This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $4,530,000 and cash expenses of $3,693,000, one-third of which are labor costs. The current level of investment in this existing division is $12,950,000. (Sales and costs of this division are not affected by the investment decision regarding the complementary line.) Mendoza estimates that incremental (noncash) net working capital of $41,500 will be needed to support the new business line. No additional facilities-level costs would be needed to support the new line-there is currently sufficient excess capacity. However, the new line would require additional cash expenses (overhead costs) of $443,000 per year. Raw materials costs associated with the new line are expected to be $1,480,000 per year, while the total labor cost is expected to double. The CFO of the company estimates that new machinery costing $3,630,000 would need to be purchased. This machinery has a nine- year useful life and an estimated salvage (terminal) value of $580,800. For tax purposes, assume that the Mendoza Company would
This exercise parallels the machine-purchase decision for the Mendoza Company that is discussed in the body of the chapter. Assume that Mendoza is exploring whether to enter a complementary line of business. The existing business line generates annual cash revenues of approximately $4,530,000 and cash expenses of $3,693,000, one-third of which are labor costs. The current level of investment in this existing division is $12,950,000. (Sales and costs of this division are not affected by the investment decision regarding the complementary line.) Mendoza estimates that incremental (noncash) net working capital of $41,500 will be needed to support the new business line. No additional facilities-level costs would be needed to support the new line-there is currently sufficient excess capacity. However, the new line would require additional cash expenses (overhead costs) of $443,000 per year. Raw materials costs associated with the new line are expected to be $1,480,000 per year, while the total labor cost is expected to double. The CFO of the company estimates that new machinery costing $3,630,000 would need to be purchased. This machinery has a nine- year useful life and an estimated salvage (terminal) value of $580,800. For tax purposes, assume that the Mendoza Company would
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter10: Evaluating Decentralized Operations
Section: Chapter Questions
Problem 18E
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