Practice Calculations Chapter 11 Problem

Practice Calculations

Chapter 11 Problem 11-A2. a. The formula for present value of a future cash flow is:

FV / (1+r) ^ t where FV = future value, r = discount rate and t = time periods

This calculation must be done with the summed cash flows from each year. On a spreadsheet, the calculation looks like this:

Purchase

Flows

Sum

PV

NPV

Thus, the net present value is $15,380.

The general rule of thumb is that projects with a positive NPV should be accepted. Therefore, this project should be accepted.

The way this question is worded, it sounds like a simple interest question rather than compound. The general formula for simple interest is:

Total payment = (Principle * r * t) + P

We plug the data we know into this equation:

$500,000 = (P * 1.1*4) + P, which we then solve for P. Therefore, P = $357,142.85

This is more of a compound interest question. The total payment is $500,000, but comes in installments, which will reflect a portion of interest and a portion of principle. To solve, this is essentially the same formula as NPV. The difference is that you know the discount rate and NPV, and you are solving for the initial investment. (in fact, you are essentially doing an NPV calculation from the perspective of UBS). The result is $396,233. Formulated on a spreadsheet to break down the interest and principle components of each year:

0

1

2

3

4

Principle

396,233

396,233

310,856

216,942

113,636

Payment

125,000

125,000

125,000

125,000

Interest Pmt

39,623

31,086

21,694

11,364

Principle Pmt

85,377

93,914

103,306

113,636

End Principle

310,856

216,942

113,636

0

11-39. 1. This question is a reprise of the NPV formula, conducted three times to reflect the different costs of capital:

10% = $1,860;

12% = 0%; 14% = -$1,717

2. The IRR can be calculated on Excel using the IRR function. However in this case that is not necessary. The IRR is the point at which the NPV = $0. So the IRR is 12%.

3. Using the NPV model, at 10% the company would accept the project because it has a positive NPV.

4. Using the IRR model, the company would accept the project. The project has an IRR of 12%, which is higher than the company's cost of capital. Thus, it would accept the project.

12-31. 1. With budgeted costs sales as the cost allocation basis, the cost allocation would be as follows:

Sunnyville

Wedgewood

Capital

Total

Budgeted

600,000

1,000,000

400,000

2,000,000

0.3

0.5

0.2

Allocation

60000

100000

40000

200000

2.

Actual

600,000

700,000

500,000

1,800,000

33%

39%

28%

Allocation

$66,667

$77,778

$55,556

$200,000

3. One of the main advantages of using cost allocations for central costs rather than actual sales is that the costs were probably incurred in anticipation of the expected sales levels. Thus, the costs were likely incurred based on the budget allocations, so that each store's cost structure is more accurately reflected if the budget allocation is used instead of the actual sales.

Problem 12-34-1. Gross margin is calculated as gross profit / revenue.

Product a

Product B

Product C

Product D

Gross Margin

12,000 / 32,000 = 37.5%

17,600 / 88,000 = 20%

56,000 / 280,000 = 20%

63,000 / 144,000 = 43.75%

The product that is the most profitable is Product D.

2. The best way to start this question is to figure out the price and COGS per unit for each product. For Product a, the price was $32,000 / 2900 = $11.03 and the COGS per unit is $6.89. For Product B, the price per unit is $20.46 and the COGS per unit is $16.37. For Product C. The price per unit is $51.37 and the COGS per unit is $41.10. For Product D. The price per unit is $90 and the COGS per unit is $50.63.

The next step is to produce an income statement for each customer type.

Problem 12-34

Product a

B

C

D

Price

$11.03

$20.47

$51.38

$90.00

COGS

$6.90

$16.37

$41.10

$50.63

Customer a

Customer B

Customer C

Revenue

$42,822

$141,384

$359,793

COGS

$25,322

$91,759

$278,319

Gross Profit

$17,501

$49,625

$81,474

Gross Margin

40.87%

35.10%

22.64%

The most profitable customer is Customer a.

The cost to serve % of sales is based on the $140,000 cost to serve expense, which is allocated on the basis of sales. This is calculated as follows:

Customer a

Customer B

Customer C

% of sales

7.87%

25.99%

66.14%

Cost to Serve

$11,020

$36,386

$92,594

These are the cost to serve percentage of sales. The most expensive customer to serve is customer C. This is also the customer with the lowest margins, but the highest dollar value of sales. However, all have the same cost-to-serve as a percentage of sales, because cost-to-serve is allocated as a percentage of sales. The figure is 25.74%.

I'm afraid I do not really understand that chart, and can't make Excel draw it. The answer to the question is actually simple, however. The best way to increase the profit for every customer is to increase the percentage of Product D. that is sold. This is the highest margin product, so the more of that product that is sold the better the margin for each customer will be. For Customer C, the gross margin is very low.

Problem 12-35

1. Using the physical units method, Solvent a would have 9000/15000 = 60% and Solvent B. would have 40%. This gives the following cost allocations:

Solvent a = 60% * $300,000 = $180,000

Solvent B = 40% * $300,000 = $120,000

2. Using the relative sales value method, we need to calculate the sales value of each product. Solvent a = $30 * 9000 = $270,000 and Solvent B = $45 * 6000 = $270,000 so 50% each.