Manufacturing costs: Variable $ 442,000 17,000 $ 26 Fixed 170,000 17,000 10 Total $ 612,000 $ 36
Selling and administrative expenses: Variable($ 2 per unit sold) $ 34,000 Fixed 32,000 Total $ 66,000 Required: Prepare a new income statement for the year using variable costing. Comment on the differences, if any, between the absorption costing and the variable costing income statements.( Points: 30) Question 2.2.( TCO I)( Ignore income taxes in this problem.) Simpson Beauty Products Corporation is considering the production of a new conditioning shampoo that will require the purchase of new mixing machinery. The machinery will cost $ 700,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $ 70,000 at the end of 10 years. The machinery will also need a $ 45,000 overhaul at the end of Year 5. A $ 60,000 increase in working capital will be needed for this investment project. The working capital will be released at the end of the 10 years. The new shampoo is expected to generate net cash inflows of $ 150,000 per year for each of the 10 years. Simpson ' s discount rate is 18 %. Items Year( s) Amount 18 % Factor Present Value Cost of machinery Now($ 700,000) 1($ 700,000) Working capital increase Now($ 60,000) 1($ 60,000) Annual cash inflows 1 – 10 $ 150,000 4.494 674,100 Overhaul 5($ 45,000) 0.437($ 19,665) Salvage value 10 $ 70,000 0.191 13,370 Working capital release 10 $ 60,000 0.191 11,460 Net present value($ 80,735) Required:( a) What is the net present value of this investment opportunity?( b) Based on your answer to( a) above, should Simpson go ahead with the new conditioning shampoo?( Points: 30)