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Lecture 12

# MGAB03H3 Lecture Notes - Lecture 12: Payback Period, Marginal Cost, Earnings Before Interest And Taxes

Department
Financial Accounting
Course Code
MGAB03H3
Professor
G.Quan Fun
Lecture
12

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B03 – Chapter 12 – Supplementary Questions
Page 1
Question 1
1. The income statement would be:
Sales revenue (72,000 loaves
×
\$1.25
per loaf)
...
\$90,000
Less cost of ingredients (\$90,000
×
40%
)
...........
(
36,000
)
Contribution margin
................................
............
54,000
Less operating expenses:
Utilities
................................
...........................
\$
9,000
Salaries
................................
...........................
18,000
Insurance
................................
........................
3,000
Depreciation*
................................
..................
7,200
Total operating expenses
................................
....
37,200
Operating income
................................
...............
\$16,800
*
\$120,000
×
90% = \$108,000
\$108,000 ÷ 15 years = \$7,200 per year.
2. The formula for the simple rate of return is:
Annual incremental operating income
Simple rate of return = Initial investment
\$16,800
= = 14%
\$120,000
Yes, the return will be acceptable since it exceeds Mr. Perotti’s 12% requirement.
3. The formula for the payback period is:

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B03 – Chapter 12 – Supplementary Questions
Page 2
Initial investment
Payback period = Net annual cash inflow
\$120,000
= = 5 years
\$24,000 per year*
*\$16,800 operating income + \$7,200 depreciation = \$24,000.
Yes, the oven and equipment would be purchased. The payback period is less than the 6-year period
Mr. Perotti requires.
Question 2 :
1. The net annual cost savings is computed as follows:
Reduction in labour costs
................................
....
\$
180,000
Reduction in material costs
................................
.
72,000
Total cost reductions
................................
..........
252,000
Less increased maintenance costs (\$
3,200
×
12
)
.
(38,400)
Net annual cost savings
................................
......
\$
213,600