2....................

Paid back in year 3................................

Net cash flows in year 3

Cumulative

Cash Flow

$ 140,000

262,000

405,200

495,000

695,000

$300,000

262,000

$ 38,000

$38,000

$143,200

= 0.265

100

$500,000 + $100,000

Average investment =

= $300,000

2

Accounting rate of return = $15,000 / $300,000 = 5%

COMPUTING NET CASH FLOWS FROM NET INCOME

Net income

Sales.............................................................$150,000

Cash flows

$150,000

80,000

Depreciation................................................. 20,000

Selling and administrative.......................... 15,000

15,000

Income taxes (30%)..................................... 10,500

10,500

Net cash flows.............................................

1. Payback period =

$240,000

$44,500

$ 44,500

= 5.39 years

$24,500

$120,000*

= 20.42%

*Average investment

Cost................................... $240,000

Salvage.............................

0

Sum................................... $240,000

Average (Sum/2)............... $120,000

Solutions Manual, Chapter 25

101

Annual

Net Cash

Flows

$ 44,500

Present

Value of

Annuity

at 8%

7.5361

Present

Value of

Net Cash

Flows

$ 335,356

Amount to be invested.........................................

(240,000)

$ 95,356)

1.

PROJECT C1

Net Cash

Flows

Present

Value of 1

at 12%

Year 1.................................................

$ 10,000

0.8929

Year 2.................................................

90,000

0.7972

Year 3.................................................

140,000

0.7118

Totals.................................................

$240,000

Amount invested...................................................

Net present value..................................................

Present

Value of

Net Cash

Flows

8,929

71,748

99,652

$180,329

(190,000)

$ (9,671)

PROJECT C2

Net Cash

Flows

Present

Value of 1

at 12%

Year 1.................................................

$ 80,000

0.8929

Year 2.................................................

80,000

0.7972

Year 3.................................................

80,000

0.7118

Totals.................................................

$240,000

Amount invested...................................................

Net present value..................................................

Present

Value of

Net Cash

Flows

$ 71,432

63,776

56,944

$192,152

(190,000)

$ 2,152

102

PROJECT C3

Net Cash

Flows

Present

Value of 1

at 12%

Year 1.................................................

$150,000

0.8929

Year 2.................................................

50,000

0.7972

Year 3.................................................

40,000

0.7118

Totals.................................................

$240,000

Amount invested...................................................

Net present value..................................................

Present

Value of

Net Cash

Flows

$133,935

39,860

28,472

$202,267

(190,000)

$ 12,267

net present value. Accordingly, both C2 and C3 are acceptable investments.

2.

Project C2 will have an internal rate of return higher than 12%. We know

this because Project C2 has a positive net present value using a 12% rate of

return.

3.

= $190,000 / $80,000 = 2.375

(ii) Factor is approximately equal to the 13% discount factor of 2.375 for 3

years (see Table B.3*).

Answer: IRR = 13%

*Instructor note: There is not a 13% column in the PV tables; students will need to

interpolate 12% + [ (15%-12%) x ({2.4018 2.3750}/ 0.1186) ] = 12.68%.

Solutions Manual, Chapter 25

103

Normal

Volume

Sales.................................................. $3,000,000

Additional

Volume*

$240,000

Combined

Total

$3,240,000

Direct materials...............................

400,000

40,0001

440,000

Direct labor......................................

800,000

80,0002

880,000

Overhead.........................................

200,000

30,000

230,000

Selling expenses............................

300,000

Administrative expenses...............

514,000

86,000

600,000

$236,000

$2,450,000

$ 790,000

300,000

4,000

2

(20,000 x $2)

(20,000 x $4)

*ADDITIONAL VOLUME COMPUTATIONS

Additional sales revenue = 20,000 units @ $12 = $240,000

Materials cost per unit = $400,000/200,000 units = $2 per unit

Labor cost per unit = $800,000/200,000 units = $4 per unit

Incremental overhead = $200,000 x 15% = $30,000

Incremental administrative = $86,000 (given)

additional sales would yield an incremental net income of $4,000.

104

INCREMENTAL COST OF MAKING THE PART

Variable costs (50,000 units @ $1.50).....................................

$ 75,000

Incremental fixed costs............................................................50,000

Total incremental cost of making 50,000 units......................

$125,000

Cost per unit to buy..................................................................

$

2.70

Total incremental cost of buying 50,000 units.......................

$135,000

RECOMMENDATION: Note that the allocated fixed costs of $45,000 are not

relevant to this managerial decision because they will continue whether the

part is made or bought. Therefore, the incremental costs of making the part

are $10,000 less per year than buying it. This implies that the company

should continue to make this part.

Note: We should recognize that this decision depends on the alternative uses for the

productive facilities dedicated to making the part. If they can be used to produce a profit

greater than the $10,000 annual savings that the company attains by making this part,

the part should probably be purchased and the facilities used for the other more

profitable activities.

Solutions Manual, Chapter 25

105

INCREMENTAL REVENUE AND COST OF ADDITIONAL PROCESSING

Revenue if processed further*................................................

$ 700,000

Revenue if sold as is................................................................

500,000

Incremental revenue.................................................................

200,000

Less incremental cost of processing.....................................

300,000

Incremental net income (or loss)............................................

$(100,000)

*Revenuefromprocessedproducts

Units

Product B.....................................................................

4,000

Product C.....................................................................

8,000

Total revenue from processed products..................

