Reference no: EM131760772
Problem - Sven's Component
Sven Nys is a divisional manager of Vandelay Industries. Sven is considering introducing a new business to the existing product line. Introducing the new component would require the purchase of new equipment. The equipment would cost $170,000, last for 2 years, and have zero salvage value at the end of the two years. Sven estimates that the variable overhead associated with the new component will be $95,000 a year and is allocated based on direct labor dollars. The new product will also require hiring a new employee at an annual wage of $30,000/year. This employee manufactures the new component. The new component consumes $20/unit of direct materials. The production volume, sales, and marketing costs for this new component in each of the two years that the new component would be produced are as follows:
|
Year
|
2012
|
2013
|
|
Production (units)
|
1,800
|
1,700
|
|
Sales (units)
|
1,200
|
2,300
|
|
Selling Price/u
|
$150
|
$150
|
|
Marketing Cost
|
$10,000
|
$10,000
|
Vandelay Industries uses full absorption for both book and tax purposes. It is company policy that straight-line depreciation is used for all production machinery, and that fixed overhead is allocated on the basis of units produced. Vandelay Industries uses LIFO (last in, first out) inventory flow assumption. Vandelay Industries uses a 12% discount rate for all net present value calculations and faces a tax rate of 30%.
The company must pay for the machine in cash upon delivery. For purposes of the analysis, assume that all other expenses associated with producing the new component will be paid in cash at the end of the year in which they occur. Also, assume that all sales of the new component will be received in cash at the end of the year in which they occur. Assume that all units produced in the year are complete and ending balance of WIP is 0.
Sven's compensation is a base salary (regardless of whether the firm takes the project) plus a bonus of 10% of after-tax income, which is paid in cash at the end of the year. Please ignore the bonus when calculating the net income below.
Required - What is the incremental after-tax net income for the business line associated with new component in 2012?