Holooly Plus Logo
Holooly Plus Logo

Question 12.5: Mariana Franca is thinking about buying a farm in southern I...

Mariana Franca is thinking about buying a farm in southern Italy that costs €400,000. She can borrow €300,000 for the purchase at 10 percent interest, but must use €100,000 of her own cash for the remainder. What is the annual cost of financing the investment in the farm?

The blue check mark means that this solution has been answered and checked by an expert. This guarantees that the final answer is accurate.
Learn more on how we answer questions.

External financial reports in the form of a profit and loss statement would only record the 10 percent interest on the loan (0.10 × €300,000), or €30,000 annually. CVP analysis, however, recognizes the forgone opportunity of using the €100,000 in cash to buy the farm. If the cash would have earned 10 percent, the cost of financing for CVP analysis is (0.10 × €400,000), or €40,000 annually.

Related Answered Questions

Question: 12.9

Based on the following information, a plastic pipe manufacturer is considering dropping a pipe that can handle high pressure from its product mix ...

Verified Answer:

Direct costs are generally avoidable, but the allo...
Question: 12.11

A European company manufactures three types of plasma televisions in separate plants. Their costs and prices are: ...

Verified Answer:

The contribution margins per unit of the three typ...
Question: 12.12

Sophie Chang, CPA, is a sole proprietor. Sophie does corporate, partnership, and individual tax returns ...

Verified Answer:

Since variable costs are zero (other than the oppo...
Question: 12.SS.1

The Scoot-2-Go Company is the brainchild of Charles Johnson. Charles has designed a unique three-wheel scooter that ...

Verified Answer:

a. Profit = (Price per unit – Variable cost per un...
Question: 12.10

A cycling shop is deciding whether to sell bicycles assembled or unassembled. An unassembled bicycle is purchased by the store for $100 and can be sold unassembled for $200. ...

Verified Answer:

The incremental revenues are $275 – $200, or $75. ...
Question: 12.8

The owner of a professional rugby union team and football stadium is considering renting the facility to a professional soccer team. The soccer team would need the stadium for eight games and would be willing to pay rent of £20,000 per game. ...

Verified Answer:

The incremental revenues are (8)(£20,000), or £160...
Question: 12.7

It is late at night and a customer arrives at a motel just off the highway. The customer has only $30 dollars and tells the motel manager that he will take a room for $30. Otherwise, ...

Verified Answer:

Given that the motel has excess capacity and the m...
Question: 12.6

A company is considering buying a manufacturing plant that assembles programmable espresso makers and electronic milk steamers. The plant is expected to make and sell twice as many espresso makers as milk steamers. ...

Verified Answer:

To solve this problem, a ‘basket’ of both goods mu...
Question: 12.4

Suppose our ice cream vendor, who must pay $300 per day to rent her cart, wants to make $100 profit a day. She sells ice cream cones for $3 and the variable costs of making the ice cream cones are $0.50 per cone ...

Verified Answer:

The necessary quantity to have a profit of $100 is...
Question: 12.3

A contractor can build 20 condominiums a year with a fixed cost of $4 million and a variable cost per condo of $150,000. ...

Verified Answer:

P = (FC/Q) + VC =[($4,000,000/20) + $150,000]VC = ...