Question
Beacon Company is considering automating its production facility. The initial investment in automation would be $6.23 million, and the equipment has a useful life of
Beacon Company is considering automating its production facility. The initial investment in automation would be $6.23 million, and the equipment has a useful life of 5 years with a residual value of $1,030,000. The company will use straight-line depreciation. Beacon could expect a production increase of 47,000 units per year and a reduction of 20 percent in the labor cost per unit. |
Current (no automation) | Proposed (automation) | |||||
Production and sales volume | 90,000 Units | 137,000 Units | ||||
Per Unit | Total | Per Unit | Total | |||
Sales revenue | $ | 92 | ? | $ | 92 | ? |
Variable costs | ||||||
Direct materials | $ | 16 | $ | 16 | ||
Direct labor | 20 | ? | ||||
Variable manufacturing overhead | 12 | 12 | ||||
Total variable manufacturing costs | 48 | ? | ||||
Contribution margin | $ | 44 | ? | $ | 48 | ? |
Fixed manufacturing costs | 1,140,000 | 2,330,000 | ||||
Net Operating income | ? | ? |
Complete the following table showing the totals and summarize the difference in the alternatives.
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2. | Determine the project's accounting rate of return. (Round your answer to 2 decimal places.) Accounting rate of return _________% 3. Determine the project's payback period. (Round your answer to 2 decimal places.) _________ 4.
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