Life-cycle costing. Maximum Metal Recycling and Salvage ...

[bclement10]

Life-cycle costing.
 
  Maximum Metal Recycling and Salvage receives the opportunity to salvage scrap metal and other materials from an old industrial site. The current owners of the site will sign over the site to Maximum at no cost. Maximum intends to extract scrap metal at the site for 24 months and then will clean up the site, return the land to useable condition, and sell it to a developer. Projected costs associated with the project follow:
 
  Ignore time value of money.
 
  Required:
  1. Assuming that Maximum expects to salvage 70,000 tons of metal from the site, what is the total project life cycle cost?
  2. Suppose Maximum can sell the metal for 110 per ton and wants to earn a profit (before taxes) of 30 per ton. At what price must Maximum sell the land at the end of the project to achieve its target profit per ton?
  3. Now suppose Maximum can only sell the metal for 100 per ton and the land at 110,000 less than what you calculated in requirement 2. If Maximum wanted to maintain the same markup percentage on total project life-cycle cost as in requirement 2, by how much would the company have to reduce its total project life-cycle cost?

Question 2

If the Income Statement Debit and Credit columns on a work sheet are not equal after adding the respective columns,
 a. an error has been made.
  b. the company generated a net income.
  c. the company incurred a net loss.
  d. the liabilities must exceed the assets.
  e. the company either generated a net income or incurred a net loss.

[nital]

Answer to Question 1

1.
Total Project Life-Cycle Costs
Variable costs:
Metal extraction and processing (80 per ton  70,000 tons) 5,600,000
Fixed costs:
Metal extraction and processing (2,000  24 months) 48,000
Rent on temporary buildings (1,000  27 months) 27,000
Administration (6,000  27 months) 162,000
Clean-up (20,000  3 months) 60,000
Land restoration 23,000
Selling land 80,000
Total life-cycle cost 6,000,000

2.
Projected Life Cycle Income Statement
Revenue (110 per ton 70,000 tons)
7,700,000
Sale of land (plug after inputting other numbers) 400,000
Total life-cycle cost (6,000,000)
Life-cycle operating income (30 per ton  70,000 tons) 2,100,000

Mark-up percentage on project life-cycle cost =
= 35
The company would have to sell the land for 400,000.
3.
Revenue (100 per ton 70,000 tons)
7,000,000
Sale of land 290,000
Total revenue 7,290,000
Total life-cycle cost at mark-up of 35
(7,290,000  1.35) 5,400,000
The company would need to reduce total life-cycle costs by
(6,000,000  5,400,000)  600,000
Check
Revenue 7,000,000
Sale of land 290,000
Total life-cycle cost (5,400,000)
Life-cycle operating income 1,890,000
Mark-up percentage = = 35

Answer to Question 2

E