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the project has a negative npv and therefore it is not profitable 667177

1 – Short Answer

The responses to these questions should not require more than 100 150 words, and may be complete with far fewer words.

A. What should a change in the reported unit cost of a particular product or service imply about the economics of that product or service? Identify one (1) specific condition when a change in the reported unit cost of a particular product or service does not correspond to this economic implication.


C. Identify two
specific and distinct conditions when traditional full absorption cost allocation can be the best method for determining reported unit cost for a particular organization. These conditions should be about the organization, and not about the costs of changing the reporting system.

D. Explain why the following statement is false:

“The project has a negative NPV and therefore it is not profitable.”

2 – Cost Systems

Each of the companies described below currently uses a traditional single cost driver cost system. Indicate whether the benefits of a multiple cost driver system could be greater than the costs to each company by (1) entering either YES or NO and (2) providing a one sentence (or at most two sentence) explanation why.

A. Company A produces three furniture products, tables, desks, and credenzas, in a single production facility. Activities in the facility include cutting, sanding, assembling, and finishing. Each product requires approximately the same amount of time from the resources available for each activity. The market for these furniture products is very competitive.

B. Company B produces three highly specialized machines that other companies use to improve productivity. Company B has only one production facility. Each of the three products requires unique attention at various stages of the production process. Each product also faces little competition because of the many engineering patents Company B possesses.

C. Company C produces three generic pharmaceutical products in a single production facility. The products take turns in the various pieces of equipment. Activities in the production process include heating, cooling, stirring/mixing, testing, separating, and cleaning. One product is very difficult to clean out of the equipment, another product requires extensive testing before it can be approved, and all products require different amounts of heating, cooling, mixing, and separating. The market for these generic pharmaceutical products is very competitive.

D. Company D produces plain 12 ounce aluminum cans that it sells to various beverage producers, who then place their own logos and pictures on the cans and fill the cans with their respective beverages.

3 Micro Devices Division

Assume that the data in case Exhibit 8
(see first tab of Excel doc) are MDD’s budget for the coming year, and that all other information in the case and the preparation document holds unless stated explicitly otherwise in this problem.

The table below contains information about Product SCM DUN. These data are also in the “MDD Data” tab of the Exam Data spreadsheet.

A. 10 Points

Prepare an estimate of the reported unit cost of Product SCM DUN if MDD were to make Product SCM DUN in its production facility. Describe the steps you take and justify any choices you make.

You may use (citing appropriately) values from the in class analysis of the case, and from the follow up assignment analysis, without providing the underlying calculations.

B. 20 Points

The Handheld Products division of Chips ‘R’ Us (MDD’s parent company) currently purchases 500,000 units (die) of Product SCM DUN from Integrated Corporation, a third party producer of high volume chips. Handheld Products pays Integrated Corporation $33.00 per unit of Product SCM DUN.

Assume (1) a marginal corporate tax rate of 25%, (2) a five year window before MDD’s new product pipeline leads to a production plan with overall utilization at 80% without Product SCM DUN, and (3) a 7% cost of corporate capital.

Prepare a one page memo to the MDD Executive Committee regarding whether MDD should insource Product SCM DUN for the next several years.

NOTE: Assume that MDD can handle this volume of Product SCM DUN without approaching 80% utilization.


3 – Micro Devices[30 Points]
A. 10 points

Reported Unit Cost of Product SCM DUN

Explanation and calculation(s):

3 – Micro Devices
B. 20 points

Date: Today

To: Micro Devices Division Executive Committee

From: Re: Insourcing Product SCM DUN
Executive Summary

Supporting Analysis

4 – MS/SCM Pictures

Assume you are the CEO of a MS/SCM Pictures, a small, publicly traded movie production company. While most of your studio’s projects are set for the coming year, there is enough money left in the budget for one additional film. Of the many scripts and ideas that writers and producers have pitched to you, you believe only two have any hope of generating a return for your shareholders. There would be no need to acquire additional equipment, facilities, or other committed resources for either film.

Finally, assume that tax rules permit straight line amortization1 of production costs over the estimated revenue producing life of the film (
all revenues, not just lease revenues).

Death of a Professor is a biographical film about a renowned teacher of cost and managerial accounting. The script is well written and you expect the film to appeal to a more intellectual audience. While you would have to invest in some up front promotional materials, this type of film, when it succeeds, normally does so by word of mouth. Studios typically view this type of film as low risk, because their success does not depend on what else is released the same weekend or on when during the year the release occurs. The expected cash flows for
Death of a Professor ($ millions) are in Table A.

Professor Stuart and the Lost Cost Allocation is an action adventure movie about a renowned teacher of cost accounting who happens to find himself, with alarming frequency, engaged in pitched battles with corporate raiders and venture capitalists. Arnold Schwarzenegger has expressed interest in playing the title role if the film is made. This type of film typically requires greater promotional outlays and production costs than average, but the chance for a blockbuster showing at the box office exists. Additionally, if the film does well it is quite likely that a sequel would also do well. Only 2% of the films that MS/SCM Picture has produced have these characteristics, and the company has yet to make a sequel. The expected cash flows for
Professor Stuart and the Lost Cost Allocation ($ millions) are in Table B.

If you choose to make a sequel, it would start production in year 3 and launch in year 4. Your industry sources suggest that the volatility (variation) of returns to such sequels is 120%. Action adventure sequels have cost, on average, $120 million to produce and promote in the year before release. Your best estimate of the present value of net cash flows
from the sequel in years 4 through 9 (sequel years 1 through 6), as of the end of Year 3, is $125 million.

A. 20 Points

Calculate the net present value of each movie (not including the sequel).

B. 5 Points

Using solely financial criteria, which movie should MS/SCM Pictures produce? “Neither” is not an acceptable response.

C. 5 Points

Explain why the NPV of
Professor Stuart and the Lost Cost Allocation does not capture the total value of the project.

D. 5 Points

Under what condition(s) would you recommend
Professor Stuart and the Lost Cost Allocation instead of
Death of a Professor?

1 “Amortization” is exactly like depreciation, only “amortization” is the term used when the asset involved is not a tangible facility or piece of equipment


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