A Customer Has Approached CapiCal Industries with a Purchase Order

question 32

Multiple Choice

A customer has approached CapiCal industries with a purchase order for a specialty product it needs for the next three years. CapiCal no longer produces the product and the related fully depreciated manufacturing equipment was going to be sold for $50,000. It will take $35,000 to recondition it and approximately 155 hours employee time at $18.50 an hour to set the equipment up. Both set up and production can be incorporated in the current space and in the factory schedule without having to hire additional labour. Sales Revenue for the special order is expected to be $120,000 per year. Direct material for the special order will amount to 55% of revenue. Working capital will expand by $16,000 immediately. Allocated administration costs amount to $5,000. Interest expense is $1,400. The company uses straight-line amortization and a hurdle rate of 10%. What is the net present value (NPV) of the order?

• A) $33,290
• B) $70,853
• C) $75,744
• D) $79,393
• E) $82,874

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Definitions:

Materials Price Variance

The difference between the actual cost of direct materials and the standard cost, multiplied by the actual quantity of materials used.

April

The fourth month of the year in the Gregorian calendar.

Variable Overhead Efficiency Variance

The difference between actual variable overhead based on the hours worked and the standard variable overhead for the same activity level.

July

The month that is positioned seventh in the Gregorian calendar year.