Price

$75

50

Total

$300,000

400,000

$700,000

Net income (loss) from processed products

Revenue if processed further.................................................

Less: Additional costs of processing..................................$(300,000)

Opportunity cost (lost sales of Product A)................. (500,000)

Net benefit to processing.......................................................

$ 700,000

(800,000)

$(100,000)

RECOMMENDATION: This analysis shows that the company will be worse off

by $100,000 if it chooses to process Product A into the two products of B

and C. (Note that the $20 per unit cost of manufacturing Product A is sunk

and irrelevant to this decision.)

106

Instructor note: In all three cases, the total unavoidable expenses of $53,900 remain the same

because they cannot be avoided by eliminating departments.

1. NO DEPARTMENTS ELIMINATED

Total

M

Sales..................................

$112,000 $31,500

Expenses

Avoidable........................

60,200

4,900

Unavoidable...................

53,900

25,900

Total expenses...............

114,100

30,800

Net income (loss).............

$ (2,100) $ 700

N

$17,500

O

$28,000

P

$21,000

T

$14,000

18,200

6,300

24,500

$ (7,000)

11,200

2,100

13,300

$14,700

7,000

14,700

21,700

$ (700)

18,900

4,900

23,800

$ (9,800)

Total

M

Sales.......................................................

$ 59,500 $31,500

Expenses

Avoidable..............................................

16,100

4,900

Unavoidable.........................................

53,900

25,900

Total expenses.....................................

70,000

30,800

Net income (loss)..................................

$(10,500) $ 700

N

$

0

6,300

$ 6,300

$(6,300)

O

$28,000

P

$

T

0

11,200

0

2,100

14,700

13,300 $ 14,700

$14,700 $(14,700)

0

4,900

4,900

$(4,900)

P, and T. The sales and avoidable expenses are the combined amounts for

Departments M and O. The net loss has actually increased because the

excess of sales dollars over avoidable expenses has declined and less

remains to cover unavoidable expenses.

3. DEPARTMENTS WITH LESS SALES THAN AVOIDABLE EXPENSES ELIMINATED

Total

M

Sales.......................................................

$80,500 $31,500

Expenses

Avoidable..............................................

23,100

4,900

Unavoidable.........................................

53,900 25,900

Total expenses.....................................

77,000 30,800

Net income (loss)..................................

$ 3,500 $ 700

N

$

O

$28,000

0

11,200

6,300

2,100

6,300

13,300

$(6,300) $14,700

P

$21,000

T

$

7,000

14,700

21,700

$ (700)

0

4,900

4,900

$(4,900)

Departments N and T are eliminated because their sales dollars do not

cover their avoidable costs.

Solutions Manual, Chapter 25

107

Preliminary computations

Contribution margin per hour

Product TLX

Selling price per unit...................................................

$12.50

Variable costs per unit................................................ 3.75

Contribution per unit...................................................

$ 8.75

Product MTV

$ 7.50

4.50

$ 3.00

Contribution margin per machine-hour

(or contribution/hours per unit)...............................

$17.50

1.

0.20

$15.00

Maximum sales.....................................................

Hours needed per unit.........................................

Total hours used (3,750 x 0.50)...........................

3,750 units

0.50

1,875 hours

Remaining hours (2,200 1,875).........................

Hours needed per unit.........................................

Maximum production* (325/0.20)........................

325 hours

0.20

1,625 units

should manufacture as many units of Product TLX as it can produce

and sell until reaching a (market or production) constraint. Thereafter,

any remaining capacity should be devoted to Product MTV, up to the

maximum that can be produced and/or sold.

2.

Un

its

Product TLX.................. 3,750

Product MTV................. 1,625

Total...............................

Contribution

per Unit

$8.75

3.00

Total

$32,813*

4,875

$37,688

*Rounded

108

1. Recovery time computation

Payback Period

Break-Even Time

money. This means break-even time should provide a superior estimate

of the recovery time relative to the payback period method.

3. When (1) the interest rate is very low, 1% for example, and (2) the

payback period is very short, then payback period and break-even time

will yield similar results.

Solutions Manual, Chapter 25

109

PROBLEM SET A

Problem 25-1A (50 minutes)

Part 1

Annual straight-line depreciation =

$300,000 - $20,000

4 years

= $70,000

Part 2

Net

Income

Net Cash

Flow

$1,150,000

Direct materials.......................................................

(300,000)

(300,000)

Direct labor..............................................................

(420,000)

(420,000)

(210,000)

(210,000)

(70,000)

(100,000)

50,000

(15,000)

Net income................................................................. $

Net cash flow*............................................................

(100,000)

(15,000)

35,000

$ 105,000

Net income + Depreciation = $35,000 + $70,000 = $105,000

Part 3

Payback Period =

$300,000

$105,000

= 2.86 years

110

Part 4

Accounting rate of return =

$35,000

$160,000*

= 21.88%

* Average investment

Asset cost................................................

$300,000

Final years book value...........................

20,000

Sum...........................................................

$320,000

Average (Sum /2).....................................

$160,000

Part 5

Present Value of Net Cash Flows

Net Cash

Flows

Year 1.............................

$105,000

Year 2.............................

105,000

Year 3.............................

105,000

Year 4*............................

125,000

Totals.............................

$440,000

Present

Value of

1 at 7%

0.9346

0.8734

0.8163

0.7629

Present

Value of Net

Cash Flows

$ 98,133

91,707

85,712

95,363

370,915

Amount invested...............................

