Capital Budgeting

    Part 1 The Smith Company has accumulated the following data concerning a mixed cost. The company is using the units produced as the activity level. Units Produced Total Cost August 10,000 $14,940 September 8,600 $13,450 October 7,100 $11,200 November 7,700 $12,200 December 8,200 $12,660 Using the high-low method, compute the variable and fixed cost elements. If the company produces 8,000 units, estimate the total cost. Part 2 James LaGrande had recently been appointed controller of the breakfast cereals division of a major food company. One of Jim's first assignments was to prepare the financial analysis for a new cold cereal, Krispie Krinkles. Mr. LaGrande discussed the product with the food lab that had designed it, with the market research department that had tested it, and with the finance people who would have to fund its introduction. After putting all the information together, he developed the following optimistic and pessimistic sales projections: Optimistic Pessimistic Year 1 $1,800,000 $1,000,000 Year 2 3,800,000 1,400,000 Year 3 5,200,000 1,200,000 Year 4 8,200,000 1,000,000 Year 5 10,200,000 600,000 The optimistic predictions assume that the introduction of a popular product is successful. The pessimistic predictions assume that the product is introduced but does not gain wide acceptance and is terminated after 5 years. LaGrande thinks that the most likely results are halfway between the optimistic and pessimistic predictions. LaGrande learned from finance that this type of product introduction requires a predicted rate of return of 16% before top management will authorize funds