Problem 8-7 Calculating NPV and IRR [LO 3, 4] A project that provides annual cash flows of $2,800 for nine years costs $9,200 today. Requirement 1: At a required return of 11 percent, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

August 3, 2014, 2:12 am

≫ Next: Problem 8-8 Calculating IRR [LO 3] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

≪ Previous: A firm evaluates all of its projects by applying the IRR rule. Year Cash Flow 0 –$ 158,000 1 58,000 2 81,000 3 65,000

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Problem 8-7 Calculating NPV and IRR [LO 3, 4]

A project that provides annual cash flows of $2,800 for nine years costs $9,200 today.

Requirement 1:

At a required return of 11 percent, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g.,32.16).)

NPV

$

Requirement 2:

At a required return of 27 percent, what is the NPV of the project? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g.,32.16).)

NPV

$

Requirement 3:

At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Discount rate

%

Explanation:

1:

The NPV of a project is the PV of the outflows plus the PV of the inflows. Since the cash inflows are an annuity, the equation for the NPV of this project at an 11 percent required return is:

NPV = – $9,200 + $2,800(PVIFA11%, 9)

NPV = $6,303.73

At an 11 percent required return, the NPV is positive, so we would accept the project.

2:

The equation for the NPV of the project at a 27 percent required return is:

NPV = – $9,200 + $2,800(PVIFA27%, 9)

NPV = –$36.22

At a 27 percent required return, the NPV is negative, so we would reject the project.

3:

We would be indifferent to the project if the required return was equal to the IRR of the project, since at that required return the NPV is zero. The IRR of the project is:

0 = – $9,200 + $2,800(PVIFAIRR, 9)

IRR = .2686, or 26.86%

   

Calculator Solution:

 

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

CFo	–$9,200	CFo	–$9,200	CFo	–$9,200
C01	$2,800	C01	$2,800	C01	$2,800
F01	9	F01	9	F01	9
I = 11%		I = 27%		IRR CPT
NPV CPT		NPV CPT		26.86%
$6,303.73		–$36.22

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Problem 8-8 Calculating IRR [LO 3] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

August 3, 2014, 2:15 am

≫ Next: Problem 8-9 Calculating NPV [LO 4] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

≪ Previous: Problem 8-7 Calculating NPV and IRR [LO 3, 4] A project that provides annual cash flows of $2,800 for nine years costs $9,200 today. Requirement 1: At a required return of 11 percent, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

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Problem 8-8 Calculating IRR [LO 3]

Consider the following cash flows:

Year	Cash Flow
0		–$	32,000
1			14,200
2			17,500
3			11,600

Required:

What is the IRR of the above set of cash flows?(Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal rate of return

%

Explanation:

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is:

0 = – $32,000 + $14,200 / (1 + IRR) + $17,500 / (1 + IRR)2 + $11,600 / (1 + IRR)3

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 17.32%

   

Calculator solution:

 

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

CFo	–$32,000
C01	$14,200
F01	1
C02	$17,500
F02	1
C03	$11,600
F03	1
IRR CPT
17.32%

Problem 8-9 Calculating NPV [LO 4] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

August 3, 2014, 2:19 am

≫ Next: Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent. Year Project M Project N 0 –$140,000 –$355,000 1 63,500 152,500 2 81,500 180,000 3 72,500 137,500 4 58,500 110,000

≪ Previous: Problem 8-8 Calculating IRR [LO 3] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

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Problem 8-9 Calculating NPV [LO 4]

Consider the following cash flows:

Year	Cash Flow
0		–$	32,000
1			14,200
2			17,500
3			11,600

Requirement 1:

What is the NPV at a discount rate of zero percent? (Do not round intermediate calculations.) Net present value $   Requirement 2: What is the NPV at a discount rate of 10 percent? (Do not round intermediate calculations.Round your answer to 2 decimal places (e.g.,32.16).)   Net present value $   Requirement 3: What is the NPV at a discount rate of 20 percent? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.Round your answer to 2 decimal places (e.g., 32.16).)   Net present value $   Requirement 4: What is the NPV at a discount rate of 30 percent? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.Round your answer to 2 decimal places (e.g., 32.16).)   Net present value $   Explanation: 1: The NPV of a project is the PV of the outflows plus the PV of the inflows. At a zero discount rate (and only at a zero discount rate), the cash flows can be added together across time. So, the NPV of the project at a zero percent required return is:   NPV = – $32,000 + 14,200 + 17,500 + 11,600 NPV = $11,300   2: The NPV at a 10 percent required return is:   NPV = – $32,000 + $14,200 / 1.10 + $17,500 / 1.102 + $11,600 / 1.103 NPV = $4,087.15   3: The NPV at a 20 percent required return is:   NPV = – $32,000 + $14,200 / 1.20 + $17,500 / 1.202 + $11,600 / 1.203 NPV = –$1,300.93   4: And the NPV at a 30 percent required return is:   NPV = – $32,000 + $14,200 / 1.30 + $17,500 / 1.302 + $11,600 / 1.303 NPV = – $5,441.97   Notice that as the required return increases, the NPV of the project decreases. This will always be true for projects with conventional cash flows. Conventional cash flows are negative at the beginning of the project and positive throughout the rest of the project.     Calculator solution:   Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.    CFo  –$32,000 CFo  –$32,000 C01  $14,200 C01  $14,200 F01  1 F01  1 C02  $17,500 C02  $17,500 F02  1 F02  1 C03  $11,600 C03  $11,600 F03  1 F03  1   I = 0%   I = 10%   NPV CPT   NPV CPT   $11,300.00   $4,087.15     CFo  –$32,000 CFo  –$32,000 C01  $14,200 C01  $14,200 F01  1 F01  1 C02  $17,500 C02  $17,500 F02  1 F02  1 C03  $11,600 C03  $11,600 F03  1 F03  1   I = 20%   I = 30%   NPV CPT   NPV CPT   –$1,300.93   –$5,441.97

Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent. Year Project M Project N 0 –$140,000 –$355,000 1 63,500 152,500 2 81,500 180,000 3 72,500 137,500 4 58,500 110,000

August 3, 2014, 2:22 am

≫ Next: Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent.

≪ Previous: Problem 8-9 Calculating NPV [LO 4] Consider the following cash flows: Year Cash Flow 0 –$ 32,000 1 14,200 2 17,500 3 11,600

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Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent.

Year	Project M	Project N
0	–$140,000	–$355,000
1	63,500	152,500
2	81,500	180,000
3	72,500	137,500
4	58,500	110,000

Required:
(a)	What is the IRR for each project? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g.,32.16).)

