Waterways Corporation is a private corporation formed for the purpose of providing the products and the services needed to irrigate farms, parks, commercial projects, and private homes. It has a centrally located factory in a U.S. city that manufactures the products it markets to retail outlets across the nation. It also maintains a division that provides installation and warranty servicing in six metropolitan areas. The mission of Waterways is to manufacture quality parts that can be used for effective irrigation projects that also conserve water. By that effort, the company hopes to satisfy its customers, provide rapid and responsible service, and serve the community and the employees who represent them in each community. The company has been growing rapidly, so management is considering new ideas to help the company continue its growth and maintain the high quality of its products. Waterways was founded by Will Winkman who is the company president and chief executive officer (CEO). Working with him from the companys inception is Wills brother, Ben, whose sprinkler designs and ideas about the installation of proper systems have been a major basis of the companys success. Ben is the vice president who oversees all aspects of design and production in the company. The factory itself is managed by Todd Senter who hires his two line managers to supervise the factory employees. The factory makes all of the parts for the irrigation systems. The purchasing department is managed by Hector Hines. The installation and training division is overseen by vice president Henry Writer, who supervises the managers of the six local installation operations. Each of these local managers hires his or her own local service people. These service employees are trained by the home office under Henry Writers direction because of the uniqueness of the companys products. There is a small Human Resources department under the direction of Sally Fenton, a vice president who handles the employee paperwork, though hiring is actually performed by the separate departments. Sam Totter is the vice president who heads the sales and marketing area; he oversees 10 well-trained salespeople. The accounting and finance division of the company is headed by Abe Headman, who is the chief financial officer (CFO) and a company vice president; he is a member of the Institute of Management Accountants and holds a certificate in management accounting. He has a small staff of Certified Public Accountants, including a controller and a treasurer, and a staff of accounting input operators who maintain the financial records.

Question 1

Vice President for Sales and Marketing Sam Totter is trying to plan for the coming year in terms of production needs to meet the sales demand. He is also trying to determine ways in which the companys profits might be increased in the coming year. Instructions (a) Waterways markets a simple water control and timer that it mass-produces. During 2021, the company sold 696,000 units at an average selling price of per solution $4.20 per unit. The variable expenses were $1,900,080, and the fixed expenses were $683,256. (1) What is the products contribution margin ratio? (Round to nearest whole percentage) (2) What is the companys break-even point in units and in dollars for this product? (3) What is the margin of safety, both in dollars and as a ratio? (Round to nearest whole percentage) (4) If management wanted to increase its income from this product by 10%, how many additional units would have to be sold to reach this income level? (5) If sales increase by 51,000 units and the cost behaviors do not change, how much will income increase on this product? (b) Waterways is thinking of mass-producing one of its special-order sprinklers. To do so would increase variable costs for all sprinklers by an average of $0.70 per unit. The company also estimates that this change could increase the overall number of sprinklers sold by 10%, and the average sales price would increase $0.20 per unit. Waterways currently sells 491,740 sprinkler units at an average selling price of $26.50. The manufacturing costs are $6,863,512 variable and $2,050,140 fixed. Selling and administrative costs are $2,651,657 variable and $794,950 fixed. (1) If Waterways begins mass-producing its special-order sprinklers, how would this affect the company? (2) If the average sales price per sprinkler unit did not increase when the company began mass-producing the special-order sprinkler, what would be the effect on the company

Question 2

Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays. In 2022 Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes. The following information is available to use in deciding whether to purchase the new backhoes. Old Backhoes New Backhoes Purchase cost when new $90,000 $200,000 Salvage value now $42,000 Investment in major overhaul needed in next year $55,000 Salvage value in 8 years $15,000 $90,000 Remaining life 8 years 8 years Net cash flow generated each year $30,425 $43,900 Instructions (a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul after one year. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.) (1) Using the net present value method for buying new or keeping the old. (2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (3) Comparing the profitability index for each choice. (4) Comparing the internal rate of return for each choice to the required 8% discount rate. (b) Are there any intangible benefits or negatives that would influence this decision? (c) What decision would you make and why?