(300,000)

$ 70,915

Solutions Manual, Chapter 25

111

Part 1

PROJECT Y

Net income........................................

$112,000

Depreciation expense*.....................

175,000

$287,000

*Annual depreciation =

$700,000 - $0

4 years

= $175,000

PROJECT Z

Net income........................................

$ 72,800

Depreciation expense*.....................

233,333

$306,133

*Annual depreciation =

$700,000 - $0

3 years

= $233,333

Part 2

PROJECT Y

Payback Period =

$700,000

$287,000

= 2.44 years

$700,000

$306,133

= 2.29 years

PROJECT Z

Payback Period =

112

Part 3

PROJECT Y

Accounting rate of return =

$112,000

$350,000*

= 32%

*Average investment

Asset cost.................................................

$700,000

Average (Cost/2).......................................

$350,000

PROJECT Z

Accounting rate of return =

$72,800

$350,000*

= 20.8%

*Average investment

Asset cost.................................................

$700,000

Average (Cost/2).......................................

$350,000

Solutions Manual, Chapter 25

113

Part 4

PROJECT Y

Present Value of Net Cash Flows

Net Cash

Flows

Years 1-4........................

$287,000

Present

Value of

1 at 8%

Annuity

Present

Value of

Net Cash

Flows

3.3121

$950,573

Amount invested...................................................

(700,000)

$250,573

PROJECT Z

Present Value of Net Cash Flows

Net Cash

Flows

Years 1-3........................

$306,133

Present

Value of

1 at 8% Annuity

Present

Value of

Net Cash

Flows

2.5771

$788,935

Amount invested...................................................

(700,000)

$ 88,935

Part 5

Recommendation to management is to pursue Project Y. This is because

Project Y has a positive net present value, which means that we expect it to

earn at least 8% on our cash investment in the machine. Project Z also has

a positive net present value, but its present value is less than that of Project

Y. We also note that the accounting rate of return is higher for Project Y

compared with Project Z.

114

Part 1

RESULTS USING STRAIGHT-LINE DEPRECIATION

(a)

Income

Before

Deprec.

Year 1.............................

$12,000

(b)

StraightLine

Deprec.

$ 3,000

(c)

Taxable

Income

(a) - (b)

$9,000

(d)

40%

Income

Taxes

$3,600

(e)

Net Cash

Flows

(a) - (d)

$8,400

Year 2.............................

12,000

6,000

6,000

2,400

9,600

Year 3.............................

12,000

6,000

6,000

2,400

9,600

Year 4.............................

12,000

6,000

6,000

2,400

9,600

Year 5.............................

12,000

6,000

6,000

2,400

9,600

Year 6.............................

12,000

3,000

9,000

3,600

8,400

(d)

40%

Income

Taxes

$2,400

(e)

Net Cash

Flows

(a) - (d)

$9,600

Part 2

RESULTS USING MACRS DEPRECIATION

(a)

Income

Before

Deprec.

Year 1.............................

$12,000

(b)

MACRS

Deprec.

$6,000

(c)

Taxable

Income

(a) - (b)

$6,000

Year 2.............................

12,000

9,600

2,400

960

11,040

Year 3.............................

12,000

5,760

6,240

2,496

9,504

Year 4.............................

12,000

3,456

8,544

3,418

8,582

Year 5.............................

12,000

3,456

8,544

3,418

8,582

Year 6.............................

12,000

1,728

10,272

4,109

7,891

Solutions Manual, Chapter 25

115

Part 3

NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION

Present

Value of

1 at 10%

0.9091

0.8264

0.7513

0.6830

0.6209

0.5645

Present

Net Cash

Value of Net

Flows

Cash Flows

Year 1.............................

$ 8,400

$ 7,636

Year 2.............................

9,600

7,933

Year 3.............................

9,600

7,212

Year 4.............................

9,600

6,557

Year 5.............................

9,600

5,961

Year 6.............................

8,400

4,742

Totals.............................

$55,200

40,041

Amount invested.......................................................................

(30,000)

Net present value......................................................................

$10,041

Part 4

NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION

Present

Net Cash

Value of

Flows

1 at 10%

Year 1.............................

$ 9,600

0.9091

Year 2.............................

11,040

0.8264

Year 3.............................

9,504

0.7513

Year 4.............................

8,582

0.6830

Year 5.............................

8,582

0.6209

Year 6.............................

7,891

0.5645

Totals.............................

$55,199

Amount invested...............................

Net present value..............................

Present

Value of Net

Cash Flows

$ 8,727

9,123

7,140

5,862

5,329

4,454

40,635

(30,000)

$10,635

Part 5

Analysis: The net present value using MACRS depreciation is greater than the

net present value using straight-line depreciation because the cash flows are

larger in the earlier years of the assets life under MACRS depreciation. They

are larger because the depreciation deductions are larger, resulting in less

income taxes paid in the earlier years.

116

CAYMAN PRODUCTS

COMPARATIVE INCOME STATEMENTS

(1)

(2)

(3)

Normal

Volume

New

Business

Combined

Sales..................................................

$1,200,000

$172,000

$1,372,000

64,000

448,000

24,000

120,000

Overhead......................................... 288,000

36,000

324,000

120,000

4,000

84,000

128,000

1,096,000

Operating income.............................

$ 232,000

$ 44,000

$ 276,000

Supporting computations

Normal direct materials cost.........................................

