Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a
ID: 2388214 • Letter: O
Question
Out of Eden, Inc. is planning to invest in new manufacturing equipment to make a new garden tool. The new garden tool is expected to generate additional annual sales of 9,000 units at $42 each. The new manufacturing equipment will cost $156,000 and it is expected to have a 10-year life and $12,000 residual value. Selling expenses related to the new product are expected to be 5% of sales revenue. The cost to manufacture the product includes the following on a pre-unit basis:Direct Labor $7.00
Direct Materials 23.40
Fixed factor overhead-depreciation 1.60
Variable factor overhead 3.60
Total 35.60
Determine the net cash flows for the first year of the project, Years 2-9, and for the last year of the project.
Explanation / Answer
Year 1 Years 2–9 Last Year
Initial investment......................... $(156,000)
Operating cash flows:
Annual revenues (9,000 units × $42).... $ 378,000 $ 378,000 $ 378,000
Selling expenses (5% × $378,000)........(18,900) (18,900) (18,900)
Cost to manufacture
(9,000 units × $34.00)* ................... (306,000) (306,000) (306,000 )
Net operating cash flows .................. $ 53,100 $ 53,100 $ 53,100
Total for Year 1................................ $(102,900)
Total for Years 2–9 (operating cash flow)..... $ 53,100
Residual value............................................ 12,000
Total for last year............................................ $ 65,100
====================
the unit manufacturing cost = $7 + $23.4 + $3.6 = $34
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.