In problem 16-1 of the attached file, I dont understand where the "Table Value" column values come from.

MGT45 HW 4 - Questions Ch 12 - Q 3,4,9,11 Ch 16 - Q 2,5,13,17 MGT45 HW 4 - Questions Ch 12 - Q 3,4,9,11 Ch 16 - Q 2,5,13,17 Chapter 12 3 4 9 11 For product costing one needs to accumulate the costs necessary to produce the product, which are direct materials, direct labor, and overhead. A direct cost is a cost that is easily traceable to a cost object. A cost-benefit analysis is necessary to determine if a cost is easily traceable to a cost object. If the costs or sacrifices to trace a cost are small in relation to the informational benefits, the cost is easily traceable. Direct material and direct labor costs are direct costs of the product. Overhead costs are indirect costs of the product. Overhead is composed of a myriad of costs that have the common property of being indirect costs of the product. Overhead costs are allocated to the product in order to estimate the total cost of manufacturing the product and to evenly spread overhead costs over the units produced in a period. This smoothing will assign an equal amount of indirect cost to each unit of product. Smoothing is necessary for the following reasons: (1) overhead may not be easily traceable to products, (2) some overhead may be unknown when the products are produced and (3) some overhead costs are not related to the number of units produced Chapter 16 2 5 13 17 This concept applies for the following reasons: 1) the smaller present amount can be invested to earn interest that increases its future worth, 2) there is risk associated with the receipt of a future amount so that it takes a greater amount in the future to equal the smaller amount today and 3) inflation depletes the buying power of a future amount so that it takes a greater amount in the future to equal the smaller amount today. In order to obtain assets (capital) to make investments, businesses must pay owners dividends and lenders interest. The return paid to investors and creditors is the company's cost of capital. The company must earn a return on its investments that equals or exceeds its cost of capital in order to stay in business. Accordingly, the cost of capital establishes the minimum acceptable rate of return on investments. Projects that produce zero or positive net present values satisfy the desired rate of return criteria. In other words, the present value of cash inflows will be equal to or greater than the present value of cash outflows. The desired rate of return represents the level of return that management seeks to attain on all investments. The internal rate of return is the actual return from a particular investment. The internal rate of return must be equal to or greater than the desired rate of return in order to satisfy the rate of return criterion for acceptance. Problem 12-1 a. Cost Assignment Categories Dept. M Dept. N Indirect Salary of V. P. of production division Salary of supervisor Department M Salary of supervisor Department N Direct materials cost Department M Direct materials cost Department N Direct labor cost Department M Direct labor cost Department N Direct utilities cost Department M Direct utilities cost Department N General factorywide utilities Production supplies Fringe benefits Depreciation Total costs $864,000 $364,800 $268,800 $1,440,000 $2,016,000 $1,152,000 $3,264,000 $576,000 $115,200 $3,532,800 172,800 172,800 662,400 3,456,000 $5,328,000 $5,664,000 b. The following bases were used to allocate the various indirect costs. Logical arguments for other bases may be possible. The bases and computations used herein are as follows: Cost Base Computation Allocation Rate Salary of VP General utilities Prod. supplies Fringe benefits No. of depts. Direct utility $ Direct mater. $ Direct labor $ $864,000 $172,800 $172,800 $662,400 / / / / 2 $691,200 $3,456,000 $4,416,000 = = = = $432,000 $0.25 $0.05 $0.15 Depreciation Machine hours $3,456,000 / 24,000 = $144 per dept. per utility $ per mater. $ per labor $ per machine hr. Problem 12-1 b. b. The following bases were used to allocate the various indirect costs. Logical arguments for other bases may be possible. The bases and computations used herein are as follows: Cost Base Computation Indirect Costs Salary of VP Allocation Rate Salary of VP General utilities Prod. supplies Fringe benefits No. of depts. Direct utility $ Direct mater. $ Direct labor $ $864,000 $172,800 $172,800 $662,400 / / / / 2 691,200 3,456,000 4,416,000 = = = = $432,000 $0.25 $0.05 $0.15 Depreciation Machine hours $3,456,000 / 24,000 = $144 Salary of VP Allocation Weight Allocated Rate x of Base = To Dept. M $432,000 x 1 dept. = $ 432,000 $432,000 x per dept. per utility $ per mater. $ per labor $ General utilities General utilities Prod. supplies Prod. supplies $0.25 $0.25 $0.05 $0.05 per machine hr. Fringe benefits Fringe benefits