	IRR
Project M	%
Project N	%

(b)	What is the NPV for each project? (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	NPV
Project M	$
Project N	$

(c)	Which, if either, of the projects should the company accept?
	Project M

Explanation:(a)

The IRR for each project is:

M:	$140,000 = $63,500 / (1 + IRR) + $81,500 / (1 + IRR)2 + $72,500 / (1 + IRR)3 + $58,500 / (1 + IRR)4

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 34.47%

N:	$355,000 = $152,500 / (1 + IRR) + $180,000 / (1 + IRR)2 + $137,500 / (1 + IRR)3 + 110,000 / (1 + IRR)4

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 24.61%

The IRR decision rule implies we accept project M because the IRR for M is greater than the IRR for N.

(b)

The NPV for each project is:

M:	NPV = – $140,000 + $63,500 / 1.19 + $81,500 / 1.192 + $72,500 / 1.193 + $58,500 / 1.194
	NPV = $43,108.55

N:	NPV = – $355,000 + $152,500 / 1.19 + $180,000 / 1.192 + $137,500 / 1.193 + $110,000 / 1.194
	NPV = $36,709.17

The NPV criterion implies we accept project M because project M has a higher NPV than project N.

(c)

Accept project M since the NPV is higher. IRR cannot be used to rank mutually exclusive projects.

   

Calculator Solution:

 

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

    

Project M
CFo	–$140,000	CFo	–$140,000
C01	$63,500	C01	$63,500
F01	1	F01	1
C02	$81,500	C02	$81,500
F02	1	F02	1
C03	$72,500	C03	$72,500
F03	1	F03	1
C04	$58,500	C04	$58,500
F04	1	F04	1
CPT IRR		I = 19
34.47%		NPV CPT
		$43,108.55

   

Project N
CFo	–$355,000	CFo	–$355,000
C01	$152,500	C01	$152,500
F01	1	F01	1
C02	$180,000	C02	$180,000
F02	1	F02	1
C03	$137,500	C03	$137,500
F03	1	F03	1
C04	$110,000	C04	$110,000
F04	1	F04	1
CPT IRR		I = 19
24.61%		NPV CPT
		$36,709.17

Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent.

August 3, 2014, 2:24 am

≫ Next: Problem 8-1 Calculating Payback [LO 1] Consider the following cash flows: Year Cash Flow 0 –$6,800 1 1,950 2 4,100 3 1,750 4 1,450

≪ Previous: Kerron Company is presented with the following two mutually exclusive projects. The required return for both projects is 19 percent. Year Project M Project N 0 –$140,000 –$355,000 1 63,500 152,500 2 81,500 180,000 3 72,500 137,500 4 58,500 110,000

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Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent.

Year	Project F		Project G
0	–$	139,000	–$	209,000
1		58,000		38,000
2		52,000		53,000
3		62,000		92,000
4		57,000		122,000
5		52,000		137,000

Required:

(a)	Calculate the payback period for both projects. (Do not round intermediate calculations.Round your answers to 2 decimal places (e.g., 32.16).)

	Payback period
Project F	years
Project G	years

(b)	Calculate the NPV for both projects. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)

	Net present value
Project F	$
Project G	$

(c)	Which project should the company accept?
	Project G

Explanation:

(a)

The payback period for each project is:

F:     2 + ($29,000 / $62,000) = 2.47 years

G:    3 + ($26,000 / $122,000) = 3.21 years

The payback criterion implies accepting project F because it pays back sooner than project G. Project G does not meet the minimum payback of three years.

(b)

The NPV for each project is:

F:     NPV = – $139,000 + $58,000 / 1.11 + $52,000 / 1.112 + $62,000 / 1.113 + $57,000 / 1.114

+ $52,000 / 1.115

NPV = $69,197.62

G:    NPV = – $209,000 + $38,000 / 1.11 + $53,000 / 1.112 + $92,000 / 1.113

+ $122,000 / 1.114 + $137,000 / 1.115

NPV = $97,187.84

The NPV criterion implies we should accept project G because project G has a higher NPV than project F.

(c)

Even though Project G does not meet the payback period of three years, it does provide the largest increase in shareholder wealth, therefore, choose Project G. Payback period should generally be ignored in this situation.

    

Calculator Solution:

 

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

   

Project F		Project G
CFo	–$139,000	CFo	–$209,000
C01	$58,000	C01	$38,000
F01	1	F01	1
C02	$52,000	C02	$53,000
F02	1	F02	1
C03	$62,000	C03	$92,000
F03	1	F03	1
C04	$57,000	C04	$122,000
F04	1	F04	1
C05	$52,000	C05	$137,000
F05	1	F05	1
I = 11		I = 11
NPV CPT		NPV CPT
$69,197.62		$97,187.84

Problem 8-1 Calculating Payback [LO 1] Consider the following cash flows: Year Cash Flow 0 –$6,800 1 1,950 2 4,100 3 1,750 4 1,450

August 3, 2014, 2:26 am

≫ Next: “Major” funds include a. all governmental funds plus proprietary funds that have fund balances greater than 10% of those of all proprietary funds combined b. the general fund, special revenue funds, capital projects funds, and debt service funds c. the general fund plus all funds having assets greater than 50% of those of the general fund d. the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

≪ Previous: Kaleb Konstruction, Inc., has the following mutually exclusive projects available. The company has historically used a three-year cutoff for projects. The required return is 11 percent.

$

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Problem 8-1 Calculating Payback [LO 1]

Consider the following cash flows:

Year	Cash Flow
0	–$6,800
1	1,950
2	4,100
3	1,750
4	1,450

Required:

What is the payback period for the above set of cash flows? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Payback period

years

Explanation:

To calculate the payback period, we need to find the time the project needs to recover its initial investment. After two years, the project has created:

$1,950 + 4,100 = $6,050

in cash flows. The project still needs to create another:

$6,800 – 6,050 = $750

in cash flows. During the third year, the cash flows from the project will be $1,750. So, the payback period will be 2 years, plus what we still need to make divided by what we will make during the third year. The payback period is:

Payback = 2 + ($750 / $1,750)

Payback = 2.43 years

“Major” funds include a. all governmental funds plus proprietary funds that have fund balances greater than 10% of those of all proprietary funds combined b. the general fund, special revenue funds, capital projects funds, and debt service funds c. the general fund plus all funds having assets greater than 50% of those of the general fund d. the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

September 2, 2014, 5:01 am

≫ Next: Internal service funds are reported as a. business-type activities in government-wide statements and governmental funds in funds statements b. proprietary funds in funds statements and governmental activities in government-wide statements c. business-type activities in government-wide statements and proprietary funds in funds statements d. governmental funds in funds statements and governmental activities in government-wide statements

≪ Previous: Problem 8-1 Calculating Payback [LO 1] Consider the following cash flows: Year Cash Flow 0 –$6,800 1 1,950 2 4,100 3 1,750 4 1,450

$

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“Major” funds include
a. all governmental funds plus proprietary funds that have fund balances greater than 10% of those of all proprietary funds combined
b. the general fund, special revenue funds, capital projects funds, and debt service funds
c. the general fund plus all funds having assets greater than 50% of those of the general fund
d. the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

                                       

Answer
the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

Internal service funds are reported as a. business-type activities in government-wide statements and governmental funds in funds statements b. proprietary funds in funds statements and governmental activities in government-wide statements c. business-type activities in government-wide statements and proprietary funds in funds statements d. governmental funds in funds statements and governmental activities in government-wide statements

September 2, 2014, 5:16 am

≫ Next: Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues, and expenses. Required: For each transaction, select whether the related account would be classified as an asset, liability, or stockholders’ equity to be reported in the balance sheet; a revenue or expense to be reported in the income statement; or a dividend to be reported in the statement of stockholders’ equity.

