Reference no: EM131643372

Question 1 - ABC Company produces a single product. Operating data for the company and its absorption costing income statement for the last year are presented below.

Units in beginning inventory	0
Units produced	9,000
Units sold	7,000
Sales	$100,000

Less cost of goods sold:

Beginning inventory	0
Add cost of goods manufactured	54,000
Goods available for sale	54,000
Less ending inventory	12,000
Cost of goods sold	42,000
Gross margin	58,000
Less selling and admin. expenses	28,000
Net operating income	$30,000

Variable manufacturing costs are $4 per unit. Fixed manufacturing overhead totals $18,000 for the year. The fixed manufacturing overhead was applied at a rate of $2 per unit. Variable selling and administrative expenses were $1 per unit sold. 

Required: Prepare a new income statement for the year using variable costing. Comment on the differences between the absorption costing and the variable costing income statements.

Question 2 - (Ignore income taxes in this problem.) Sampson 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 $550,000, is expected to have a useful life of 10 years, and is expected to have a salvage value of $55,000 at the end of 10 years. The machinery will also need a $35,000 overhaul at the end of Year 5. A $50,000 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 95,000 per year for each of the 10 years. Sampson's discount rate is 16%. 

Required:

Part A: What is the net present value of this investment opportunity?

Part B: Based on your answer to (a) above, should Sampson go ahead with the new conditioning shampoo?