Depreciation Depreciation Total allocated cost x x x x 1 dept. = $576,000 $115,200 $1,440,000 $2,016,000 = $ = = $ = 144,000 $0.15 x $1,152,000 = $ 172,800 $0.15 x $144 x $144 x $3,264,000 = 20,000 = $ 4,000 = 2,880,000 $ 3,700,800 Allocated To Dept. N $ 432,000 $ 28,800 $ 100,800 $ 489,600 $ 576,000 $ 1,627,200 72,000 Problem 12-1 cont'd. b. c. Indirect Allocation Costs Rate x of Base = To Dept. M Salary of VP $432,000 x 1 dept. = $432,000 $0 Salary of VP $432,000 x 1 dept. = $0 General utilities General utilities Prod. supplies Prod. supplies Fringe benefits Fringe benefits Depreciation Depreciation $0.25 $0.25 $0.05 $0.05 $0.15 $0.15 $144.00 $144.00 x x x x x x x x Total allocated cost Weight $576,000 $115,200 $1,440,000 $2,016,000 $1,152,000 $3,264,000 20,000 4,000 Allocated = $144,000 = $0 = $72,000 = $0 = $172,800 = $0 = $2,880,000 = $0 $3,700,800 Allocated Department To Dept. N Total direct cost $ 3,532,800 $ 5,664,000 Total indirect cost $ 3,700,800 $ 1,627,200 $432,000 Total production costs (a) $ 7,233,600 $ 7,291,200 $0 $28,800 $0 $100,800 $0 $489,600 $0 $576,000 Number of units (b) Cost per unit (c = a b) Price (c x 1+markup %) $1,627,200 # M 8,000 $904.20 $2,350.92 N 16,000 $455.70 $1,184.82 Problem 12-2 a. Total Estimated Overhead Cost $48,000 Software Package Total cost of software Allocated fixed cost Total cost of sales Average cost per unit Units Total cost Number of units b. Software Package Total cost of software Allocated fixed cost Total cost of sales Average cost per unit Units Total cost Number of units Allocation = Allocation Rate Base 120 = $400 hours per hour EZRecords $128,000 32,000 $160,000 ProOffice $144,000 $16,000 $160,000 320 $500 200 $800 EZRecords $320,000 $32,000 $352,000 ProOffice $288,000 $16,000 $304,000 800 $440 400 $760 c. The allocated fixed costs are spread over a larger number of units. Increasing sales volume enables price reductions. Problem 16-1 a. Alternative 1 Cash Inflows Annual cash inflows Salvage value Working capital recovery Cash outflows Cost of vans Working capital increase Net present value Alternative 2 Cash Inflows Year 1 Year 2 Year 3 Year 4 Salvage value Cash outflows Cost of trucks Training cost Net present value $ $ $ 1,120,000 x 25,000 x 160,000 x $ $ $ $ $ $ $ $ 704,000 1,408,000 1,760,000 1,936,000 320,000 x x x x x Table Value 0.909 0.826 0.751 0.683 0.683 = = = = = $ $ 3,676,607 = 3,040,000 Alternative 2: Present Value of Cash Inflows Present Value of Cash Outflows $ $ 4,666,829 = 3,300,000 2 1.209 1.414 (2,880,000) (160,000) 636,607 Present Value $640,000 $1,163,636 $1,322,314 $1,322,314 $218,564 $ $ $ b. Alternative 1: Present Value of Cash Inflows Present Value of Cash Outflows c. Recommend Alternative because it has a higher NPV Table Value Present Value 3.170 = $ 3,550,249 0.683 = $ 17,075 0.683 = $ 109,282 (3,200,000) (100,000) 1,366,829 "Table" 0 1.000 1 0.909 2 0.826 3 0.751 4 0.683 Problem 16-2 a. Cash Inflows Year 1 Year 2 Year 3 Year 4 Cash outflows Cost of investment Net present value Table Value $352,800 403,200 504,000 772,800 x x x x 0.877 0.769 0.675 0.592 Present Value = = = = $309,474 $310,249 $340,186 $457,560 "table" 0 1.000 ($1,600,000) ($182,532) Since the net present value of the project is negative, Mr. Collins should not approve the project. b. & c. The cash flow should increase by $ 96,000 per year due to the tax savings from depreciation. The revised cash flow forecast and the net present value computation should be as follows: Cash Inflows Year 1 Year 2 Year 3 Year 4 Cash outflows Cost of investment Net present value Table Value $448,800 $499,200 $600,000 $868,800 x x x x 0.877 0.769 0.675 0.592 Present Value = = = = $393,684 $384,118 $404,983 $514,399 ($1,600,000) $97,185 Since the net present value with the revised cash flow is positive, Mr. Collins should approve the project. 1 0.877 2 0.769 3 0.675 4 0.592 Problem 16-3 a. Cash Inflows Year 1 Year 2 Year 3 Year 4 Year 5 Cash outflows Table Value $13,200,000 19,680,000 18,240,000 19,920,000 16,800,000 x x x x x 0.885 0.783 0.693 0.613 0.543 Present Value = = = = = Cost of investment $11,681,416 $15,412,327 $12,641,235 $12,217,309 $9,118,367 (60,000,000) Net present value $1,070,654 b. Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 Cash outflows Table Value $10,800,000 12,240,000 19,680,000 15,600,000 14,400,000 x x x x x 0.885 0.783 0.693 0.613 0.543 Present Value = = = = = $9,557,522 $9,585,715 $13,639,227 $9,567,772 $7,815,743 Cost of investment (60,000,000) Net present value ($9,834,020) c. The postaudit reveals that the original cash flow estimates were inaccurate. Had the decision makers known the real cash flows in advance, they would have rejected the investment opportunity. This result may also cause forecasters of cash flows to be more conservative in their future forecasts. present value table for 13% Years 0 1 2 Factor 1.000 0.885 0.783 3 0.693 4 0.613 5 0.543