$384,000

Units of output................................................................

300,000

Cost per unit...................................................................

$

1.28

New business volume....................................................50,000

New business direct materials cost.............................

$ 64,000

Normal direct labor cost................................................

$ 96,000

Units of output................................................................

300,000

Cost per unit...................................................................

$

0.32

Overtime per unit (50%)................................................. 0.16

New business direct labor cost per unit......................

$

0.48

New business volume....................................................50,000

New business direct labor cost....................................

$ 24,000

Total overhead................................................................

$288,000

Fixed overhead (25%)..................................................... 72,000

Variable overhead...........................................................

$216,000

Units of output................................................................

300,000

Cost per unit...................................................................

$

0.72

New business volume....................................................50,000

New business variable overhead cost.........................

$ 36,000

Solutions Manual, Chapter 25

117

Part 1

Product G

Product B

$120

$160

90

$ 80

$ 70

2.0

(or contribution/[hours per unit]).....................

$100

$ 35

Part 2

Sales Mix Recommendation. To the extent allowed by production and

market constraints, the company should produce as much of Product G as

possible. With a single shift yielding 176 hours per month (8 x 22), the

company can produce these units of Product G:

Maximum output of G =

0.8 hrs. per unit

Contribution margin = 220 units x $80 per unit = $17,600 per month

118

Part 3

Sales Mix Recommendation with Second Shift. If the second shift is

added, the maximum possible output of G will double

352 hrs. per mo.

= 440 units per mo.

0.8 hrs. per unit

However, this level of output exceeds the companys market constraint of

400 units of G per month. This means the company should produce 400

units of Product G, and commit the remainder of the productive capacity to

Product B. This is computed as follows

Maximum possible output of G =

= 400 units per month

Hours per unit............................................................ 0.8

Hours used for Product G.........................................320 hours

Hours available for Product B (352 hrs - 320 hrs)......... 32 hours

Units of Product B

2 hr. per unit

Units

From G...............................................

400

From B...............................................

16

Less extra shift costs.......................

Total contribution margin................

Contr./unit

$80

70

Total

$32,000

1,120

(6,500)

$26,620

contribution margin of $17,600 generated by one shift alone (see part 2).

Therefore, management should add the second shift.

Solutions Manual, Chapter 25

119

Part 4

Sales Mix Recommendation. By incurring additional marketing cost, the

company can relax the market constraint for sales of Product G up to the

point where 440 units can be sold. This means the company can produce

440 units of Product G, and commit the remainder of its productive

capacity, if any, to Product B. These computations are

Units of Product G...................................................

= 440 units per month

Hours per unit........................................................... 0.8

Hours used for Product G....................................... 352 hours

Hours available for Product B (352 hrs - 352 hrs)......

0 hours

The output of Product B with 0 production hours is

Units of Product B

2 hr. per unit

Units

From G............................................... 440

From B............................................... 0

Less extra shift costs.......................

Less extra marketing costs.............

Total contribution margin................

Contr./unit

$80

70

Total

$35,200

0

(6,500)

(2,000)

$26,700

better than the contribution margin of $26,620 generated under the existing

market constraint (see part 3). Therefore, management may decide to

undertake this marketing strategy or decide that the marginal benefits

generated do not warrant the marketing efforts.

120

Part 1

HOME DECOR COMPANY

Analysis of Expenses under Elimination of Department 200

Total

Expenses

Eliminated

Expenses

Continuing

Expenses

$ 938,000

$414,000

$524,000

Direct expenses

Advertising..........................................................

58,000

24,000

34,000

15,600

7,600

8,000

DepreciationStore equipment........................

16,600

Allocated expenses

Sales salaries*....................................................

208,000

16,600

104,000

Rent expense......................................................

28,320

Bad debts expense.............................................

36,000

104,000

28,320

16,200

Office salary*.......................................................

62,400

19,800

62,400

Insurance expense*............................................

6,200

1,540

4,660

8,000

800

7,200

Total expenses......................................................

$1,377,120

$568,140

$808,980

*Computation notes. Closing Department 200 will eliminate 70% of its insurance

expense and 25% of its miscellaneous office expense. Sales salaries will be

reduced by the amounts paid to the two clerks who will not be replaced. The

office salary will not be eliminated, but it will be reclassified so that one-half will

be reported as sales salary and one-half as office salary.

Solutions Manual, Chapter 25

121

Part 2

HOME DECOR COMPANY

Forecasted Annual Income Statement

Under Plan to Eliminate Department 200

Sales......................................................................

$872,000

Cost of goods sold...............................................

524,000

Gross profit from sales........................................

348,000

Operating expenses

Advertising..........................................................

34,000

Store supplies used...........................................

8,000

Depreciation of store equipment......................

16,600

Sales salaries.....................................................

135,200*

Rent expense......................................................

28,320

Bad debts expense............................................

19,800

Office salary........................................................

31,200*

Insurance expense.............................................

4,660

Miscellaneous office expenses.........................

7,200

Total operating expenses....................................

284,980

Net income............................................................

$ 63,020

Total

Sales

Salaries

Salaries

Salesclerks.........................................................................

$104,000

$104,000

Administrative worker.......................................................

62,400

Reassign adm. worker to sales.........................................

0

31,200

Revised salaries.................................................................

$166,400

$135,200

Office

Salary

$62,400

(31,200)

$31,200

122

Part 3

HOME DCOR COMPANY

Reconciliation of Combined Income with Forecasted Income

Combined net income ......................................................... $ 74,880

Less Dept. 200's lost sales..................................................

