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ACCT 521 ACCT521 Connect Plus Homework 7 (Liberty)

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ACCT 521 Connect Plus Homework 7

A division is considering the acquisition of a new asset that will cost $740,000 and have a cash flow of $277,000 per year for each of the four years of its life. 

 

 

 

 

 Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes

Ocean Division currently earns $930,000 and has divisional assets of $3.4 million. 

 

 

 

 The division manager is considering the acquisition of a new asset that will add to profit. 

 

 

 

 The investment has a cost of $670,000 and will have a yearly cash flow of $163,000.

 

 

 

 The asset will be depreciated using the straight-line method over a five-year life and is expected to have no salvage value.

 

 

 

 Divisional performance is measured using ROI with beginning-of-year net book values in the denominator.

 

 

 

 The company's cost of capital is 15 percent. Ignore taxes.

 

 

 

 The division manager learns that he has the option to lease the asset on a year-to-year lease for $143,000 per year. 

 

 

 

 All depreciation and other tax benefits would accrue to the lessor

Noonan Division has total assets (net of accumulated depreciation) of $2,700,000 at the beginning of year 1. 

 

 

 

 

 

 One of the assets is a machine that has a net book value of $320,000. 

 

 

 

 

 

 Expected divisional income in year 1 is $370,000 including $23,000 in income generated by the machine (after depreciation).

 

 

 

 

 

 Noonan’s cost of capital is 9 percent. Noonan is considering disposing of the asset today (the beginning of year 1)

The Caribbean Division of Mega-Entertainment Corporation just started operations.

 

 

 

 It purchased depreciable assets costing $27 million and having a 4-year expected life, after which the assets can be salvaged for $5.4 million. 

 

 

 

 In addition, the division has $27 million in assets that are not depreciable.

 

 

 

 After four years, the division will have $27 million available from these nondepreciable assets.

 

 

 

 This means that the division has invested $54 million in assets with a salvage value of $32.4 million. 

 

 

 

 Annual depreciation is $5.4 million. Annual operating cash flows are $10 million.

 

 

 

 Depreciation is computed on a straight-line basis, recognizing the salvage values noted. Ignore taxes.

 

 

 

 Assume that the division uses beginning-of-year asset values in the denominator for computing ROI

Upper Division of Lower Company acquired an asset with a cost of $570,000 and a four-year life.

 

 

 

 

 

 The cash flows from the asset, considering the effects of inflation, were scheduled as follows

Leapin’ Larry’s Pre-Owned Cars has two divisions, Operations and Financing. 

 

 

 

 Operations is responsible for selling Larry’s inventory as quickly as possible and purchasing cars for future sale. 

 

 

 

 Financing Division takes loan applications and packages loans into pools and sells them in the financial markets.

 

 

 

 It also services the loans. Both divisions meet the requirements for segment disclosures under accounting rules.

 

 

 

 Operations Division had $50.6 million in sales last year. Costs, other than those charged by Financing Division, totaled $39.7 million. 

 

 

 

 Financing Division earned revenues of $12.7 million from servicing loans and incurred outside costs of $10.1 million.

 

 

 

 In addition, Financing charged Operations $6.7 million for loan-related fees.

 

 

 

 Operations’s manager complained to Larry that Financing was charging twice the commercial rate for loan-related fees and that Operations would be better off sending its buyers to an outside lender.

 

 

 

 Financing's manager replied that although commercial rates could be lower, servicing Larry's loans is more difficult, thereby justifying the higher fee

Mississippi Company has two decentralized divisions, Illinois and Iowa. 

 

 

 

 

 

 

 

 

 Illinois always has purchased certain units from Iowa at $29 per unit.

 

 

 

 

 

 

 

 

 Because Iowa plans to raise the price to $38 per unit, Illinois is considering buying these units from outside suppliers for $29 per unit

Amazon Beverages produces and bottles a line of soft drinks using exotic fruits from Latin America and Asia. 

 

 

 

 The manufacturing process entails mixing and adding juices and coloring ingredients at the bottling plant, which is a part of Mixing Division. 

 

 

 

 The finished product is packaged in a company-produced glass bottle and packed in cases of 24 bottles each.

 

 

 

 Because the appearance of the bottle heavily influences sales volume, Amazon developed a unique bottle production process at the company's container plant, which is a part of Container Division. 

 

 

 

 The Mixing Division uses all of the container plant's production.

 

 

 

 Each division (Mixing and Container) is considered a separate profit center and evaluated as such. 

 

 

 

 As the new corporate controller, you are responsible for determining the proper transfer price to use for the bottles produced for Mixing Division.

 

 

 

 At your request, Container Division's general manager asked other bottle manufacturers to quote a price for the number and sizes demanded by Mixing Division

CHS is a large multidivision firm. One division, Health Services, is well known inside CHS for its efficient information technology (IT).

 

 

 

 A smaller division, Optics, has approached Health Services with a proposal that it provide IT support in the form of machine time for some of Optics’s billing and administrative work.

 

 

 

 After an analysis of the demands that Optics would place on the system, the IT manager of Health Services notes that Health Services would have to lease a new server because of the additional load.

 

 

 

 The lease rates for the current server are a fixed annual lease of $3,400 and it averages machine time of 2,880 hours annually.

 

 

 

 The new server leases for an annual rate of $5,170. Because the new server is a faster machine, Health Services can complete its current requirements in only 2,180 hours. 

 

 

 

 The work for Optics is estimated to be 1,180 hours.

 

 

 

 In addition to leasing a new server, there are two other changes Health Services would have to make in IT. 

 

 

 

 First, they will have to upgrade their server support position. 

 

 

 

 The IT manager estimates that it will cost an additional $20,100 per year to get an individual with the necessary advanced training. In addition, Health Services has a contract for service from the machine vendor. 

 

 

 

 The support contract is a fixed price contract of $8.00 per hour of machine usage

 

 

 

 The current lease contract can be canceled at no cost if Health Services leases a more expensive machine.

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