A company is considering the purchase of new equipment for $48,000. The projecte
ID: 2485966 • Letter: A
Question
A company is considering the purchase of new equipment for $48,000. The projected annual net cash flows are $20,100. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 11% return on investment. The present value of an annuity of 1 for various periods follows:
$16,000
$3,100
$1,118
$19,100
$46,675
If budgeted beginning inventory is $8,950, budgeted ending inventory is $10,180, and budgeted cost of goods sold is $10,910, budgeted purchases should be:
$9,680
$1,230
$12,140
$1,960
$730
Georgia, Inc. has collected the following data on one of its products. The direct materials price variance is:
$36,250 favorable.
$60,000 unfavorable.
$23,750 unfavorable.
$55,750 favorable.
$36,250 unfavorable.
A company is considering the purchase of new equipment for $48,000. The projected annual net cash flows are $20,100. The machine has a useful life of 3 years and no salvage value. Management of the company requires a 11% return on investment. The present value of an annuity of 1 for various periods follows:
Periods Present value of an annuity of 1 at 11% 1 0.9009 2 1.7125 3 2.4437
What is the net present value of this machine assuming all cash flows occur at year-end?
$16,000
$3,100
$1,118
$19,100
$46,675
If budgeted beginning inventory is $8,950, budgeted ending inventory is $10,180, and budgeted cost of goods sold is $10,910, budgeted purchases should be:
$9,680
$1,230
$12,140
$1,960
$730
Georgia, Inc. has collected the following data on one of its products. The direct materials price variance is:
Explanation / Answer
Solution:
1)
Correct Answer is Net Present Value $1,118
Net Present Value = Present Value of Cash Flows – Initial Investment (Present Value of Cash Outflow)
= ($20,100 x 2.4437) - $48,000
= $49,118 - $48,000
= $1,118
2)
Budgeted Purchases = $12,140
Here is the calculation:
Beginning Inventory + Budgeted Purchases – Ending Inventory = Cost of Goods Sold
$8,950 + Budgeted Purchases - $10,180 = $10,910
Budgeted Purchases = $10,910 + 1,230 = $12,140
3)
Material Price Variance = $36,250 favorable
Here is the calculation and working.
Total Direct Material Cost Variance = Material Price Variance + Material Quantity Variance
In this equation we can easily calculate Material Quantity Variance because all the related information are present in the question.
Material Quantity Variance = Standard Price (Standard Quantity for Actual Production - Actual Quantity Used)
Standard Quantity for Actual Production = Actual Units produced x Standard Quantity needed for 1 unit = 30,000*3 lbs = 90,000 lbs
Material Quantity Variance = $2 (90,000 – 120,000) = $60,000 unfavorable
Hence,
Material Price Variance + Material Quantity Variance = Total Direct Material Cost Variance
Material Price Variance + $60,000 Unfavorable = $23,750 Unfavorable
Unfavorable can be shown with minus (-) sign
Material Price Variance - $60,000 = - $23,750
Material Price Variance = -$23,750 + $60,000
Material Price Variance = $36,250 favorable
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