Part I: (17 points) Madison Company produces four lines of accessories for major U.S. combine manufacturers. The lines are known by the code letters A, B, C, and D. The current sales mix for Madison Company and the contribution margin ratio for these product lines are as follows: Product Percentage Contribution of Total Margin Line Sales Ratio A 23.67 % 36.00 % B 39.33% 42.00% 21.67 % 24.00 % D 15.33 % 56.00 % Assume total sales for next year are forecast to be $3,500,000 and total fixed costs will be $525,000. 1. Prepare a table showing the values for sales, total variable costs, and the contribution margin (gross profit) associated with each product line and the company as a whole. (15 points total - one point per table value) 2 Calculate break-even sales dollars for accessories produces To major U.S. combine manufacturers. The lines are known by the code letters A, B, C, and D. The current sales mix for Madison Company and the contribution margin ratio for these product lines are as follows: Product Percentage Contribution of Total Margin Line Sales Ratio A 23.67 % 36.00 % B 39.33% 42.00% 21.67 % 24.00 % D 15.33% 56.00 % Assume total sales for next year are forecast to be $3,500,000 and total fixed costs will be $525,000. 1. Prepare a table showing the values for sales, total variable costs, and the contribution margin (gross profit) associated with each product line and the company as a whole. (15 points total - one point per table value) 2. Calculate break-even sales dollars for the Madison Company. (2 points) Part II: (8 points) Green House Tomato Company is considering the purchase of new processing equipment for $1,500,000, with an additional installation cost of $18,000. The new equipment will result in earnings before interest and taxes of $450,000 per year, and to operate the equipment properly, workers would have to go through an initial training session costing the company $50,000. In addition, because the equipment is extremely efficient, its purchase necessitates an increase in inventory of $90,000. Assume the company uses straight-line depreciation, the equipment has an expected life of seven years, the equipment will have no salvage value, the marginal tax rate is 28 percent, and the company has a required rate of return of 12 percent. For each of the final values calculated below, you must show all component numbers that comprise the final value. 1. What is the initial outlay (year O) associated with the equipment? (3 points) is extremely efficient, its purchase necessitates an increase in inventory of $90,000. Assume the company uses straight-line depreciation, the equipment has an expected life of seven years, the equipment will have no salvage value, the marginal tax rate is 28 percent, and the company has a required rate of return of 12 percent. For each of the final values calculated below, you must show all component numbers that comprise the final value. 1. What is the initial outlay (year 0) associated with the equipment? (3 points) 2. What are the annual after-tax cash flows associated with the equipment for years one through six? (3 points) 3. What is the terminal cash flow in year seven? In other words, what is the annual after-tax cash flow in year seven? Do not forget any additional cash flows (inventory) associated with the termination of the equipment? (2 points)