≪ Previous: “Major” funds include a. all governmental funds plus proprietary funds that have fund balances greater than 10% of those of all proprietary funds combined b. the general fund, special revenue funds, capital projects funds, and debt service funds c. the general fund plus all funds having assets greater than 50% of those of the general fund d. the general fund plus other funds in which total assets, revenues, or expenditures/expenses of the fund are at least 10% of the corresponding total for the relevant fund category (governmental or enterprise) and also at least 5% of the corresponding total for all governmental and enterprise funds combined

$

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Internal service funds are reported as
a. business-type activities in government-wide statements and governmental funds in funds statements
b. proprietary funds in funds statements and governmental activities in government-wide statements
c. business-type activities in government-wide statements and proprietary funds in funds statements
d. governmental funds in funds statements and governmental activities in government-wide statements

Answer


proprietary funds in funds statements and governmental activities in government-wide statements

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Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues, and expenses. Required: For each transaction, select whether the related account would be classified as an asset, liability, or stockholders’ equity to be reported in the balance sheet; a revenue or expense to be reported in the income statement; or a dividend to be reported in the statement of stockholders’ equity.

September 4, 2014, 10:10 am

≫ Next: Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies

≪ Previous: Internal service funds are reported as a. business-type activities in government-wide statements and governmental funds in funds statements b. proprietary funds in funds statements and governmental activities in government-wide statements c. business-type activities in government-wide statements and proprietary funds in funds statements d. governmental funds in funds statements and governmental activities in government-wide statements

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Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues, and expenses.

Required:

For each transaction, select whether the related account would be classified as an asset, liability, or stockholders’ equity to be reported in the balance sheet; a revenue or expense to be reported in the income statement; or a dividend to be reported in the statement of stockholders’ equity.

Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies

September 8, 2014, 6:55 am

≫ Next: For each of the following, compute the future value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 2,500 12 12 % $ 9,252 6 10 81,355 13 11 188,796 7 7 Explanation: To find the FV of a lump sum, we use: FV = PV(1 + r)t FV = $2,500(1.12)12 = $ 9,739.94 FV = $9,252(1.10)6 = $ 16,390.48 FV = $81,355(1.11)13 = $ 315,924.26 FV = $188,796(1.07)7 = $ 303,165.12 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 12 12% ±$2,500 N I/Y PV PMT FV Solve for $9,739.94 Enter 6 10% ±$9,252 N I/Y PV PMT FV Solve for $16,390.48 Enter 13 11% ±$81,355 N I/Y PV PMT FV Solve for $315,924.26 Enter 7 7% ±$188,796 N I/Y PV PMT FV Solve for $303,165.12

≪ Previous: Account classifications include assets, liabilities, stockholders’ equity, dividends, revenues, and expenses. Required: For each transaction, select whether the related account would be classified as an asset, liability, or stockholders’ equity to be reported in the balance sheet; a revenue or expense to be reported in the income statement; or a dividend to be reported in the statement of stockholders’ equity.

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Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies the direct costs of consulting jobs as variable costs. A contribution format segmented income statement for the company's most recent year is given below:

			Office
	Total Company		Chicago		Minneapolis
Sales	$600,000	100%	$120,000	100%	$480,000	100%
Variable expenses	324,000	54%	36,000	30%	288,000	60%
Contribution margin	276,000	46%	84,000	70%	192,000	40%
Traceable fixed expenses	134,400	22%	62,400	52%	72,000	15%
Office segment margin	141,600	24%	$21,600	18%	$120,000	25%
Common fixed expenses not       traceable to offices	96,000	16%
Net operating income	$45,600	8%

Refer to the original data. Assume that sales in Chicago increase by $40,000 next year and that sales in Minneapolis remain unchanged. Assume no change in fixed costs. Prepare a new segmented income statement for the company. (Round your percentage amounts to 2 decimal places. Input all amounts as positive value. Omit the "$" and "%" signs in your response.)

			Segments
	Total Company		Chicago		Minneapolis
	Amount	%	Amount	%	Amount	%
Sales	$		$		$
Variable expenses
Contribution margin
Traceable fixed expenses
Office segment margin			$		$
Common fixed expenses      not traceable to segments
Net operating income	$

For each of the following, compute the future value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 2,500 12 12 % $ 9,252 6 10 81,355 13 11 188,796 7 7 Explanation: To find the FV of a lump sum, we use: FV = PV(1 + r)t FV = $2,500(1.12)12 = $ 9,739.94 FV = $9,252(1.10)6 = $ 16,390.48 FV = $81,355(1.11)13 = $ 315,924.26 FV = $188,796(1.07)7 = $ 303,165.12 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 12 12% ±$2,500 N I/Y PV PMT FV Solve for $9,739.94 Enter 6 10% ±$9,252 N I/Y PV PMT FV Solve for $16,390.48 Enter 13 11% ±$81,355 N I/Y PV PMT FV Solve for $315,924.26 Enter 7 7% ±$188,796 N I/Y PV PMT FV Solve for $303,165.12

September 11, 2014, 2:26 am

≫ Next: For each of the following, compute the present value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future value $ 12 6 % $ 15,051 3 12 47,557 28 13 882,073 30 10 546,164 Explanation: To find the PV of a lump sum, we use: PV = FV / (1 + r)t PV = $15,051 / (1.06)12 = $ 7,479.89 PV = $47,557 / (1.12)3 = $ 33,850.13 PV = $882,073 / (1.13)28 = $ 28,794.41 PV = $546,164 / (1.10)30 = $ 31,299.87 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 12 6% $15,051 N I/Y PV PMT FV Solve for $7,479.89 Enter 3 12% $47,557 N I/Y PV PMT FV Solve for $33,850.13 Enter 28 13% $882,073 N I/Y PV PMT FV Solve for $28,794.41 Enter 30 10% $546,164 N I/Y PV PMT FV Solve for $31,299.87

