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Computing average costs - Excel

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Excel Simulation Difficulty: 1 Basic Section: 11.3 Break-Even Analysis

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Operating cash flow and leverage - Excel

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Excel Simulation Difficulty: 1 Basic Section: 11.5 Operating Leverage

Mountain Goat Inc. produces mountain climbing gear. The company can manufacture mountain climbing shoes for $20.05 per pair in raw material costs and $16.61 per pair in labor expense. The shoes sell for $106 per pair. Last year, production was 180,000 pairs, and the fixed costs of producing the shoes were $730,000.

Required: (a) What were total production costs? (Do not round your intermediate calculations.)

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(b) What is the marginal cost per pair? (Do not round your intermediate calculations.)

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(c) What is the average cost per pair? (Do not round your intermediate calculations.)

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(d)The company is considering a one-time order for an extra 8,000 pairs. What is the minimum total revenue the firm should accept for producing these extra shoes? (Do not round your intermediate calculations.)

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rev: 09_18_2012

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Worksheet Learning Objective: 11-03 How to determine and interpret cash, accounting, and financial break- even points.

Difficulty: Basic Section: 11.3 Break-Even Analysis

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Excel Simulation Difficulty: 1 Basic Section: 11.4 Operating Cash Flow, Sales Volume, and Break- Even

Day Vision Inc. produces sunglasses. The company uses $1.37 in materials and $2.6 in labor to construct each pair. Over the course of one year, Day Vision incurs fixed costs of $420,000. Day Vision anticipates producing 252,000 units this year.

Requirement 1: What is the variable cost per unit? (Do not round your intermediate calculations.)

(Click to select)

Requirement 2: What are the anticipated total costs for the year? (Do not round your intermediate calculations.)

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Requirement 3: (a)If the selling price is $11.9 per unit, what is the Day Vision's break-even quantity on a cash basis? (Do

not round your intermediate calculations.)

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(b)If depreciation is $151,200 per year, what is the accounting break-even quantity? (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-03 How to determine and interpret cash, accounting, and financial break- even points.

Difficulty: Basic Section: 11.3 Break-Even Analysis

Wendy and Wayne are evaluating a project that requires an initial investment of $890,000 in fixed assets. The project will last for fourteen years, and the assets have no salvage value. Assume that depreciation is straight-line to zero over the life of the project.

Sales are projected at 103,000 units per year. Price per unit is $38, variable cost per unit is $26, and fixed costs are $891,780 per year. The tax rate is 35 percent, and the required annual return on this project is 12 percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 19 percent.

Required: (a) Calculate the best-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the worst-case NPV. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

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Worksheet Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment.

Difficulty: Basic Section: 11.2 Scenario and Other What-If Analyses

Wendy and Wayne are evaluating a project that requires an initial investment of $890,000 in fixed assets. The project will last for fourteen years, and the assets have no salvage value. Assume that depreciation is straight-line to zero over the life of the project.

Sales are projected at 103,000 units per year. Price per unit is $38, variable cost per unit is $26, and fixed costs are $891,780 per year. The tax rate is 35 percent, and the required annual return on this project is 12 percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 19 percent.

Required: (a) Calculate the best-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the worst-case NPV. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment.

Difficulty: Basic Section: 11.2 Scenario and Other What-If Analyses

Wendy and Wayne are evaluating a project that requires an initial investment of $890,000 in fixed assets. The project will last for fourteen years, and the assets have no salvage value. Assume that depreciation is straight-line to zero over the life of the project.

Sales are projected at 103,000 units per year. Price per unit is $38, variable cost per unit is $26, and fixed costs are $891,780 per year. The tax rate is 35 percent, and the required annual return on this project is 12 percent. The projections given for price, quantity, variable costs, and fixed costs are all accurate to within +/- 19 percent.

Required: (a) Calculate the best-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the worst-case NPV. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-02 How to perform and interpret a scenario analysis for a proposed investment.

Difficulty: Basic Section: 11.2 Scenario and Other What-If Analyses

At an output level of 31,000 units, you calculate that the degree of operating leverage is 3.00. If output rises to 47,120 units, what will the percentage change in operating cash flow be? (Do not round your intermediate calculations.)

rev: 09_18_2012

156.00%

102.63%

163.80%

160.68%

148.20%

References

Multiple Choice Learning Objective: 11-04 How the degree of operating leverage can affect the cash flows of a project.

Difficulty: Basic Section: 11.5 Operating Leverage

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Consider each of the following projects:

Project Accounting Break-Even Unit Price Unit Variable Cost Fixed Costs Depreciation

Alpha 121,200 $ 40 $ 32 $ 794,000 ? Beta 117,000 ? 44 3,400,000 $ 950,000 Zeta 6,540 111 ? 151,000 120,000

Required: (a) Find the depreciation for Project Alpha. (Do not round your intermediate calculations.)

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(b) Find the unit price for Project Beta. (Do not round your intermediate calculations.)