(580,000)

568,140

$ 63,020

ANALYSIS

Department 200's avoidable expenses of $568,140 are $11,860 less than its

revenues of $580,000. This means the company's annual net income would

be $11,860 less from eliminating Department 200. This analysis suggests

the department should probably not be eliminated.

Solutions Manual, Chapter 25

123

PROBLEM SET B

Problem 25-1B (50 minutes)

Part 1

Annual straight-line depreciation =

$100,000 - $25,000

= $15,000

5 years

Part 2

Net

Income

Expected annual sales of new product........................

$ 350,000

Net Cash

Flow

$ 350,000

Direct materials............................................................ 150,000

150,000

50,000

100,000

Selling and administrative expenses......................... 23,000

23,000

Income taxes (20%)........................................................

2,400

Net income......................................................................$

9,600

2,400

$ 24,600

Net income + Depreciation = $9,600 + $15,000 = $24,600

124

Part 3

Payback Period =

$100,000

$24,600

= 4.07 years

Part 4

Accounting rate of return =

$9,600

$62,500*

= 15.36%

*Average investment

Asset cost..................................................

$100,000

Final years book value.............................

25,000

Sum............................................................

$125,000

Average (Sum /2).......................................

$ 62,500

Part 5

Present Value of Net Cash Flows

Net Cash

Flows

Year 1.............................

$ 24,600

Year 2.............................

24,600

Year 3.............................

24,600

Year 4.

24,600

Year 5*............................

49,600

Present

Value of

1 at 12%

0.8929

0.7972

0.7118

0.6355

0.5674

Present

Value of Net

Cash Flows

$ 21,965

19,611

17,510

15,633

28,143

Totals.............................

$148,000

$102,862

Amount invested...............................

(100,000)

2,862

Solutions Manual, Chapter 25

125

Part 1

PROJECT A

Net income...............................................$ 31,500

Depreciation expense*............................ 160,000

Net cash flow...........................................$191,500

$480,000 - $0

3 years

*Annual depreciation =

= $160,000

PROJECT B

Net income............................................ $ 51,800

Depreciation expense*........................

120,000

$480,000 - $0

4 years

*Annual depreciation =

= $120,000

Part 2

PROJECT A

Payback Period =

$480,000

$191,500

= 2.5 years

$480,000

$171,800

= 2.8 years

PROJECT B

Payback Period =

126

Part 3

PROJECT A

Accounting rate of return =

$31,500

$240,000*

= 13.1%

*Average investment

Asset cost..................................................

$480,000

Average (Cost/2)........................................

$240,000

PROJECT B

Accounting rate of return =

$51,800

$240,000*

= 21.6%

*Average investment

Asset cost..................................................

$480,000

Average (Cost/2)........................................

$240,000

Solutions Manual, Chapter 25

127

Part 4

PROJECT A

Present Value of Net Cash Flows

Net Cash

Flows

Years 1-3........................

$191,500

Present

Value of

1 at 10%

Annuity

Present

Value of

Net Cash

Flows

2.4869

$ 476,241

Amount invested...................................................

(480,000)

PROJECT B

Present Value of Net Cash Flows

Net Cash

Flows

Present

Value of

1 at 10%

Annuity

Present

Value of

Net Cash

Flows

Years 1-4........................

$171,800

3.1699

$544,589

Amount invested...................................................

(480,000)

Part 5

Recommendation to management is to pursue Project B. This is because

Project B has a positive net present value, which means that we expect it to

earn at least 10% on our cash investment in the machine. Project A has a

negative net present value, meaning that it is not expected to earn the

required rate of return. We might also note that the accounting rate of

return is also higher for Project B compared with Project A.

128

Part 1

RESULTS USING STRAIGHT-LINE DEPRECIATION

(a)

Income

Before

Deprec.

Year 1.............................

$15,000

(b)

StraightLine

Deprec.

$2,500

(c)

Taxable

Income

(a) - (b)

$12,500

(d)

30%

Income

Taxes

$3,750

(e)

Net Cash

Flows

(a) - (d)

$11,250

Year 2.............................

15,000

5,000

10,000

3,000

12,000

Year 3.............................

15,000

5,000

10,000

3,000

12,000

Year 4.............................

15,000

5,000

10,000

3,000

12,000

Year 5.............................

15,000

5,000

10,000

3,000

12,000

Year 6.............................

15,000

2,500

12,500

3,750

11,250

(d)

30%

Income

Taxes

$3,000

(e)

Net Cash

Flows

(a) - (d)

$12,000

Part 2

RESULTS USING MACRS DEPRECIATION

(a)

Income

Before

Deprec.

Year 1.............................

$15,000

(b)

MACRS

Deprec.

$5,000

(c)

Taxable

Income

(a) - (b)

$10,000

Year 2.............................

15,000

8,000

7,000

2,100

12,900

Year 3.............................

15,000

4,800

10,200

3,060

11,940

Year 4.............................

15,000

2,880

12,120

3,636

11,364

Year 5.............................

15,000

2,880

12,120

3,636

11,364

Year 6.............................

15,000

1,440

13,560

4,068

10,932

Solutions Manual, Chapter 25

129

Part 3

NET PRESENT VALUE OF ASSET USING STRAIGHT-LINE DEPRECIATION

Net Cash

Flows

Present

Value of

1 at 15%

Present

Value of Net

Cash Flows

Year 1.............................