≪ Previous: Raner, Harris, & Chan is a consulting firm that specializes in information systems for medical and dental clinics. The firm has two offices—one in Chicago and one in Minneapolis. The firm classifies

$

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For each of the following, compute the future value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)):

Present Value				Years		Interest Rate			Future Value
	$	2,500		12		12	%		$
		9,252		6		10
		81,355		13		11
		188,796		7		7

Explanation:

To find the FV of a lump sum, we use:

  

FV = PV(1 + r)t

FV = $2,500(1.12)12	=	$	9,739.94
FV = $9,252(1.10)6	=	$	16,390.48
FV = $81,355(1.11)13	=	$	315,924.26
FV = $188,796(1.07)7	=	$	303,165.12

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

12

12%

±$2,500

N

I/Y

PV

PMT

FV

Solve for

$9,739.94

Enter

6

10%

±$9,252

N

I/Y

PV

PMT

FV

Solve for

$16,390.48

Enter

13

11%

±$81,355

N

I/Y

PV

PMT

FV

Solve for

$315,924.26

Enter

7

7%

±$188,796

N

I/Y

PV

PMT

FV

Solve for

$303,165.12

For each of the following, compute the present value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future value $ 12 6 % $ 15,051 3 12 47,557 28 13 882,073 30 10 546,164 Explanation: To find the PV of a lump sum, we use: PV = FV / (1 + r)t PV = $15,051 / (1.06)12 = $ 7,479.89 PV = $47,557 / (1.12)3 = $ 33,850.13 PV = $882,073 / (1.13)28 = $ 28,794.41 PV = $546,164 / (1.10)30 = $ 31,299.87 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 12 6% $15,051 N I/Y PV PMT FV Solve for $7,479.89 Enter 3 12% $47,557 N I/Y PV PMT FV Solve for $33,850.13 Enter 28 13% $882,073 N I/Y PV PMT FV Solve for $28,794.41 Enter 30 10% $546,164 N I/Y PV PMT FV Solve for $31,299.87

September 11, 2014, 2:29 am

≫ Next: Solve for the unknown interest rate in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 280 5 % $ 372 400 19 1,370 43,000 20 238,809 42,261 30 1,107,073 Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV / PV)1 / t – 1 FV = $372 = $280(1 + r)5; r = ($372 / $280)1/5 – 1 = 0.0585, or 5.85% FV = $1,370 = $400(1 + r)19; r = ($1,370 / $400)1/19 – 1 = 0.0669, or 6.69% FV = $238,809 = $43,000(1 + r)20; r = ($238,809 / $43,000)1/20 – 1 = 0.0895, or 8.95% FV = $1,107,073 = $42,261(1 + r)30; r = ($1,107,073 / $42,261)1/30 – 1 = 0.1150, or 11.50% Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 5 $280 ±$372 N I/Y PV PMT FV Solve for 5.85% Enter 19 $400 ±$1,370 N I/Y PV PMT FV Solve for 6.69% Enter 20 $43,000 ±$238,809 N I/Y PV PMT FV Solve for 8.95% Enter 30 $42,261 ±$1,107,073 N I/Y PV PMT FV Solve for 11.50%

≪ Previous: For each of the following, compute the future value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 2,500 12 12 % $ 9,252 6 10 81,355 13 11 188,796 7 7 Explanation: To find the FV of a lump sum, we use: FV = PV(1 + r)t FV = $2,500(1.12)12 = $ 9,739.94 FV = $9,252(1.10)6 = $ 16,390.48 FV = $81,355(1.11)13 = $ 315,924.26 FV = $188,796(1.07)7 = $ 303,165.12 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 12 12% ±$2,500 N I/Y PV PMT FV Solve for $9,739.94 Enter 6 10% ±$9,252 N I/Y PV PMT FV Solve for $16,390.48 Enter 13 11% ±$81,355 N I/Y PV PMT FV Solve for $315,924.26 Enter 7 7% ±$188,796 N I/Y PV PMT FV Solve for $303,165.12

$

0

0

For each of the following, compute the present value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)):

 

Present Value	Years		Interest Rate			Future value
$	12		6	%		$	15,051
	3		12				47,557
	28		13				882,073
	30		10				546,164

Explanation:

To find the PV of a lump sum, we use:

 

PV = FV / (1 + r)t

PV = $15,051 / (1.06)12	=	$	7,479.89
PV = $47,557 / (1.12)3	=	$	33,850.13
PV = $882,073 / (1.13)28	=	$	28,794.41
PV = $546,164 / (1.10)30	=	$	31,299.87

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

12

6%

$15,051

N

I/Y

PV

PMT

FV

Solve for

$7,479.89

Enter

3

12%

$47,557

N

I/Y

PV

PMT

FV

Solve for

$33,850.13

Enter

28

13%

$882,073

N

I/Y

PV

PMT

FV

Solve for

$28,794.41

Enter

30

10%

$546,164

N

I/Y

PV

PMT

FV

Solve for

$31,299.87

Solve for the unknown interest rate in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 280 5 % $ 372 400 19 1,370 43,000 20 238,809 42,261 30 1,107,073 Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV / PV)1 / t – 1 FV = $372 = $280(1 + r)5; r = ($372 / $280)1/5 – 1 = 0.0585, or 5.85% FV = $1,370 = $400(1 + r)19; r = ($1,370 / $400)1/19 – 1 = 0.0669, or 6.69% FV = $238,809 = $43,000(1 + r)20; r = ($238,809 / $43,000)1/20 – 1 = 0.0895, or 8.95% FV = $1,107,073 = $42,261(1 + r)30; r = ($1,107,073 / $42,261)1/30 – 1 = 0.1150, or 11.50% Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 5 $280 ±$372 N I/Y PV PMT FV Solve for 5.85% Enter 19 $400 ±$1,370 N I/Y PV PMT FV Solve for 6.69% Enter 20 $43,000 ±$238,809 N I/Y PV PMT FV Solve for 8.95% Enter 30 $42,261 ±$1,107,073 N I/Y PV PMT FV Solve for 11.50%

