Donovan Davidson, majority stockholder and present of Davidson, Inc., Is working with his top managers on future plans for the company. As a company is managerial accountant, you've been asked to analyze the following situations and make recommendations to the management team.
1. Division A of Davidson, Inc. has $4.700,000 in assets. Its yearly fixed costs are 5808.000, and the variable costs of its product line are $1.90 per unit. The division's volume is currently 460,000 units. Competitors offer a similar product, at the same quality, to retailers for $4.25 each. Davidson's management team wants to earn a 6% retum on investment on the division's assis a. What is Division A's target full product cost? b. Given the division's current costs, will Division A be able to achieve its target profit? 6. Assume Division A has identified ways to cut its variable costs to 51 75 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 580 000 next year to advertise and its variable costs continue to be 51 75 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 Breceived the following operating Income data for the past year 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 $78,000 and decrease fixed selling and administrative expenses by 58,000 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 divinion can sell all of the product it can produce, Davidson 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 4,000 machine hours per month The plant can manufacture other 28 units of K7075 or 45 units of G582s per machine hour a. Identify the constraining factor for Division C. b. Prepare an analysis to show which product line to emphasize 4. Division is considering two possible expansion plans Plan A would expand a current product line at a cost of $8,700,000 Expected annual net cash inflows are $1,650,000 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 $8,250.000. This plan is expected to generate not cash intlows of $1.090.000 per year for 10 years, the estimated useful life of the product line Estimated residual value for Plan B is $1,300.000 Division Duses straight-line depreciation and requires an annual return of 10% a. Compute the payback, the ARR the NPV and the profitability index for both plans b. Compute the estimated IRR of Plan A c. 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? d. Division must rank the plans and make a recommendation to Davidson's top management team for the best plan which expansion plan should Division D choose? Why? Division B of Davidson, Inc. Income Statement For the Year Ended December 31, 2018 Product Line T205 B179 Total Net Sales Revenue $ 340,000 $ 420,000 $ 760,000 Cost of Goods Sold Variable 40,000 280,000 48,000 64,000 88,000 344,000 Fixed 320,000 112,000 432,000 20.000 308,000 328.000 Total Cost of Goods Sold Gross Profit Selling and Administrative Expenses Variable 67,000 55,000 79,000 26,000 146,000 81.000 Fixed 122.000 105,000 227.000 Total Selling and Administrative Expenses $ (102,000) $ 203,000 $ 101,000 Operating Income (Loss) Question 1, COMP26-1 (... Part 1 of 23 Data Table Per Unit K707 G582 $ e variable costs of its product line are $ ame quality, to retailers for $4 25 each 78 $ 28 52 15 Sales price Variable costs Contribution margin Contribution margin ratio $ 50 $ 37 64.1% 71.2% ew target fixed cost? Will this decrease duct from its competitors. The division de In spend Sonnnn neyt var to arrortid
