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2. New product analysis. Perkins Company is considering the introduction of a new product which will be manufactured in an existing plant; however, new equipment
2. New product analysis. Perkins Company is considering the introduction of a new product which will be manufactured in an existing plant; however, new equipment costing $150,000 with a 746 COST AND PROFIT ANALYSIS PART 1 useful life of five years (no salvage value) will be necessary. The space in the existing plant to be. used for the new product is currently used for warehousing. When the new product takes over the warehouse space, on which the actual depreciation is $20,000, Perkins Company will rent ware house space at an annual cost of $25,000. An accounting study produces the following estimates of differential revenue and expense on an average annual basis: Sales. -Cost of merchandise sold (excluding depreciation) Depreciation of equipment (straight-line).. Marketing expenses.. $500.000 385,000 30,000 10,000 The company requires an average annual rate of return of 11% (after income tax) on the average investment in proposals. The effective income tax rate is 46%. (ignore the time value of money.) Required: (1) The average annual differential cost for the first five years (including income tax) which must be considered in evaluating this decision. (2) The minimum annual net income needed to meet the company's requirement for this pr posal. (3) The estimated annual differential income (after allowing for return on investment in n equipment) resulting from introduction of the new product. (4) The estimated differential cash flow during the third year. Sau Insecticid (AICPA adapt mpany is currently produ
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