September 11, 2014, 2:31 am

≫ Next: Solve for the unknown number of years in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 510 9 % $ 1,212 760 10 1,629 17,900 17 260,563 21,000 15 391,887 Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for t, we get: t = ln(FV / PV) / ln(1 + r) FV = $1,212 = $510(1.09)t; t = ln($1,212/ $510) / ln(1.09) = 10.04 years FV = $1,629 = $760(1.10)t; t = ln($1,629/ $760) / ln(1.10) = 8.00 years FV = $260,563 = $17,900(1.17)t; t = ln($260,563 / $17,900) / ln(1.17) = 17.06 years FV = $391,887 = $21,000(1.15)t; t = ln($391,887 / $21,000) / ln(1.15) = 20.94 years Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 9% $510 ±$1,212 N I/Y PV PMT FV Solve for 10.04 Enter 10% $760 ±$1,629 N I/Y PV PMT FV Solve for 8.00 Enter 17% $17,900 ±$260,563 N I/Y PV PMT FV Solve for 17.06 Enter 15% $21,000 ±$391,887 N I/Y PV PMT FV Solve for 20.94

≪ Previous: For each of the following, compute the present value (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future value $ 12 6 % $ 15,051 3 12 47,557 28 13 882,073 30 10 546,164 Explanation: To find the PV of a lump sum, we use: PV = FV / (1 + r)t PV = $15,051 / (1.06)12 = $ 7,479.89 PV = $47,557 / (1.12)3 = $ 33,850.13 PV = $882,073 / (1.13)28 = $ 28,794.41 PV = $546,164 / (1.10)30 = $ 31,299.87 Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 12 6% $15,051 N I/Y PV PMT FV Solve for $7,479.89 Enter 3 12% $47,557 N I/Y PV PMT FV Solve for $33,850.13 Enter 28 13% $882,073 N I/Y PV PMT FV Solve for $28,794.41 Enter 30 10% $546,164 N I/Y PV PMT FV Solve for $31,299.87

$

0

0

Solve for the unknown interest rate in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)):

 

Present Value				Years		Interest Rate		Future Value
	$	280		5		%		$	372
		400		19					1,370
		43,000		20					238,809
		42,261		30					1,107,073

Explanation:

We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is:

 

FV = PV(1 + r)t

Solving for r, we get:

r = (FV / PV)1 / t– 1

  

FV = $372 = $280(1 + r)5;		r = ($372 / $280)1/5– 1	=	0.0585, or 5.85%
FV = $1,370 = $400(1 + r)19;		r = ($1,370 / $400)1/19– 1	=	0.0669, or 6.69%
FV = $238,809 = $43,000(1 + r)20;		r = ($238,809 / $43,000)1/20– 1	=	0.0895, or 8.95%
FV = $1,107,073 = $42,261(1 + r)30;		r = ($1,107,073 / $42,261)1/30– 1	=	0.1150, or 11.50%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

5

$280

±$372

N

I/Y

PV

PMT

FV

Solve for

5.85%

Enter

19

$400

±$1,370

N

I/Y

PV

PMT

FV

Solve for

6.69%

Enter

20

$43,000

±$238,809

N

I/Y

PV

PMT

FV

Solve for

8.95%

Enter

30

$42,261

±$1,107,073

N

I/Y

PV

PMT

FV

Solve for

11.50%

Solve for the unknown number of years in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 510 9 % $ 1,212 760 10 1,629 17,900 17 260,563 21,000 15 391,887 Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for t, we get: t = ln(FV / PV) / ln(1 + r) FV = $1,212 = $510(1.09)t; t = ln($1,212/ $510) / ln(1.09) = 10.04 years FV = $1,629 = $760(1.10)t; t = ln($1,629/ $760) / ln(1.10) = 8.00 years FV = $260,563 = $17,900(1.17)t; t = ln($260,563 / $17,900) / ln(1.17) = 17.06 years FV = $391,887 = $21,000(1.15)t; t = ln($391,887 / $21,000) / ln(1.15) = 20.94 years Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 9% $510 ±$1,212 N I/Y PV PMT FV Solve for 10.04 Enter 10% $760 ±$1,629 N I/Y PV PMT FV Solve for 8.00 Enter 17% $17,900 ±$260,563 N I/Y PV PMT FV Solve for 17.06 Enter 15% $21,000 ±$391,887 N I/Y PV PMT FV Solve for 20.94

September 11, 2014, 2:32 am

≫ Next: Assume that in January 2010, the average house price in a particular area was $276,400. In January 2002, the average price was $193,300. What was the annual increase in selling price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Annual increase in selling price % Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV / PV)1 / t – 1 r = ($276,400 / $193,300)1/8 – 1 = 0.0457, or 4.57% Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 8 $193,300 ±$276,400 N I/Y PV PMT FV Solve for 4.57%

≪ Previous: Solve for the unknown interest rate in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 280 5 % $ 372 400 19 1,370 43,000 20 238,809 42,261 30 1,107,073 Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV / PV)1 / t – 1 FV = $372 = $280(1 + r)5; r = ($372 / $280)1/5 – 1 = 0.0585, or 5.85% FV = $1,370 = $400(1 + r)19; r = ($1,370 / $400)1/19 – 1 = 0.0669, or 6.69% FV = $238,809 = $43,000(1 + r)20; r = ($238,809 / $43,000)1/20 – 1 = 0.0895, or 8.95% FV = $1,107,073 = $42,261(1 + r)30; r = ($1,107,073 / $42,261)1/30 – 1 = 0.1150, or 11.50% Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 5 $280 ±$372 N I/Y PV PMT FV Solve for 5.85% Enter 19 $400 ±$1,370 N I/Y PV PMT FV Solve for 6.69% Enter 20 $43,000 ±$238,809 N I/Y PV PMT FV Solve for 8.95% Enter 30 $42,261 ±$1,107,073 N I/Y PV PMT FV Solve for 11.50%

$

0

0

Solve for the unknown number of years in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)):

 

	Present Value			Years	Interest Rate			Future Value
	$	510			9	%		$	1,212
		760			10				1,629
		17,900			17				260,563
		21,000			15				391,887

Explanation:

We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for t, we get:

t = ln(FV / PV) / ln(1 + r)

  

FV = $1,212 = $510(1.09)t;		t = ln($1,212/ $510) / ln(1.09)	=	10.04 years
FV = $1,629 = $760(1.10)t;		t = ln($1,629/ $760) / ln(1.10)	=	8.00 years
FV = $260,563 = $17,900(1.17)t;		t = ln($260,563 / $17,900) / ln(1.17)	=	17.06 years
FV = $391,887 = $21,000(1.15)t;		t = ln($391,887 / $21,000) / ln(1.15)	=	20.94 years

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

9%

$510

±$1,212

N

I/Y

PV

PMT

FV

Solve for

10.04

Enter

10%

$760

±$1,629

N

I/Y

PV

PMT

FV

Solve for

8.00

Enter

17%

$17,900

±$260,563

N

I/Y

PV

PMT

FV

Solve for

17.06

Enter

15%

$21,000

±$391,887

N

I/Y

PV

PMT

FV

Solve for

20.94

Assume that in January 2010, the average house price in a particular area was $276,400. In January 2002, the average price was $193,300. What was the annual increase in selling price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Annual increase in selling price % Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV / PV)1 / t – 1 r = ($276,400 / $193,300)1/8 – 1 = 0.0457, or 4.57% Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 8 $193,300 ±$276,400 N I/Y PV PMT FV Solve for 4.57%

September 11, 2014, 2:34 am

≫ Next: Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned.