$11,250

0.8696

$ 9,783

Year 2.............................

12,000

0.7561

9,073

Year 3.............................

12,000

0.6575

7,890

Year 4.............................

12,000

0.5718

6,862

Year 5.............................

12,000

0.4972

5,966

Year 6.............................

11,250

0.4323

4,863

Totals.............................

$70,500

$44,437

Amount invested.......................................................................

(25,000)

Net present value......................................................................

$19,437

Part 4

NET PRESENT VALUE OF ASSET USING MACRS DEPRECIATION

Present

Value of

1 at 15%

Present

Value of Net

Cash Flows

Year 1.............................

$12,000

0.8696

Year 2.............................

12,900

0.7561

Year 3.............................

11,940

0.6575

Year 4.............................

11,364

0.5718

Year 5.............................

11,364

0.4972

Year 6.............................

10,932

0.4323

Totals.............................

$70,500

Amount invested...............................

$10,435

9,754

7,851

6,498

5,650

4,726

$44,914

(25,000)

$19,914

Net Cash

Flows

Part 5

Analysis: The net present value using MACRS depreciation is greater than the

net present value using straight-line depreciation because the cash flows are

larger in the earlier years of the assets life under MACRS depreciation. They

are larger because the depreciation deductions are larger, resulting in less

income taxes paid in the earlier years.

130

WINDTRAX COMPANY

COMPARATIVE INCOME STATEMENTS

(1)

(2)

(3)

Normal

Volume

New

Business

Combined

Sales..................................................$200,000

$16,000

$216,000

Direct materials............................... 30,000

3,000

33,000

2,400

14,400

Overhead......................................... 50,000

1,000

51,000

Selling expenses............................

7,500

7,500

750

32,250

7,150

138,150

$ 8,850

$ 77,850

Supporting computations

Normal direct material cost...........................................

$ 30,000

Units of output................................................................

200,000

Cost per unit...................................................................

$ 0.15

New business volume....................................................

20,000

New business direct material cost...............................

$ 3,000

Normal direct labor cost................................................

$ 12,000

Units of output................................................................

200,000

Cost per unit...................................................................

$ 0.06

Overtime per unit (100%)............................................... 0.06

New business direct labor cost per unit......................

$ 0.12

New business volume....................................................

20,000

New business direct labor cost....................................

$ 2,400

Total overhead................................................................

$ 50,000

Fixed overhead (80%).....................................................

40,000

Variable overhead...........................................................

$ 10,000

Units of output................................................................

200,000

Cost per unit...................................................................

$ 0.05

New business volume....................................................

20,000

New business variable overhead cost.........................

$ 1,000

Solutions Manual, Chapter 25

131

Part 1

Product 22

Selling price per unit............................................ $ 175

Variable costs per unit.........................................

100

Contribution margin per unit............................... $ 75

Machine hours to produce 1 unit........................

0.8

Contribution per machine hour

(or contribution/[hours per unit])..................... $93.75

Product 44

$ 200

150

$ 50

0.5

$ 100

Part 2

Sales Mix Recommendation To the extent allowed by production and

market constraints, the company should produce as much of Product 44 as

possible. With a single shift yielding 184 hours per month (8 x 23), the

company can produce these units of Product 44:

Maximum output of 44 =

0.5 hrs. per unit

Contribution margin = 368 units x $50 per unit = $18,400 per month

132

Part 3

Sales Mix Recommendation with Second Shift If the second shift is added,

the maximum possible output of 44 will double:

368 hrs. per mo.

= 736 units per mo.

0.5 hrs. per unit

However, this level of output exceeds the companys market constraint of

450 units of Product 44 per month. This means the company should

produce 450 units of Product 44, and commit the remainder of the

productive capacity to Product 22. This is computed as follows:

Maximum possible output of 44 =

Hours per unit........................................................... 0.5

Hours used for Product 44...................................... 225 hours

Hours available for Product 22 (368 hrs - 225 hrs)...... 143 hours

Units of Product 22

0.8 hrs. per unit

Units

From 44.............................................. 450

From 22.............................................. 178

Less extra shift costs.......................

Total contribution margin................

Contr./unit

$50

75

Total

$22,500

13,350

(5,000)

$30,850

margin of $18,400 generated by one shift alone (see part 2). Therefore,

management should add the second shift.

Solutions Manual, Chapter 25

133

Part 4

Sales Mix Recommendation By incurring additional marketing cost, the

company can relax the market constraint for sales of Product 44 up to the

point where 500 units can be sold. This means the company can produce

500 units of Product 44, and commit the remainder of its productive

capacity to Product 22. These computations are:

Units of Product 44................................................= 500 units per month

Hours per unit........................................................ 0.5

Hours used for Product 44.................................... 250 hours

Hours available for Product 22

(368 hrs less 250 hrs)......................................... 118 hours

Units of Product 22

0.8 hr. per unit

Units

From 44.............................................. 500

From 22.............................................. 147

Less extra shift costs.......................

Less extra marketing costs.............

Total contribution margin................

Contr./unit

$50

75

Total

$25,000

11,025

(5,000)

(500)

$30,525

margin of $30,850 generated under the existing market constraint (see part

3). Therefore, management should not undertake this marketing strategy.

