Conch Republic Electronics is a mid sized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company's finance department. One of the major revenue-producing items manufactured by Conch Republic is a personal digital assistant (PDA). Conch Republic currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features incomparison with newer models. Conch Republic spent $750,000 to develop a proto-type for a new PDA that has all the features of the existing one, but adds new features such as cell phone capability. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new PDA. Conch Republic can manufacture the new PDA for $215 each in variable costs. Fixed costs for the operation are estimated to run $4.3 million per year. The estimated sales volume is 65,000, 82,000 108,000 94,000 and 57,000 per year for the next five years, respectively. The unit price of the new PDA will be $500. The necessary equipment can be purchased for $32.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $3.5 million. Net working capital for the PDAs will be 20 percent of sales and will occur with timing of the cash flows for the year (i.e., there is no initial outlay for NWC). Changes in NWC will thus first occur in Year 1 with the first year’s sales. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return. Shelly has asked Jay to prepare a report that answers the following questions: 1. What is the payback period on the project? 2. Create a net present value chart in your spreadsheet. 3. What is the IRR of the project? 4. What is the NPV of the project? 5. How sensitive is the NPV to changes in the price of the new PDA? 6. How sensitive is the NPV to chances in the quantity sold? 7. Should Conch Republic produce the new PDA? 8. Suppose Conch Republic loses sales on other models because of the introduction of the new model. How would this affect your analysis?
Cost Management: A Strategic Emphasis
Title: Cost Management: A Strategic Emphasis Author: Blocher, Stout & Cokins ISBN: 978-0-07-352694-2 Publisher: McGraw-Hill/Irwin Application of Factory Overhead Tomek Company uses a job costing system that applies factory overhead on the basis of direct labor-hours. The company’s factory overhead budget for 2010 included the following estimates: Budgeted total factory overhead $568,000 Budgeted total direct labor-hours 71,000 blo26940_ch04_091-126.indd 112 blo26940_ch04_091-126.indd 112 6/9/09 2:23:01 PM 6/9/09 2:23:01 PM Confirming Pages Chapter 4 Job Costing 113 At the end of the year, the company shows these results: Actual factory overhead $582,250 Actual direct labor-hours 71,500 The following amounts of the year’s applied factory overhead remained in the various manufacturing accounts: Applied Factory Overhead Work-in-process inventory $139,000 Finished goods inventory 216,840 Cost of goods sold 200,160 Required 1. Compute the firm’s predet...
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