Soldrum Company is considering automating its production facility. The initial investment in automation would be $13.10 million, and the equipment has a useful life of 10 years with a residual value of $1.10 million. The company will use straight line depreciation. Soldrum could expect a production increase of 33,000 units per year and a reduction of 20 percent in the labor cost per unit.
| Current (no automation) | Proposed (automation) | |||||
| Production and sales volume | 72,000 units | 105,000 units | ||||
| Per Unit | Total | Per Unit | Total | |||
| Sales revenue | $ | 94 | ? | $ | 94 | ? |
| Variable costs | ||||||
| Direct materials | $ | 15 | $ | 15 | ||
| Direct labor | 20 | ? | ||||
| Variable manufacturing overhead | 9 | 9 | ||||
| | | | | |||
| Total variable manufacturing costs | 44 | ? | ||||
| Contribution margin | $ | 50 | ? | $ | 54 | ? |
| Fixed manufacturing costs | 1,210,000 | 2,200,000 | ||||
| | | |||||
| Net income | ? | ? | ||||
| | | |||||
| | ||||||
rev: 04_11_2012
1. value:
10.00 points
| Requirement 1: |
| Complete the preceding table showing the totals. (Omit the “$” sign in your response.) |
| Current (no automation) | Proposed (automation) | |||||||
| Production and sales volume | 72,000 units | 105,000 units | ||||||
| Per Unit | Total | Per Unit | Total | |||||
| Sales revenue | $ | 94 | $ | $ | 94 | $ | ||
| Variable costs | ||||||||
| Direct materials | $ | 15 | $ | 15 | ||||
| Direct labor | 20 | |||||||
| Variable manufacturing overhead | 9 | 9 | ||||||
| | | | | |||||
| Total variable manufacturing costs | 44 | |||||||
| Contribution margin | $ | 50 | $ | 54 | ||||
| Fixed manufacturing costs | 1,210,000 | 2,200,000 | ||||||
| | | | | |||||
| Net income | $ | $ | ||||||
| | | | | |||||
| | ||||||||
| Worksheet | Difficulty: Hard |
2. value:
10.00 points
| Requirement 2: |
| Determine the project’s accounting rate of return. (Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
| Accounting rate of return | % |
| Worksheet | Difficulty: Hard |
3. value:
10.00 points
| Requirement 3: |
| Determine the project’s payback period. (Round your answer to 2 decimal places.) |
| Payback period | years |
4. value:
10.00 points
| Requirement 4: |
| Using a discount rate of 13 percent, calculate the net present value (NPV) of the proposed investment. (Round your intermediate calculations to 4 decimal places and final answer to the nearest whole dollar amount. Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) |
| Net present value | $ |
| Worksheet | Difficulty: Hard |
5. value:
10.00 points
| Requirement 5: |
| Recalculate the NPV using a 8% discount rate. (Round your intermediate calculations to 4 decimal places and final answer to the nearest whole dollar amount. Omit the “$” sign in your response.) |
| Net present value | $ |
rev: 04_11_2012
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