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Wright Corp. is considering the purchase of a new piece of equipment, which would have an initial cost of $1,000,000 and a 5-year life. There is no salvage value for the equipment. The increase in cash flow each year of the equipment’s life would be as follows:      Year 1 $ 375,000 Year 2 $ 350,000 Year 3 $ 285,000 Year 4 $ 230,000 Year 5 $ 185,000   What is the payback period?

Olive Corp. currently makes 20,000 subcomponents a year in one of its factories. The unit costs to produce are:    Per unit Direct materials   $ 12 Direct labor     8 Variable manufacturing overhead     12 Fixed manufacturing overhead     8 Total unit cost   $ 40 An outside supplier has offered to provide Olive Corp. with the 20,000 subcomponents at a $36 per unit price. Fixed overhead is not avoidable. If Olive Corp. accepts the outside offer, what will be the effect on short-term profits?

North Division has the following information: Sales              $1,200,000 Variable expenses        640,000 Fixed expenses             620,000 If this division is eliminated, the fixed expenses will be allocated to the company’s other divisions. What is the incremental effect on net income if the division is dropped?

Fornelli, Inc. can produce 100 units of a component part with the following costs: Direct Materials            $15,000 Direct Labor            6,500 Variable Overhead      16,000 Fixed Overhead           11,000 If Fornelli, Inc. can purchase 100 units of the component part externally for $44,000 and only $4,000 of the fixed costs can be avoided, what is the correct make-or-buy decision?

Homer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. If the salvage value of the equipment is estimated to be $75,000, what is the annual net cash flow as a result of this investment? (assume that straight-line depreciation method is used)

Byron Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5-year life. The salvage value of the equipment is estimated to be $75,000. If the hurdle rate is 10%, what is the approximate net present value? Ignore income taxes.

It costs Camp, Inc. $52 per unit to manufacture 1,000 units per month of a product that it can sell for $78 each. Alternatively, Camp could process the units further into a more complex product, which would cost an additional $46 per unit. Camp could sell the more complex product for $121 each. How would processing the product further affect Camp’s profit?

Clay Inc. has two divisions, Myrtle and Laurel. Following is the income statement for the previous year:    Myrtle   Laurel   Total Sales $ 560,500   $ 336,700     $ 897,200 Variable Costs   176,700     174,500       351,200 Contribution Margin   383,800     162,200       546,000 Fixed Costs (allocated)   284,875     171,225       456,100 Profit Margin $ 98,925   $ (9,025 )   $ 89,900   What would Clay’s profit margin be if the Laurel division was dropped and all fixed costs are unavoidable?

Underwood, Inc. manufactures two products. It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month. The table below lists the contribution margin, labor and machine time requirements, and demand for each product.    Product A Product B Unit contribution margin $ 49.00   $ 41.00   Demand   1,000 units   2,000 units Labor time   ¾ hour   ½ hour Machine time   1 hour   ½ hour   What is the contribution margin per machine hour for Product A?

Which of the following is not a limitation of using the accounting rate of return method for capital budgeting?