Quiz 10: Project Cash-Flow Analysis

Business

Fixed and Variable Costs: Fixed costs refer to the costs that change over time but remain fixed to the quantity of production for a relevant time period. Hence fixed costs are time reliable and not depend on the levels of goods and services produced by a company. Variable costs refer to the costs that vary depending on production volume of a company. Variable costs rise as production increases and fall as production decreases a.Since a company tends to increase its production with minimum expenses will prefer temporary workers rather than permanent workers. Temporary workers will be paid less comparatively than permanent workers and this creates the variable costs in a company's budget. Hence, wages paid to temporary workers is a variable cost. b.Whether a particular cost is a fixed or variable cost is based on how it reacts to the change in the business. Property taxes on factory building are a kind of overhead costs which is an indirect manufacturing expense of a company. Hence the property taxes on factory building are a fixed overhead cost as it is not charged directly in the finished goods. c.Whether a particular cost is a fixed or variable cost is based on how it reacts to the change in the business. Hence, property tax on administrative building is a fixed cost. d.Sales commission refers to the amount received by an individual from the sales apart from his regular salary income. Hence, sales commission to a sales person comes under variable cost of a company as variable cost does not change with the changes in the level of activity but affected by the changes in the particular activity. e. Company's overhead expenses include costs such as electricity for machinery and equipment in a plant is a variable cost. These costs are identified when there is a change in the volume of production in a company. f. Since heat and air-conditioning for a plant comes under company's overhead costs which are quite predictable and remains unchanged is termed as fixed cost. g. Since salaries paid to the design engineers are quite predictable and remains unchanged during a volume of production is termed as fixed cost. h. Regular maintenance on machinery and equipment is a kind of semi-variable fixed cost, which varies continuously but not at the direct proportion of volume of production changes. Hence, regular maintenance on machinery and equipment is a fixed cost. i. Since basic raw materials used in production varies in proportion to the change in volume of production is known as a variable cost. j. Since factory fire insurance are quite predictable and remains unchanged during a volume of production is termed as a fixed cost.

Given information: • Taxable income (TI) is $320,000. • Revenue (R) is $100,000. • Operating cost (C) per year is $40,000. • Time period (N) is 2 years. Tax rate for first year: Tax rate can be calculated by using the following formula: img …… (1)Salvage value after 2 year is $12,000. Hence, the depreciation (D) per year is img . Substitute the respective values in Equation (1) to calculate the tax rate. img img The tax rate is img percent. Hence, option c is correct.

Product and period cost: Product costs refer to all the cost included while manufacturing or purchasing a product, such as raw materials purchased and manufacturing overhead costs. Period cost refers to all the cost that is not included while manufacturing or purchasing a product. Sales commission, office rent, administrative and selling cost are few examples of period costs. Examples of product and period costs: a.Since the purchase of raw materials includes in the cost of manufacturing or producing a product is a product cost. b.Since income taxes paid is not included while manufacturing a product and seen as an administrative cost is refers to a period cost. c.Since interest expenses on borrowed funds is not included while manufacturing a product and comes under selling cost is refers to a period cost. d.Since the wages incurred in producing products includes in the cost of manufacturing or producing a product is a product cost. e. Since fire insurance premium paid on factory buildings is not included while manufacturing a product and seen as an administrative cost is refers to a period cost. f. Since electricity bill for the warehouse operation is not included while manufacturing a product and comes under selling cost is refers to a period cost. g. Since the salary paid for engineers is not included while manufacturing a product and seen as an administrative cost is refers to a period cost. h. Since the material handling cost related to production includes in the cost of manufacturing or producing a product is a product cost. i. Since salary paid for the plant manager is not included while manufacturing a product and seen as a marketing cost is refers to a period cost. j. Since leasing expense for fork-lift trucks in warehouse operation is not included while manufacturing a product and comes under selling or marketing cost is refers to a period cost. k. Since mortgage payments on factory buildings is not included while manufacturing a product and comes under selling or marketing cost is refers to a period cost.

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