Creative Furniture Is Considering Two Mutually Exclusive Projects That Would

question 10

Multiple Choice

Creative Furniture is considering two mutually exclusive projects that would automate part of its production facilities. Project A costs $120,000 and would produce net cash flows of $37,000 annually for 5 years. Project B also costs $120,000 and will produce annual net cash flows of $25,000 for 10 years. Creative's cost of capital is 11%. Assume that in 5 years, Project A will still cost $120,000 and produce 5 more years of $37,000 annual net cash flows. Using the equivalent annual annuity method, which project should be chosen?

• A) Project B, as NPV is approximately $823 higher.
• B) Project A, as NPV_B is negative.
• C) Project B, as NPV is approximately $10,473 higher.
• D) Project B, NPV is approximately $90.56 higher.

Calculate the break-even point in both units and dollar sales.

Apply contribution format income statements to decision-making scenarios.

Understand the relationship between sales volume, fixed expenses, and profitability.

Assess the financial implications of changes in production costs and selling price on business operations.

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Definitions:

FOH Budget Variance

is the difference between the budgeted factory overhead costs and the actual overhead costs incurred.

FOH Volume Variance

A measure used in accounting to describe the difference between the budgeted and actual volume of production, affecting fixed overhead costs.

Standard Cost Variances

Differences between the actual costs incurred and the standard costs that were expected or budgeted, used for budget control and financial analysis.

Raw Materials

Basic substances in their natural, modified, or semi-processed state used as inputs to a production process for manufacturing goods.