Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
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Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his division’s return on investment (ROI), which has exceeded 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

 

  Product A Product B
Initial investment:    
Cost of equipment (zero salvage value) $ 180,000 $ 390,000
Annual revenues and costs:    
Sales revenues $ 270,000 $ 360,000
Variable expenses $ 130,000 $ 180,000
Depreciation expense $ 44,000 $ 86,000
Fixed out-of-pocket operating costs $ 80,000 $ 60,000

 

The company’s discount rate is 16%.

 

Required:

1. Calculate the payback period for each product.

2. Calculate the net present value for each product.

3. Calculate the internal rate of return for each product.

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4. Calculate the profitability index for each product.

5. Calculate the simple rate of return for each product.

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, which of the two products should Lou’s division accept

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4. Calculate the profitability index for each product.

5. Calculate the simple rate of return for each product.

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, which of the two products should Lou’s division accept

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Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning