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Question
A company is trying to decide which of two new product lines to introduce in the coming year. The predicted revenue and cost data for each product line follows:
| Product A | Product B | |
| Sales............................................................ | $80,000 | $96,000 |
| Direct materials............................................................ | 3,000 | 6,000 |
| Direct labor............................................................ | 30,000 | 45,000 |
| Other cash operating expenses............................................................ | 7,500 | 9,000 |
| New equipment costs............................................................ | 75,000 | 100,000 |
| Estimated useful life (no salvage)............................................................ | 5 years | 5 years |
The company has a 30% tax rate, it uses the straight-line depreciation method, and it predicts that cash flows will be spread evenly throughout each year. Calculate each product's payback period. If the company requires a payback period of three years or less, which, if either, product should be chosen?
Answer
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Related questions
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Although a fixed budget is only useful over the relevant range of operations, a flexible budget is useful over all possible production levels.
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A fixed budget performance report never provides useful information for evaluating variances.
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Use the following information to prepare a budgeted income statement for Arbor Company for the month of June.
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Use the following information to prepare the June cash budget for Arbor Company. It should show expected cash receipts and cash disbursement for the month and the cash balance expected on June 30.
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