Requirement 1. Division A of Deisel, Inc. has $4,750,000 in assets. Its yearly fixed costs are $782,500, and the variable costs of its product line are $1.25 per unit. The division's volume is currently 510,000 units. Competitors offer a similar product, at the same quality, to retailers for $3.50 each. Deisel's management team wants to earn a 8% return on investment on the division's assets. 1a. What is Division A's target full product cost? Revenue at current market price $ 1,785,000 380,000 Less: Desired profit 1,405,000 Target full product cost 1b. Given the division's current costs, will Division A be able to achieve its target profit? Begin by calculating Division A's current full product cost. Current variable costs $ 637,500 Plus: Current fixed costs 782,500 1,420,000 Current full product cost Division A's current full product costs are higher than its target full product cost, therefore Division A will not be able to acheive its target profit. 1c. Assume Division A has identified ways to cut its variable costs to $1.10 per unit. What is its new target fixed cost? Will this decrease in variable costs allow the division to achieve its target profit? Begin by calculating Division A's new target fixed cost. Target full product cost $ 1,405,000 561,000 Less: Variable costs $ 844,000 Target fixed cost Will this decrease in variable costs allow the company to achieve its target profit? Since the company's actual fixed costs are less than or equal to the new target fixed cost amount, Division A will be able to achieve its target profit without having to take any other cost cutting measures 1d. 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 $105,000 next year to advertise and its variable costs continue to be $1.10 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? 1d. 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 $105,000 next year to advertise and its variable costs continue to be $1.10 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? Begin by calculating the cost-plus price per unit. (Round your answer to the nearest cent.) Current variable costs $ Plus: Fixed costs 561,000 887,500 1,448,500 380,000 $ Full product cost Plus: Desired profit Target revenue $ 1,828,500 510,000 Divided by: Number of units $ 3.59 Cost-plus price per unit Do you think Division A will be able to sell its product at the cost-plus price? Why or why not? If the advertising campaign is effective, Division A should be able to sell its product at this price because it is not significantly higher than the $3.50 charged by competitors. 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 $83,000 and decrease fixed selling and administrative expenses by $15,000. 2a. Prepare a differential analysis to show whether Division B should drop the T205 product line. (Enter decreases to profits with a parentheses or minus sign.) $ (360,000) Expected decrease in revenues Expected decrease in total variable costs $ 106,000 98,000 Expected decrease in fixed costs Expected decrease in total costs 204,000 Expected decrease $ (156,000) in operating income 2b. What is vour recommendation to the manager of Division B? 2b. What is your recommendation to the manager of Division B? Division B should not drop the T205 product line. If the T205 product line is dropped, operating income will decrease. Requirement 3. Division C also produces two product lines. Because the division can sell all of the product it can produce, Deisel 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 either 35 units of K707s or 58 units of G582s per machine hour. 3a. Identify the constraining factor for Division C. Division C's constraining factor is machine hours 3b. Prepare an analysis to show which product line to emphasize. K707 G582 Units produced each hour 35 58 Contribution margin per unit 60 30 S Contribution margin per machine hour 2,100 $ 1,740 Decision: Emphasize the K707 product Requirement 4. Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,400,000. Expected annual net cash inflows are $1,600,000, 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 net cash inflows of $1,050,000 per year for 10 years, the estimated useful life of the product line. Estimated residual value for Plan B is $1,000,000. Division D uses straight-line depreciation and requires an annual return of 10%. 4a. Compute the payback, the ARR, the NPV, and the profitability index for both plans. Begin by calculating the payback for both plans. (Round your answers to one decimal place, X.X.) 4. Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,400,000. Expected annual net cash inflows are $1,600,000, 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 net cash inflows of $1,050,000 per year for 10 years, the estimated useful life of the product line. Estimated residual value for Plan B is $1,000,000 Division D uses 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 D must rank the plans and make a recommendation to Deisel's top management team for the best plan. Which expansion plan should Division D choose? Why? Requirement 4. Division D is considering two possible expansion plans. Plan A would expand a current product line at a cost of $8,400,000. Expected annual net cash inflows are $1,600,000, 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 net cash inflows of $1,050,000 per year for 10 years, the estimated useful life of the product line. Estimated residual value for Plan B is $1,000,000. Division D uses straight-line depreciation and requires an annual return of 10%. 4a. Compute the payback, the ARR, the NPV, and the profitability index for both plans. Begin by calculating the payback for both plans. (Round your answers to one decimal place, X.X.) = Payback Plan A years Plan B years Division B of Deisel, Inc. Income Statement For the Year Ended December 31, 2018 Product Line T205 B179 Total 360,000 $ 370,000 $ 730,000 Net Sales Revenue Cost of Goods Sold: Variable 87,000 41,000 260,000 46,000 62,000 Fixed 322,000 301,000 108,000 409,000 59,000 262,000 321,000 Total Cost of Goods Sold Gross Profit Selling and Administrative Expenses: Variable 65,000 61,000 77,000 23,000 142,000 84,000 Fixed 126,000 100,000 226,000 Total Selling and Administrative Expenses $ (67,000) $ 162,000 $ 95,000 Operating Income (Loss) Per Unit K707 G582 Sales price $ 86 $ 52 26 22 Variable costs $ 60 $ 30 Contribution margin Contribution margin ratio 69.8% 57.7%