(Appendix 13C) Bedolla Corporation Is Considering a Capital Budgeting Project

question 32

Multiple Choice

(Appendix 13C) Bedolla Corporation is considering a capital budgeting project that would require investing $160,000 in equipment with an expected life of 4 years and zero salvage value. Annual incremental sales would be $430,000 and annual incremental cash operating expenses would be $310,000. The company's income tax rate is 30% and its after-tax discount rate is 8%. The company uses straight-line depreciation. Assume cash flows occur at the end of the year except for the initial investments. The company takes income taxes into account in its capital budgeting.
-The income tax expense in year 2 is:

• A) $12,000
• B) $24,000
• C) $93,000
• D) $129,000

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Definitions:

Manufacturing Overhead

All indirect costs associated with the production process, such as utilities, depreciation on equipment, and factory rent.

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate manufacturing overhead costs to products based on a selected activity base such as machine hours or labor hours.

Direct Labor-Hours

The full extent of hours dedicated by employees who are directly integrated into the production process.

Manufacturing Overhead

All indirect factory-related costs incurred during the production process, excluding direct materials and direct labor costs.