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(c) Find the unit variable cost for Project Zeta. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-03 How to determine and interpret cash, accounting, and financial break- even points.

Difficulty: Basic Section: 11.4 Operating Cash Flow, Sales Volume, and Break- Even

Randall's Ales & Porters S.A., is considering expanding into Costa Rica. As an incentive, Costa Rica agrees not to charge the company any taxes. The project has the following estimated data:

price = $98 per unit variable costs = $57.82 per unit fixed costs = $7,400 required return = 13 percent initial investment = $12,000 life = three years depreciable life = three years, straight-line.

Required: (a)What is the accounting break-even quantity? (Do not round your intermediate calculations.)

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(b) What is the cash break-even quantity? (Do not round your intermediate calculations.)

(Click to select)

(c) What is the financial break-even quantity? (Do not round your intermediate calculations.)

(Click to select)

(d)What is the degree of operating leverage at the financial break-even level of output? (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-03 How to determine and interpret cash, accounting, and financial break- even points.

Difficulty: Basic Section: 11.4 Operating Cash Flow, Sales Volume, and Break- Even

Knight Shades Inc. is considering adding new line of sunglasses to their designer series. The glasses will sell for $1,100 per pair and have a variable cost of $400 per unit. The company has spent $84,000 for a marketing study that estimates the company will sell 62,000 sunglasses per year for seven years.

The fixed costs each year to produce the sunglasses will be $4,200,000. The company has also spent $630,000 on research and development for the new glasses. The new plant and equipment will cost $12,000,000 at start-up and will be depreciated on a straight-line basis to zero over the seven years. At the end of the seven years the plant and equipment will be worthless. The new sunglasses will also require an increase in net working capital of $586,000 that will be returned at the end of the project. The tax rate is 37 percent, and the cost of capital is 15 percent.

The marketing study also estimates that introducing the new sunglasses will reduce sales of the company's high-priced sunglasses by 15,000 units. The high-priced glasses sell at $1,700 and have variable costs of $800. The study also estimates that the company will increase sales of its cheap sunglasses by 12,000 units. The cheap sunglasses sell for $600 and have variable costs of $200 per unit.

Knight Shades Inc. estimates the project's NPV to be $70,215,660.28, but would like to know the sensitivity of NPV to changes in the price of the new sunglasses and the quantity of new sunglasses sold. Note: you may want to verify the base-case NPV to make sure you're setting up the problem correctly.

Required: (a)What is the sensitivity of the NPV to changes in the price of the new sunglasses?

Note: In your economics classes you learned that sensitivity (elasticity) is defined as the percent change in one variable due to a percent change in another variable. Hence, it is easiest to estimate the sensitivity by re-calculating the NPV if price increases by 1%. (Do not round your intermediate calculations.)

(Click to select)

(b)What is the sensitivity of the NPV to changes in the quantity sold? Calculate the sensitivity by assuming sales increase by 1%. (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012, 11_12_2012

We are evaluating a project that costs $976,000, has an 15-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 143,000 units per year. Price per unit is $40, variable cost per unit is $25, and fixed costs are $992,592 per year. The tax rate is 35 percent, and we require a 11 percent return on this project.

Requirement 1: Break-Even (a) Calculate the accounting break-even point. (Do not round your intermediate calculations.)

(Click to select)

(b)What is the degree of operating leverage at the accounting break-even point? (Do not round your intermediate calculations.)

(Click to select)

Requirement 2: Base-Case & NPV Sensitivity (a)Calculate the base-case operating cash flow. (Do not round your intermediate calculations.)

(Click to select)

(b) Calculate the base-case NPV. (Do not round your intermediate calculations.)

(Click to select)

(c)What is the sensitivity/elasticity of NPV to changes in the sales figure? Recall from your economics class that an elasticity measures a percentage change in one variable due to a percentage change in another. So simply increase sales quantity by 1 percent, calculate the new NPV, and then calculate the percentage change in the NPV. (Do not round your intermediate calculations.)

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(d)Based on this sensitivity, what is the change in NPV (in dollars) if there is a 10 percent decrease in projected sales? (Do not round your intermediate calculations.)

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Requirement 3: Sensitivity of OCF (a)In addition to NPV, we can calculate the sensitivity of other things, such as OCF. What is the sensitivity of

base-case OCF to changes in the variable cost? Estimate the sensitivity by increasing variable costs by 10%. (Do not round your intermediate calculations.)

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(b)Based on this sensitivity, estimate the change in OCF (in dollars) given a 14% decrease in the variable costs? (Do not round your intermediate calculations.)

(Click to select)

rev: 09_18_2012

References

Worksheet Learning Objective: 11-01 How to perform and interpret a sensitivity analysis for a proposed investment.

Section: 11.4 Operating Cash Flow, Sales Volume, and Break- Even

Difficulty: Basic Learning Objective: 11-03 How to determine and interpret cash, accounting, and financial break- even points.