Derek Deeler, majority stockholder and president of Deeler, Inc., is working with his top managers on future plans for the company. As the company's managerial accountant, you've been asked to analyze the following situations and make recommendations to the management team.
1. Division A of Deeler, Inc. has $4,950,000 in assets. Its yearly fixed costs are $985,000, and the variable costs of its product line are $1.70 per unit. The division's volume is currently 550,000 units. Competitors offer a similar product, at the same quality, to retailers for $4.00 each. Deeler's management team wants to earn a 6% return on investment on the division's assets What is Division A's target full product cost? a. b. Given the division's current costs, will Division A be able to achieve its target profit? c. Assume Division A has identified ways to cut its variable costs to $1.55 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the division to achieve its target profit? d. Division A is considering an aggressive advertising campaign strategy to differentiate its product from its competitors. The division does not expect volume to be affected, but it hopes to gain more control over pricing. If Division A has to spend $155,000 next year to advertise and its variable costs continue to be $1.55 per unit, what will its cost-plus price be? Do you think Division A will be able to sell its product at the cost-plus price? Why or why not? 2. The division manager of Division B received the following operating income data for the past year: EE(Click the icon to view the Division B operating income data.) The manager of the division is surprised that the T205 product line is not profitable. The division accountant estimates that dropping the T205 product line will decrease fixed cost of goods sold by $77,000 and decrease fixed selling and administrative expenses by $17,000 a. Prepare a differential analysis to show whether Division B should drop the T205 product line b. What is your recommendation to the manager of Division B? 3. Division C also produces two product lines. Because the division can sell all of the product it can produce, Deeler is expanding the plant and needs to decide which product line to emphasize. To make this decision, the division accountant assembled the following data: (Click the icon to view the Division C product data.) After expansion, the factory will have a production capacity of 4,900 machine hours per month. The plant can manufacture either 26 units of K707s or 56 units of G582s per machine hour. Identify the constraining factor for Division C. a. b. Prepare an analysis to show which product line to emphasize. 4. Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,450,000. Expected annual net cash inflows are $1,500,000, with zero residual value at the end of 10 years. Under Plan B, Division D would begin producing a new product at a cost of $8,340,000. This plan is expected to generate net cash inflows of $1,120,000 per year for 10 years, the estimated useful life of the product line. Estimated residual value for Plan B is $1,300,000. Division D uses straight-line depreciation and requires an annual return of 8% Compute the payback, the ARR, the NPV, and the profitability index for both plans a. b. Compute the estimated IRR of Plan A. Use Excel to verify the NPV calculations in Requirement 4(a) and the actual IRR for the two plans. How does the IRR of each plan compare with the company's required rate of return? C. d. Division D must rank the plans and make a recommendation to Deeler's top management team for the best plan. Which expansion plan should Division D choose? Why? Data Table Data Table Division B of Deeler, Inc. Per Unit Income Statement K707 G582 For the Year Ended December 31, 2018 Sales price 82 $ 49 30 23 Product Line Variable costs T205 B179 Total 52 $ 25 Contribution margin 400,000 770,000 Net Sales Revenue 370,000 $ Contribution margin ratio 63.4% 52.1% Cost of Goods Sold: Variable 35,000 40,000 75,000 Print Done 290,000 64,000 354,000 Fixed 325,000 104,000 429,000 Total Cost of Goods Sold 45,000 Gross Profit 296,000 341,000 Selling and Administrative Expenses: 63.000 Variable 79,000 142,000 43,000 23,000 66,000 Fixed 106,000 102,000 208,000 Total Selling and Administrative Expenses 194,000 133,000 (61,000) S Operating Income (Loss) get profit
