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Managerial Accounting Problem Set 1 & 2
Answered

## Problem Set 1 - Decision Making

CariTech (CT) Company produces and sells 7,000 Special purpose chairs per year at a selling price of \$850 each. Its current production equipment, purchased for \$1,850,000 and with a five-year useful life, is only two years old. It has a terminal disposal value of \$0 and is depreciated on a straight-line basis. The equipment has a current disposal price of \$500,000. However, the emergence of a new technology has led CT to consider either upgrading or replacing the production equipment. The following table presents data for the two

 alternatives: A B C 1 Choice Upgrade Replace 2 One-time equipment costs \$3,000,000 \$4,800,000 3 Variable manufacturing cost per chair \$150 \$70 4 Remaining useful life of equipment (years) 3 3 5 Terminal disposal value of equipment 0 0

1. ShouldCT upgrade its production line or replace it? Show your  (10 Marks)

2. Supposethe one-time equipment cost to replace the production equipment is negotiable

All other data are as given previously. What is the maximum one-time equipment cost that CT would be willing to pay to replace the old equipment rather than upgrade it? (10 Marks)

3. Assume that the capital expenditures to replace and upgrade the production equipment areas given in the original exercise, but that the production and sales quantity is not known. For what production and sales quantity would CT (i) upgrade the equipment or (ii) replace the equipment? (10 Marks)

4. Assume that all data are as given in the original exercise. Thom Son is CT’s manager, andhis bonus is based on operating  Because he is likely to relocate after about a year, his current bonus is his primary concern. Which alternative would Thom Son choose? Explain. (10 Marks)

Caribo produces and markets wheelbarrows for the Caribbean market. The following are estimates relating to its 2019 budget:

Selling Price                                           \$1000

Variable cost per wheelbarrow              \$500

Fixed annual cost                             \$150000

Nett Profit (After tax)                      \$300000

Income tax rate 25%

The mid-year review of the income statement revealed that sales were not at the expected level. For the six months of the year to June 2019, 350 units were sold at the estimated selling price with variable cost as planned. However, the net profit projection for 2019 would not be achieved unless management decisions are made. The following mutually exclusive alternatives were presented to management:

a. The selling price should be reduced by \$100. This reduction in selling price will allow1000 units to be sold for the balance of the year. The budgeted fixed cost and variable cost per unit will remain

b. The variable cost per unit will be reduced by \$25 by sourcing less expensive direct Also, the selling price will be reduced by \$150 and the expected sales for the balance of the year is 1200 units.

c. The fixed cost would be reduced by\$15000 and the selling price by 5%. Variable costwill remain unchanged and 1100 units are expected to be sold for the balance of the

1. Assumethat no changes are made to the selling price or costs, calculate the amount of units that Caribo must sell:

i. Tobreakeven (2 Marks)

ii. Toattain the estimated net profit (6 Marks)

2. Determinethe alternative that Caribo should select to achieve its Net profit  (12 Marks)

3. Cost-Volume-Profit (CVP) analysis is a significant tool used in management accounting.Explain cost-volume-profit analysis using the data in this question? (10 Marks)