Ben Gualita, vice-president of seles, has recommended adding a new product line. A market Study and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Ben Gualita, vice-president of seles, has recommended adding a new product line. A market Study and cost analyses show that the new line should yield the following annual results. Net Sales Cost of Sales Operating Expenses Total Expenses Income before income taxes income taxes (40%) Net Income Net Sales Cost of Sales Operating Expense Total Expense Operating Income Interest Expense Income before income taxes Income taxes (40%) Net Income Total Assets Current Liabilities Long term debt Shareholder's Equity Total liabilities & Equities $ $ $ $ Depreciation of $150,000 is included in the total expenses.Cost of Sales and operating expenses include only direct cost of the new line. $ $ $ $ 2,800,000 1,600,000 200,000 1,800,000 1,000,000 400,000 600,000 $ 12,000,000 $ 7,500,000 1,800,000 9,300,000 2,700,000 100,000 S 2,600,000 1,040,000 $ 1,560,000 $ 12,000,000 3,000,000 1,000,000 8,000,000 $ 12,000,000 *Depreciation expense included total $400,000 for the firm The investment in additional equipment for the production and sale of the new product line has been estimated at $3,000,000.00. "The new product line will yield a 20 percent return on assets," Guslits states. Steve Grunewald, the vice president of production, interrupts. "Are you talking about a cash flow return, Ben?" he asks. "No," Guslits answers. "When depreciation is added back, the cash-flow return will be even greater." The vice president of finance, Jude Gallagher, ask, "How do you think we should finance the investment?" "We should be able to issue long-term notes," Guslits responds. "Our debt at the present is modest. And, with debt financing, we gain the advantage of leverage." "In your estimate, Ben, you forgot to include any interest cost. It will cost us $150,000 after income taxes to finance $3,000,000,"Gallagher replies Examine and comment on Guslits' strategy to finance the investment. Is it likely that shareholders will impressed with the investment? Why? Ben Gualita, vice-president of seles, has recommended adding a new product line. A market Study and cost analyses show that the new line should yield the following annual results. Net Sales Cost of Sales Operating Expenses Total Expenses Income before income taxes income taxes (40%) Net Income Net Sales Cost of Sales Operating Expense Total Expense Operating Income Interest Expense Income before income taxes Income taxes (40%) Net Income Total Assets Current Liabilities Long term debt Shareholder's Equity Total liabilities & Equities $ $ $ $ Depreciation of $150,000 is included in the total expenses.Cost of Sales and operating expenses include only direct cost of the new line. $ $ $ $ 2,800,000 1,600,000 200,000 1,800,000 1,000,000 400,000 600,000 $ 12,000,000 $ 7,500,000 1,800,000 9,300,000 2,700,000 100,000 S 2,600,000 1,040,000 $ 1,560,000 $ 12,000,000 3,000,000 1,000,000 8,000,000 $ 12,000,000 *Depreciation expense included total $400,000 for the firm The investment in additional equipment for the production and sale of the new product line has been estimated at $3,000,000.00. "The new product line will yield a 20 percent return on assets," Guslits states. Steve Grunewald, the vice president of production, interrupts. "Are you talking about a cash flow return, Ben?" he asks. "No," Guslits answers. "When depreciation is added back, the cash-flow return will be even greater." The vice president of finance, Jude Gallagher, ask, "How do you think we should finance the investment?" "We should be able to issue long-term notes," Guslits responds. "Our debt at the present is modest. And, with debt financing, we gain the advantage of leverage." "In your estimate, Ben, you forgot to include any interest cost. It will cost us $150,000 after income taxes to finance $3,000,000,"Gallagher replies Examine and comment on Guslits' strategy to finance the investment. Is it likely that shareholders will impressed with the investment? Why?
Expert Answer:
Answer rating: 100% (QA)
Guslits strategy to finance the investment is to use ... View the full answer
Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ
Posted Date:
Students also viewed these finance questions
-
New England Metals is considering adding a new product line that has an expected life of 8 years. The product manufacturer would require the firm to incur setup costs of $6,400,000 to handle the new...
