Answer the Following Questions Using the Information Below

question 121

Multiple Choice

Answer the following questions using the information below:
Snowy River Transformers is in the process of evaluating a new product using the following information:
∙ A new transformer has two production runs each year,each with $10 000 in set-up costs.
∙ The new transformer incurred $30 000 in development costs and is expected to be produced over the next three years.
∙ Direct costs of producing the transformers are $40 000 per run of 5000 transformers.
∙ Indirect manufacturing costs charged to each run are $45 000.
∙ Destination charges for each transformer average $1.00.
∙ Customer service expenses average $0.20 per transformer.
∙ The transformers are selling for $25 the first year and will increase by $3 each year thereafter.
∙ Sales units equal production units each year.
-What is the estimated life-cycle operating profit for the first three years?

• A)$840 000
• B)$204 000
• C)$174 000
• D)$636 000

---

Definitions:

Semi-annually Compounded

Relating to the process in which the interest on a loan or investment is calculated and added to the principal amount twice a year.

Effective Annual Rate

A measure of the true interest rate accounting for the effects of compounding over a year.

Contributions

Amounts given or donated to a particular cause, project, or for a retirement account.

Effective Rate of Return

A measure of the return on an investment that accounts for the effect of compounding over a specified time period.