Here is the question with all requirements.
Dennis Durant, majority stockholder and president of Durant, 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. Read the requirements Requirement 1. Division A of Durant, Inc. has $4,900,000 in assets. Its yearly fixed costs are $825,500, and the variable costs of its product line are $1.40 per unit. The division's volume is currently 470,000 units. Competitors offer a similar product, at the same quality, to retailers for $3.75 each. Durant's management team wants to earn a 6% return on investment on the division's assets. 1a. What is Division A's target full product cost? Less Target full product cost Requirements X - X Data Table nag ger Division B of Durant, Inc. per Income Statement ret For the Year Ended December 31, 2018 Product Line T205 B179 Total Net Sales Revenue $ 280,000 $ 420,000 $ 700,000 Cost of Goods Sold: Variable 33,000 290,000 43.000 65,000 76,000 355,000 Fixed Total Cost of Goods Sold 323,000 108,000 431,000 (43,000) 312.000 269,000 1. Division A of Durant, Inc. has $4,900,000 in assets. Its yearly fixed costs are $825,500, and the variable costs of its product line are $1.40 per unit. The division's volume is currently 470,000 units. Competitors offer a similar product, at the same quality, to retailers for $3.75 each. Durant's management team wants to earn a 6% return on investment on the division's assets. 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? C. Assume Division A has identified ways to cut its variable costs to $1.25 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 $80,000 next year to advertise and its variable costs continue to be $1.25 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: 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 $76,000 and decrease fixed selling and administrative expenses by $16,000. 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. Durant 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 5,000 machine hours per month. The plant can manufacture either 23 units of K707s or 60 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 D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,425,000. 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 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%. Gross Profit Selling and Administrative Expenses: Variable 67,000 41.000 81,000 24.000 148.000 65,000 Fixed 108,000 Total Selling and Administrative Expenses 105,000 213,000 Operating Income (Loss) $ (151,000) $ 207,000 $ 56,000 - X Data Table Per Unit K707 G582 Sales price $ 58 94 $ 29 Variable costs 17 $ 65 $ 41 Print Done Contribution margin Contribution margin ratio 69.1% 70.7% Print Done Requirements - X - X Data Table nag Division B of Durant, Inc. per Income Statement For the Year Ended December 31, 2018 Product Line T205 B179 Total Net Sales Revenue $ 280,000 $ 420,000 $ 700,000 Cost of Goods Sold: Variable 33,000 290,000 43,000 65,000 76,000 355,000 Fixed 323,000 108,000 431,000 (43,000) 312.000 269,000 c. Assume Division A has identified ways to cut its variable costs to $1.25 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 $80,000 next year to advertise and its variable costs continue to be $1.25 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. E: (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 $76,000 and decrease fixed selling and administrative expenses by $16,000 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. Durant 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 5,000 machine hours per month. The plant can manufacture either 23 units of K707s or 60 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 D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,425,000. 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%. 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 D must rank the plans and make a recommendation to Durant's top management team for the best plan. Which expansion plan should Division D choose? Why? Total Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Variable 67,000 41,000 81,000 24,000 148,000 65,000 Fixed 108,000 105,000 213,000 Total Selling and Administrative Expenses S (151,000) S 207,000 $ 56,000 Operating Income (Loss) Data Table -X Per Unit K707 G582 Sales price $ 94 $ 29 58 17 Variable costs $ 65 $ 41 Contribution margin Contribution margin ratio Print Done 69.1% 70.7%