-
A company that is considering adding a new product line has determined that the first cost would be $80 million. The company is not sure about how the product will be received, so it has projected...
-
A company is trying a new product line in a random sample of stores.Previously; the average of sales at all stores was $5,000 a week. Weekly sales at the stores trying out the new product line were...
-
On the cost of goods manufactured schedule, depreciation onfactory equipment... A. is not listed because it is not a product cost. B. is not an inventoriable cost. C. is not listed because it is...
-
1. Identify and discuss some of the benefits that Blades, Inc., could obtain from DFI. 2. Do you think Blades should wait until next year to undertake DFI in Thailand? What is the tradeoff if Blades...
-
Present a persuasive speech your topic must be something that your audience must decide over, like who to vote for an important position at your workplace, or an action that must be taken or be...
-
The pressure limit in a Otto cycle are 1 bar and 20 bar. The compression ratio is 5. Calculate (a) thermal efficiency, and (b) mean effective pressure. Assume \(\gamma=1.4\) for air.
-
Because of a monumental error committed by its purchasing department, Corner Grocery ordered 5,000 heads of lettuce rather than the 1,000 that should have been ordered. The company paid $0.65 per...
-
How does the selection of solvent polarity and solubility parameters influence the efficiency and selectivity of liquid-liquid extraction processes, particularly in the extraction of complex mixtures...
-
You are the Owners project manager on an electrical upgrade project. Existing overhead power lines are being buried in a duct bank to hide them from view in an area of the town that is being...
-
1. Design Your Own T-Shirt Trial Balance September 30, 2019 DR CR Cash 575,000 Prepaid Insurance 1,890,000 Office Equipment 4,500,000 Accumulated Depreciation, Office Equipment 680,000 Inventory...
-
In business, accuracy counts, so please include a word document that describes how you arrived at the numbers used in your income statement. Make sure you check and recheck your numbers before...
-
Suppose the following: Beginning Inventory = 11167 Ending Inventory= 12334 Beginning Receivables = 6397 Ending Receivables = 6850 Beginning Payables = 8302 Ending Payables = 8925 Credit Sales = 91677...
-
Assess the extent to which legal, regulatory and ethical factors can influence options for funding in the UK, and the extent to which legal and regulatory responses to changes in the commercial...
-
How does the use of ekphrasis in literature create a dialogue between the visual and verbal arts, enriching the reader's sensory experience and aesthetic appreciation ?
-
An owner of a supermarket is a good family friend of yours. He knows that you have been taking an audit course and would like you to help review his supermarket payroll schedule. He believes...
-
Luxury Food Processing Company prepared the following budgeted amounts for the month of March 2023 based on 5,000 units of production: Variable Cost of Production per Unit: Direct materials 3 lbs. @...
-
Explain what is meant by vicarious liability and when it is available?
-
Deli One operates a chain of 10 retirement homes in the Toronto area. Its central food-catering facility, Deliman, prepares and delivers meals to the retirement homes. It has the capacity to deliver...
-
Rashid Daley is the manager of the athletic shoe division of Raider Products. Raider is a European-based company that has just purchased Fastfoot, a leading European shoe company. Fastfoot has...
-
Appleton Company makes wooden toys in its Forming department, and it uses the weighted-average method of process costing. All direct materials are added at the beginning of the process, and...
-
The Current Better Life Survey (https://www.oecdbetterlifeindex.org) is used by the Organization for Economic Co-operation and Development (OECD) to assign Better Life Indices, calculated through...
-
During the spring semester in 2014, an ebook survey was administered to students at Winthrop University. Of the 170 students sampled, 45% indicated that they had used ebooks for their academic work....
-
Suppose a student is interested in knowing the preferred holiday destinations of the faculty members in their university. They are affiliated to the college of business and interview a few of the...
Study smarter with the SolutionInn App