134

Part 1

TURFTIME COMPANY

Analysis of Expenses under Elimination of Department Z

Total

Expenses

$293,200

Eliminated

Expenses

Continuing

Expenses

$62,550

$230,650

1,500

700

13,500

2,800

10,500

Sales salaries*....................................................

46,800

Rent expense......................................................

13,800

Bad debts expense.............................................

12,500

Office salary*.......................................................

13,000

Insurance expense*............................................

2,800

Miscellaneous office expenses*........................

2,100

23,400

455

375

23,400

13,800

10,500

13,000

2,345

1,725

Total expenses......................................................

$413,200

$90,980

$322,220

Direct expenses

Advertising..........................................................

15,000

Store supplies used...........................................

3,500

Depreciation of store equip...............................

10,500

Allocated expenses

2,000

expense and 30% of its miscellaneous office expense. Sales salaries will be

reduced by the amounts paid to the two clerks who will not be replaced. The

office salary will not be eliminated, but it will be reclassified so that one-half will

be reported as sales salary and one-half as office salary.

Solutions Manual, Chapter 25

135

Part 2

TURFTIME COMPANY

Forecasted Annual Income Statement

Under Plan to Eliminate Department Z

Sales......................................................................

$350,000

Cost of goods sold...............................................

230,650

Gross profit from sales........................................

119,350

Operating expenses

Advertising..........................................................

13,500

Store supplies used...........................................

2,800

Depreciation of store equipment......................

10,500

Sales salaries.....................................................

29,900*

Rent expense......................................................

13,800

Bad debts expense............................................

10,500

Office salary........................................................

6,500*

Insurance expense.............................................

2,345

Miscellaneous office expenses.........................

1,725

Total operating expenses....................................

91,570

Net income............................................................

$ 27,780

Total

Sales

Office

Salaries Salaries Salary

Salesclerks.........................................................................

$23,400 $23,400

Office clerk.........................................................................

13,000

$13,000

Reassign office clerk to sales...........................................

0

6,500

(6,500)

Revised salaries.................................................................

$36,400 $29,900 $ 6,500

136

Part 3

TURFTIME COMPANY

Reconciliation of Combined Income with Forecasted Income

Combined net income ...................................................... $ 24,300

Less Dept. Z's lost sales.................................................. (87,500)

Plus Dept. Zs eliminated expenses................................

90,980

ANALYSIS

Department Z's avoidable expenses of $90,980 are $3,480 greater than its

revenues of $87,500. This means the company's annual net income would

be $3,480 higher from eliminating Department Z. This analysis suggests

management should probably go ahead with the elimination of the

department as planned.

Solutions Manual, Chapter 25

137

SERIAL PROBLEM

Serial Problem, Success Systems (50 minutes)

COMPUTING NET CASH FLOWS FROM NET INCOME

Net income

Sales.............................................................$150,000

Cash flows

$150,000

(80,000)

Depreciation................................................. (20,000)

Selling and administrative.......................... (15,000)

(15,000)

Income taxes (30%)..................................... (10,500)

(10,500)

Net cash flows.............................................

1. Payback period =

$120,000

$44,500

$ 44,500

= 2.7 years

$24,500

$60,000*

= 40.8%

*Average investment

Cost................................... $120,000

Salvage..............................

0

Sum................................... $120,000

Average (Sum/2)............... $ 60,000

138

Reporting in Action

BTN 25-1

know how many times the promotion will be successful and how many

patrons will redeem ticket stubs.

If the Royals rarely achieve 12 hits then Krispy Kreme has a tremendous

advertising campaign at very low cost. However, the Royals might

surprise marketing managers at Krispy Kreme and achieve the 12 hits

much more frequently than expected.

2. 20,000 fans x .05 redemption rate = 1,000 dozen donuts.

3. 15 games x 20,000 fans x .05 redemption rate = 15,000 dozen donuts x $2

4. Krispy Kreme gains low cost exposure (Krispy Kreme may have been

Royals TV and radio announcers frequently mention the promotion on

air. The fans love the promotion and cheer wildly for MORE HITS and

DONUTS as the Royals approach 12 hits in a game. The excitement

added by Krispy Kreme to the ballgames can only be positive for its

reputation with customers.

Krispy Kreme hopes that customers redeeming ticket stubs for free

donuts will also purchase coffee, additional donuts, or memorabilia

while they are in the store.

benefits as greater than the promotion costs. If it discontinued the

promotion the potential reasons would likely be that it viewed the

promotion costs as greater than the promotion benefits or that its

marketing executives wanted to keep their promotions fresh and everchanging.

Solutions Manual, Chapter 25

139

Comparative Analysis

BTN 25-2

1. Answer depends on the newspaper selected and its price for advertising

space. The cost of a one-quarter page advertisement in a medium-sized

U.S. city newspaper is probably near $2,000.

2. If we assume that the average product of Krispy Kreme and Tastykake

sells for around $5, then the contribution margin per product is about $1

(using the 20% stated assumption in the problem). This would mean that

the company would need to sell at least 2,000 additional products

(computed by dividing the $2,000 advertisement by the $1 contribution

margin per product) to recover the price of the advertisement.

Incremental sales of more than 2,000 products from this advertisement

would support the profitability of this marketing strategy.

3.

TO:

FROM:

DATE:

SUBJECT:

MEMORANDUM

(a) Students need to recognize that advertising is very expensive and

crucial to most merchandisers.

(b) The students should also recognize that an advertisement must be

effective to justify its cost and the related product mix decision of

managers.