≪ Previous: Solve for the unknown number of years in each of the following (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)): Present Value Years Interest Rate Future Value $ 510 9 % $ 1,212 760 10 1,629 17,900 17 260,563 21,000 15 391,887 Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for t, we get: t = ln(FV / PV) / ln(1 + r) FV = $1,212 = $510(1.09)t; t = ln($1,212/ $510) / ln(1.09) = 10.04 years FV = $1,629 = $760(1.10)t; t = ln($1,629/ $760) / ln(1.10) = 8.00 years FV = $260,563 = $17,900(1.17)t; t = ln($260,563 / $17,900) / ln(1.17) = 17.06 years FV = $391,887 = $21,000(1.15)t; t = ln($391,887 / $21,000) / ln(1.15) = 20.94 years Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 9% $510 ±$1,212 N I/Y PV PMT FV Solve for 10.04 Enter 10% $760 ±$1,629 N I/Y PV PMT FV Solve for 8.00 Enter 17% $17,900 ±$260,563 N I/Y PV PMT FV Solve for 17.06 Enter 15% $21,000 ±$391,887 N I/Y PV PMT FV Solve for 20.94

$

0

0

Assume that in January 2010, the average house price in a particular area was $276,400. In January 2002, the average price was $193,300.

  

What was the annual increase in selling price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

 

Annual increase in selling price

%

Explanation:

We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is:

FV = PV(1 + r)t

Solving for r, we get:

r = (FV / PV)1 / t– 1

r = ($276,400 / $193,300)1/8– 1 = 0.0457, or 4.57%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

Enter

8

$193,300

±$276,400

N

I/Y

PV

PMT

FV

Solve for

4.57%

---

Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned.

September 26, 2014, 11:08 pm

≫ Next: Pro Golf Corporation produces private label golf clubs for pro shops throughout North America. The company uses activity-based costing to evaluate the profitability of serving its customers. This analysis is based on categorizing the company’s costs as follows, using the ease of adjustment color coding scheme.

≪ Previous: Assume that in January 2010, the average house price in a particular area was $276,400. In January 2002, the average price was $193,300. What was the annual increase in selling price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) Annual increase in selling price % Explanation: We can use either the FV or the PV formula. Both will give the same answer since they are the inverse of each other. We will use the FV formula, that is: FV = PV(1 + r)t Solving for r, we get: r = (FV / PV)1 / t – 1 r = ($276,400 / $193,300)1/8 – 1 = 0.0457, or 4.57% Calculator Solution: Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation. Enter 8 $193,300 ±$276,400 N I/Y PV PMT FV Solve for 4.57%

$

0

0

Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $22.15 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on more remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, a simple system consisting of four activity cost pools seemed to be adequate. The activity cost pools and their activity measures appear below:

Activity Cost Pool	Activity Measure	Activity for the Year
Cleaning carpets	Square feet cleaned (00s)	13,000	hundred square feet
Travel to jobs	Miles driven	273,000	miles
Job support	Number of jobs	2,000	jobs
Other (organization-sustaining     and idle capacity costs)	None	Not applicable

The total cost of operating the company for the year is $363,000, which includes the following costs:

Wages	$	148,000
Cleaning supplies		30,000
Cleaning equipment depreciation		14,000
Vehicle expenses		28,000
Office expenses		63,000
President’s compensation		80,000
Total cost	$	363,000

Resource consumption is distributed across the activities as follows:

Distribution of Resource Consumption Across Activities

	Cleaning Carpets		Travel to Jobs		Job Support		Other		Total
Wages	78	%	11	%	0	%	11	%	100	%
Cleaning supplies	100	%	0	%	0	%	0	%	100	%
Cleaning equipment depreciation	74	%	0	%	0	%	26	%	100	%
Vehicle expenses	0	%	81	%	0	%	19	%	100	%
Office expenses	0	%	0	%	58	%	42	%	100	%
President’s compensation	0	%	0	%	34	%	66	%	100	%

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

1.	Prepare the first-stage allocation of costs to the activity cost pools. (Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

	Cleaning          Carpets	Travel to Jobs	Job        Support	Other	Total
Wages	$	$	$	$	$
Cleaning supplies
Cleaning equipment depreciation
Vehicle expenses
Office expenses
President’s compensation
Total cost	$	$	$	$	$

2.	Compute the activity rates for the activity cost pools. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

Activity Cost Pool	Activity Rate
Cleaning carpets	$	per hundred square feet
Travel to jobs	$	per mile
Job support	$	per job

3.

The company recently completed a 8 hundred square-foot carpet-cleaning job at the Lazy Bee Ranch—a 52.00-mile round-trip from the company’s offices in Eagle-Vail. Compute the cost of this job using the activity-based costing system. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

Cost

$

4.

The revenue from the Lazy Bee Ranch was $177.20 (8 hundred square-feet at $22.15 per hundred square feet). Prepare a report showing the margin from this job. (Input all amounts as positive values except losses which should be indicated by a minus sign. Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

Gore Range Carpet Cleaning Customer Margin—Activity-Based Costing
Sales		$
Costs:
Cleaning carpets	$
Travel to jobs
Job support
Customer margin		$

Explanation:

1.

The first-stage allocation of costs to activity cost pools appears below:

Wages:

Cleaning Carpets = 78% × $148,000 = $115,440

Travel to Jobs = 11% × $148,000 = $16,280

Job Support = 0% × $148,000 = $0

Other = 11% × $148,000= $16,280

Cleaning supplies:

Cleaning Carpets = 100% × $30,000 = $30,000

Travel to Jobs = 0% × $30,000 = $0

Job Support = 0% × $30,000 = $0

Other = 0% × $30,000 = $0

Cleaning equipment depreciation:

Cleaning Carpets = 74% × $14,000 = $10,360

Travel to Jobs = 0% × $14,000 = $0

Job Support= 0% × $14,000 = $0

Other = 26% × $14,000 = $3,640

Vehicle expenses:

Cleaning Carpets = 0% × $28,000 = $0

Travel to Jobs = 81% × $28,000 = $22,680

Job Support = 0% × $28,000 = $0

Other = 19% × $28,000 = $5,320

Office expenses:

Cleaning Carpets = 0% × $63,000 = $0

Travel to Jobs = 0% × $63,000 = $0

Job Support = 58% × $63,000 = $36,540

Other = 42% × $63,000 = $26,460

President's compensation:

Cleaning Carpets = 0% × $80,000 = $0

Travel to Jobs = 0% × $80,000 = $0

Job Support = 34% × $80,000 = $27,200

Other = 66% × $80,000 = $52,800

2.

