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Various costs associated with the operation of factories are given below. Classify each cost as either variable or fixed with respect to the number of units produced and sold. Also indicate whether each cost would typically be treated as a direct cost or an indirect cost with respect to units of product. List each numbered item with either a ‘V’ for variable or ‘F’ for fixed AND either a ‘D’ for direct cost or ‘I’ for indirect cost so for example: 1. VD, 2. FI, etc.

1. Electricity to run production equipment.
2. Rent on a factory building.
3. Cloth used to make drapes.
4. Prodcution superintendent’s salary.
5. Wages of laborers assembling a product.
6. Depreciation of air purification equipment used to make furniture.
7. Janitorial salaries
8. Peaches used in canning fruit.
9. Lubricants for production equipment.
10. Sugar used in soft drink production.
11. Property taxes on the factory.
12. Wages of workers painting a product.
13. Depreciation on cafeteria equipment.
14. Insurance on a building used in producing helicopters.
15. Cost of rotor blades used in producing helicopters.

 

The ProBuilder Company is considering the introduction of a new product line which will require the construction of a new plant and equipment, estimated to cost $8,000,000 plus $600,000 for shipping and installation. Depreciation will be the straight line method to zero over 10 years. ProBuilder acquired the land on which the plant is to be built a year ago for $500,000, but land prices have risen 15% since then. On termination of the project, it is expected that the land could be sold for $1,100,000.

If the project goes ahead additional working capital equal to 40% of annual sales revenue will be required. Assume the initial working capital is required immediately (T0), and that any subsequent changes also occur at the beginning of each period. Sales revenues are estimated to be $1,000,000 in Year 1, $2,000,000 in Year 2, and $5,000,000 in Years 3 – 10.

Corresponding cash operating are $800,000, $1,250,000 and $2,000,000. ProBuilder expects fixed costs to be $75,000 per year.

i. If the tax rate is 30%, and the cost of capital is 14.5%, should the new product be introduced?
ii. If inflation is expected to average 5% over the next 10 years, does it appear that the project’s cash flow estimates are real or nominal? Is the 14.5% cost of capital a real or nominal rate? Is the current NPV biased, and if so, in which direction?

You are the general manager of a large construction project. The contract has both financial incentives for finishing on time or early as well as large penalties if the project is completed late. To get the project done on time or early that project planning using a formal timeline is essential. You ask the project manager to address the following questions:

1. In terms of creating a timeline, what is meant by the critical path of a PERT chart?

2. As a project manager you know that the fastest possible time a project can be completed is known as the critical path. This implies that any delay in any step of a projects critical path, will therefore delay the overall project. On a particular project, step B is part of the critical path; step C and D both are not. Assume that all of these steps, B, C, and D are at risk of being delayed due to some issue (could be lack of people, lack of materials, equipment downtime – it makes no difference).

How would the manager go about prioritizing correction of the problem existing in B, C, or D?
Should the manager address the issue in step B first, step C first, or step D first; why?

3. Once repair is completed in step #2, how would go you about prioritizing repairs at the other two steps?