(c) In most cases the advertisement must generate several thousand

dollars in sales to pay for the advertisement.

140

Ethics Challenge

BTN 25-3

discount rate is approximately $32. This is computed as $100 x 0.322.

2. We need to be concerned about any project with expected long-term

cash inflows. This is especially the case if the larger cash inflows are

expected later rather than sooner in the assets life. This concern is tied

to the riskiness of long-term predictions and the likely biases of

individuals proposing the project.

The answer to part 1 shows that long-term cash inflows are small when

factoring in their present values. Also, since the long-term predictions

are inherently more risky, the discount factor should probably increase

as the cash inflow gets further into the future.

Communicating in Practice

BTN 25-4

Instructor note: Answers will vary, but responses should address the questions asked and

include some discussion of the following points for each method.

Payback

Period

Cash flows

Accounting

Rate of Return

Accrual

income

Net Present

Value

Cash flows

Internal Rate of

Return

Cash flows

Profitability

Profitability

Measurement

basis

Measurement

unit

Periods

Percent

Dollars

Percent

Strengths

Easy to

understand

Easy to

understand

Allows

comparison

of projects

Allows

comparison

of projects

Reflects time

value of

money

Reflects

different risk

levels over

projects life

Reflects time

value of

money

Allows

comparisons

of dissimilar

projects

Ignores

time value

of money

Ignores

time value

of money

Ignores

cash flows

after

payback

period

Ignores

annual

rates over

life of

project

Difficult to

compare

dissimilar

projects

Limitations

Ignores

varying risk

levels over

life of

project

Solutions Manual, Chapter 25

141

BTN 25-5

private sector in the sense that the commissions report also defines

capital as having future value.

2. The investment analysis techniques (for example, payback period, NPV,

and IRR) may be useful depending on the nature of the investment. This

is because many of the capital investments that the federal government

makes have social/societal benefits, which are hard to quantify. For

example, it is hard to quantify investments in highways or education or

health care. For investments whose benefits are quantifiable, it would

be helpful to use the techniques explained in the chapter.

Teamwork in Action

BTN 25-6

Instructor note: Answers will vary across students. Yet the examples, while different, should

capture similar qualitative factors.

SAMPLE SOLUTION

Project

Investment in an improved baggage handling system. The new, improved

baggage handling system is expected to increase both customer

satisfaction and likelihood of repeat business.

Qualitative Factors

Competition has a new, more efficient and effective system.

Need to replace old system.

Increased customer demand for a new system because of special

baggage handling needs, for example, golf clubs to vacation destination.

Eases the workload of baggage handlers.

Improves employee morale.

Safety concerns with the older system--both employees and customers.

142

BTN 25-7

cash flows. It is possible to measure the cost of the education against

the possible future benefits (increased cash flows) using the capital

budgeting techniques discussed in this chapter.

2. To calculate the payback, Stephan first figures out the students'

opportunity cost of attendingboth the tuition payments and the

forgone salary. He assumes a student in a two-year program loses 18

months of income (allowing for a summer internship). Then he projects

the graduates' earnings over the next eight years, folding bonuses and

other compensation into the post-MBA salary. Stephan assumes a 10%

raise each year after graduationwhich smoothes out differences in

occupations as well as economic ups and downs over the course of 10

years.

3. The average 2002 graduate will break even on the investment in an MBA

education after 5.6 years.

4. The European payback period is shorter at 5.1 years versus 5.6 years for

Americans.

5. A 35.5% annual return.

Entrepreneurial Decision

BTN 25-8

Since AnthroTronix can sell all it can produce of both products, it should

allocate all of its production capacity to the home model of the CosmoBot.

This is because the home model yields a $1,600 contribution margin per

production hour (versus $1,000 for the enhanced model).

Enhanced

Model

Contribution margin per unit............................... $ 500

Production hours per unit...................................

Home

Model

$ 400

1/2

1/4

$1,600

Solutions Manual, Chapter 25

143

BTN 25-9

Sample Example

For illustrative purposes, one sample solution would appear as

follows:

Lease terms$400 per month for 35 months; plus $10,000 final

payment at the end of 35 months; 12% annual interest rate.

To compute the present value of the lease payments

PV of 35 payments of $400 per month discounted

at 1% (12%/12 months).......................................................

$11,763*

PV of $10,000 final payment at end of 35 months

discounted at 1%................................................................

7,059**

Total PV of lease....................................................................

$18,822

* $400 x 29.4086 (from Table B.3)

** $10,000 x 0.7059 (from Table B.1)

Purchase terms$16,500

automobile than to purchase it outright. Also, getting the salesperson

to negotiate the outright purchase of the automobile is sometimes

challenging once youve shown interest in leasing. This is because of

the usually higher profit margin associated with leasing.

Using the sample numbers from part 1, the PV of the lease is $18,822,

which is $2,322 more than the outright purchase price of $16,500.

144

Global Decision

BTN 25-10

(70%) in 2002. The plan is to further this distribution in 2003.

2. Yes. Grupo Bimbo closed plants in Dallas, Vienna, and Mexico City.

3. Mrs. Bairds Honey 7 Grain and Sugar Free Breads, and Oroweats

Country Wheat Bread.

4. Grupo Bimbo increased sales volume for 2002 in Brazil, Chile, Colombia,

Peru, and Central America.

5. The most outstanding activity was the support of the junior soccer

tournament held throughout Latin America.

Solutions Manual, Chapter 25

145

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