The activity rates are computed as follows:

Activity Cost Pool	(a) Total Cost		(b) Total Activity		(a) ÷ (b) Activity Rate
Cleaning carpets	$	155,800	13,000	hundred square feet	$	11.98	per hundred square feet
Travel to jobs	$	38,960	273,000	miles	$	0.14	per mile
Job support	$	63,740	2,000	jobs	$	31.87	per job

3.

The cost for the Lazy Bee Ranch job is computed as follows:

Activity Cost Pool	(a) Activity Rate			(b) Activity		(a) × (b) ABC Cost
Cleaning carpets	$	11.98	per hundred square feet	8	hundred square feet	$	95.84
Travel to jobs	$	0.14	per mile	52	miles		7.28
Job support	$	31.87	per job	1	job		31.87
Total						$	134.99

Pro Golf Corporation produces private label golf clubs for pro shops throughout North America. The company uses activity-based costing to evaluate the profitability of serving its customers. This analysis is based on categorizing the company’s costs as follows, using the ease of adjustment color coding scheme.

September 26, 2014, 11:09 pm

≫ Next: Pryad Corporation makes ultra-lightweight backpacking tents. Data concerning the company's two product lines appear below:

≪ Previous: Gore Range Carpet Cleaning is a family-owned business in Eagle-Vail, Colorado. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned.

$

0

0

Pro Golf Corporation produces private label golf clubs for pro shops throughout North America. The company uses activity-based costing to evaluate the profitability of serving its customers. This analysis is based on categorizing the company’s costs as follows, using the ease of adjustment color coding scheme.

   

	Ease of Adjustment Code
Direct materials	Green
Direct labor	Yellow
Indirect labor	Yellow
Factory equipment depreciation	Red
Factory administration	Red
Selling and administrative wages and salaries	Red
Selling and administrative depreciation	Red
Marketing expenses	Yellow

   

Management would like to evaluate the profitability of a particular customer—the Peregrine Golf Club of Eagle, Colorado. Over the last 12 months this customer submitted 2 order for 90 golf clubs that had to be produced in 2 batches due to differences in product labeling requested by the customer. Summary data concerning the order appear below:

   

Number of clubs		90
Number of orders		2
Number of batches		2
Direct labor-hours per club		.30
Selling price per club	$	52.00
Direct materials cost per club	$	24.60
Direct labor rate per hour	$	22.00

   

A cost analyst working in the controller's office at the company has already produced the action analysis cost matrix for the Peregrine Golf Club that follows:

   

Action Analysis Cost Matrix for Peregrine Golf Club
	Activity Cost Pools
	Volume		Batch Processing		Order Processing		Customer Service		Total
Activity	27.00 direct labor-hours		2 batches		2 order		1 customer
Manufacturing overhead:
Indirect labor	$	34.00	$	51.80	$	5.00	$	0.00	$	90.80
Factory equipment depreciation		103.20		.70		0.00		0.00		103.90
Factory administration		15.40		.60		12.00		221.00		249.00
Selling and administrative overhead:
Wages and salaries		13.00		0.00		35.00		388.00		436.00
Depreciation		0.00		0.00		4.00		20.00		24.00
Marketing expenses		116.40		0.00		60.00		372.00		548.40
Total	$	282.00	$	53.10	$	116.00	$	1,001.00	$	1,452.10

   

Required:

Prepare an action analysis report showing the profitability of the Peregrine Golf Club. Include direct materials and direct labor costs in the report. (Round your answers to 2 decimal places. Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

   

Peregrine Golf Club
Sales		$
Green costs:
Direct materials	$
Green margin
Yellow costs:
Direct labor
Indirect labor
Marketing expenses
Yellow margin
Red costs:
Factory equipment depreciation
Factory administration
Selling and administrative wages and salaries
Selling and administrative depreciation
Red margin		$

Explanation:

Sales = 90 clubs × $52.00 per club = $4,680.00

Direct materials = 90 clubs × $24.60 per club = $2,214.00

Direct labor = 90 clubs × .30 hour per club × $22.00 per hour = $594.00

Pryad Corporation makes ultra-lightweight backpacking tents. Data concerning the company's two product lines appear below:

September 26, 2014, 11:11 pm

≫ Next: Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company’s cost analyst has determined that if a truck is driven 147,000 miles during a year, the average operating cost is 8.7 cents per mile. If a truck is driven only 98,000 miles during a year, the average operating cost increases to 9.6 cents per mile.

≪ Previous: Pro Golf Corporation produces private label golf clubs for pro shops throughout North America. The company uses activity-based costing to evaluate the profitability of serving its customers. This analysis is based on categorizing the company’s costs as follows, using the ease of adjustment color coding scheme.

$

0

0

Pryad Corporation makes ultra-lightweight backpacking tents. Data concerning the company's two product lines appear below:

 

	Deluxe			Standard
Direct materials per unit	$	82		$	51
Direct labor per unit	$	12.40		$	9.50
Direct labor-hours per unit		.80	DLHs		1.00	DLHs
Estimated annual production		25,000	units		30,000	units

  

The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

 

Estimated total manufacturing overhead	$310,000
Estimated total direct labor-hours	50,000	DLHs

 

Required:
1.	Determine the unit product costs of the Deluxe and Standard products under the company's traditional costing system. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

	Deluxe	Standard
Unit product cost	$	$

2.	The company is considering replacing its traditional costing system for determining unit product costs for external reports with an activity-based costing system. The activity-based costing system would have the following three activity cost pools:

 

			Expected Activity
Activities and Activity Measures	Estimated Overhead Cost		Deluxe	Standard	Total
Supporting direct labor (direct labor-hours)	$	175,000	20,000	30,000	50,000
Batch setups (setups)		66,700	180	110	290
Safety testing (tests)		68,300	29	71	100
Total manufacturing overhead cost	$	310,000

  

Determine the unit product costs of the Deluxe and Standard products under the activity-based costing system. (Round your intermediate and final answers to 2 decimal places. Omit the "$" sign in your response.)

	Deluxe	Standard
Unit product cost	$	$

Explanation:

1.

The predetermined overhead rate is computed as follows:

 

Predetermined overhead rate	=	$310,000	= $6.20 per DLH
		50,000 DLHs

  

The unit product costs under the company's traditional costing system are computed as follows:

	Deluxe		Standard
Direct materials	$	82.00	$	51.00
Direct labor		12.40		9.50
Manufacturing overhead            (.80 DLH × $6.20 per DLH; 1.00 DLH × $6.20 per DLH)		4.96		6.20
Unit product cost	$	99.36	$	66.70

2.

