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Rings Company has three product lines, A, B, and C. The following financial information is available: Item Sales Product Line A $ 60,000 Product Line
Rings Company has three product lines, A, B, and C. The following financial information is available: Item Sales Product Line A $ 60,000 Product Line B Product Line C $ 120,000 $ 27,000 Variable costs $ 36,000 $ 64,000 $ 16,875 Contribution margin $ 24,000 $ 56,000 $ 10,125 Fixed costs: Avoidable $ 5,800 $ 16,500 $ 7,500 Unavoidable $ 4,500 $ 12,000 Pre-tax operating income $ 13,700 $ 27,500 $ 3,500 $ (875) If Product Line C is discontinued and the manufacturing space formerly devoted to this line is rented for $6,000 per year, pre-tax operating income for the company will likely: Multiple Choice Be unchanged-the two effects cancel each other out. Increase by $2,175. Increase by $3,375. Increase by $6,075. Increase by some other amount. On January 1, 2021 Tractor Company will acquire a new asset that costs $390,000 and that is anticipated to have a salvage value of $34,000 at the end of four years. The new asset: qualifies as three-year property under the Modified Accelerated Cost Recovery System (MACRS) will replace an old asset that currently has a tax basis of $96,000 and that can be sold on this date for $76,000 (net of selling costs) will continue to generate the same operating revenues as the old asset ($130,000 per year). However, it is predicted that savings in cash operating costs will be experienced as follows: a total of $130,000 in each of the first three years, and $91,000 in the fourth year. Tractor is subject to a combined income tax rate, t, of 40% and rounds all computations to the nearest dollar. Tractor's fiscal year coincides with the calendar year. Assume that any gain or loss affects the taxes paid at the end of the year in which the gain or loss occurs. The company uses the net present value (NPV) method to analyze projects using the factors and rates presented below (based on a discount rate of 14%): Year 2021 PV of $1 at 14% PV of $1 Annuity at 14% 0.877 0.877 2022 0.769 1.647 2023 2024 0.675 0.592 2.322 2.914 MACRS 33% 45% 15% 7% The discounted net-of-tax amount that should be factored into Tractor Company's analysis for the disposal of the old asset (rounded to the nearest whole dollar) is: Multiple Choice $56,256. $75,840. $83,016. $84,000
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