The activity rates are computed as follows:

Activities	(a) Estimated Overhead Cost		(b) Total Expected Activity		(a) ÷ (b) Activity Rate
Supporting direct labor	$	175,000	50,000	DLHs	$	3.50	per DLH
Batch setups	$	66,700	290	setups	$	230	per setup
Safety testing	$	68,300	100	tests	$	683.00	per test

Manufacturing overhead is assigned to the two products as follows:

Deluxe Product:

Activity Cost Pool	(a) Activity Rate			(b) Activity		(a) × (b) ABC Cost
Supporting direct labor	$	3.50	per DLH	20,000	DLHs	$	70,000
Batch setups	$	230	per setup	180	setups		41,400
Safety testing	$	683.00	per test	29	tests		19,807
Total						$	131,207

Standard Product:

Activity Cost Pool	(a) Activity Rate			(b) Activity		(a) × (b) ABC Cost
Supporting direct labor	$	3.50	per DLH	30,000	DLHs	$	105,000
Batch setups	$	230	per setup	110	setups		25,300
Safety testing	$	683.00	per test	71	tests		48,493
Total						$	178,793

 

Activity-based costing unit product costs are computed as follows:

 

	Deluxe		Standard
Direct materials	$	82.00	$	51.00
Direct labor		12.40		9.50
Manufacturing overhead         ($131,207 ÷ 25,000 units; $178,793 ÷ 30,000 units)		5.25		5.96
Unit product cost	$	99.65	$	66.46

Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company’s cost analyst has determined that if a truck is driven 147,000 miles during a year, the average operating cost is 8.7 cents per mile. If a truck is driven only 98,000 miles during a year, the average operating cost increases to 9.6 cents per mile.

September 26, 2014, 11:18 pm

≫ Next: Alden Company has decided to use a contribution format income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas:

≪ Previous: Pryad Corporation makes ultra-lightweight backpacking tents. Data concerning the company's two product lines appear below:

$

0

0

Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company’s cost analyst has determined that if a truck is driven 147,000 miles during a year, the average operating cost is 8.7 cents per mile. If a truck is driven only 98,000 miles during a year, the average operating cost increases to 9.6 cents per mile.

Required:
1.	Using the high-low method, estimate the variable and fixed cost elements of the annual cost of truck operation. (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your response.)

Variable cost	$	per mile
Fixed cost	$	per year

2.	Express the variable and fixed costs in the form Y = a + bX. (Round the "Variable cost per mile" to 3 decimal places and the "Fixed cost" to the nearest dollar amount. Omit the "$" sign in your response.)

Y  =

$

+

$

X

3.	If a truck were driven 122,000  miles during a year, what total cost would you expect to be incurred? (Round the "Variable cost per mile" to 3 decimal places. Round your intermediate and final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Total annual cost

$

Explanation:

1.

	Miles Driven	Total Annual Cost*
High level of activity	147,000	$12,789
Low level of activity	98,000	9,408
Change	49,000	$  3,381

* 147,000 miles × $.087 per mile = $12,789

98,000 miles × $.096 per mile = $9,408

Variable cost per mile:

Change in cost	=	$3,381	= $.069 per mile
Change in activity		49,000 miles

Fixed cost per year:

Total cost at 147,000 miles	$12,789
Less variable cost element: 147,000 miles × $.069 per mile	10,143
Fixed cost per year	$  2,646

3.

Fixed cost	$  2,646
Variable cost: 122,000 miles × $.069 per mile	8,418
Total annual cost	$11,064

Alden Company has decided to use a contribution format income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas:

September 26, 2014, 11:21 pm

≫ Next: Yedder Enterprises was a pioneer in designing and producing precision surgical lasers. Yedder’s product was brilliantly designed, but the manufacturing process was neglected by management with a consequence that quality problems have been chronic.

≪ Previous: Speedy Parcel Service operates a fleet of delivery trucks in a large metropolitan area. A careful study by the company’s cost analyst has determined that if a truck is driven 147,000 miles during a year, the average operating cost is 8.7 cents per mile. If a truck is driven only 98,000 miles during a year, the average operating cost increases to 9.6 cents per mile.

$

0

0

Alden Company has decided to use a contribution format income statement for internal planning purposes. The company has analyzed its expenses and has developed the following cost formulas:

Cost	Cost Formula
Cost of goods sold	$27 per unit sold
Advertising expense	$184,000 per quarter
Sales commissions	7% of sales
Administrative salaries	$94,000 per quarter
Shipping expense	?
Depreciation expense	$64,000 per quarter

Management has concluded that shipping expense is a mixed cost, containing both variable and fixed cost elements. Units sold and the related shipping expense over the last eight quarters are given below:

Quarter	Units Sold	Shipping Expense
Year 1:
First	30,000	$174,000
Second	32,000	$189,000
Third	37,000	$231,000
Fourth	33,000	$194,000
Year 2:
First	31,000	$184,000
Second	34,000	$199,000
Third	44,400	$246,000
Fourth	41,400	$222,000

Management would like a cost formula derived for shipping expense so that a budgeted contribution format income statement can be prepared for the next quarter.

Required:
1.	Using the high-low method, estimate a cost formula for shipping expense based on the data for the last eight quarters above. (Omit the "$" sign in your response.)

Y = $ + $ X

2.

In the first quarter of Year 3, the company plans to sell 37,000 units at a selling price of $55 per unit. Prepare a contribution format income statement for the quarter. (Input all amounts as positive values except losses which should be indicated by a minus sign. Omit the "$" sign in your response.)

Alden Company Budgeted Income Statement For the First Quarter of Year 3
Sales		$
Variable expenses:
Cost of goods sold	$
Shipping expense
Sales commissions
Total variable expenses
Contribution margin
Fixed expenses:
Shipping expense
Advertising expense
Administrative salaries
Depreciation expense
Total fixed expenses
Net operating income		$

Explanation:1.
High-low method:

	Units Sold		Shipping Expense
High activity level	44,400		$	246,000
Low activity level	30,000			174,000
Change	14,400		$	72,000

Variable cost per unit	=	Change in cost
		Change in activity

	=	$72,000	= $5 per unit
		14,400 units

Fixed cost element:

Total shipping expense at high activity level	$	246,000
Less variable element:     44,400 units × $5.00 per unit		222,000
Fixed cost element	$	24,000

Therefore, the cost formula is: Y = $24,000 + $5X.

2.

Sales: (37,000 units × $55 per unit) = $2,035,000

Cost of goods sold: (37,000 units × $27 per unit) = $999,000

Shipping expense: (37,000 units × $5 per unit) = $185,000

Sales commission: ($2,035,000 × .07) = $142,450