Relevant Costs for Equipment Replacement Decision
Health Scan, Inc. paid $50,000 for X-ray equipment four years ago. The equipment was expected to have a useful life of 10 years from the date of acquisition with annual operating costs of $50,000. Technological advances have made the machine purchased four years ago obsolete with a zero salvage value. An improved X-ray device incorporating the new technology is available at an initial cost of $146,000 and annual operating costs of $23,000. The new machine is expected to last only six years before it, too, is obsolete. Asked to analyze the financial aspects of replacing the obsolete but still functional machine, Health Scan’s accountant prepared the following analysis. After looking over these numbers, the Center’s manager rejected the proposal.
|Six-year savings [($50,000 − $23,000) × 6]
|Cost of new machine
|Undepreciated cost of old machine
|Advantage (disadvantage) of replacement
Calculate the net benefit (cost) of purchasing the new machine.
Special Order: High-Low Cost Estimation
SafeRide, Inc. produces air bag systems that it sells to North American automobile manufacturers. Although the company has a capacity of 300,000 units per year, it is currently producing at an annual rate of 180,000 units. SafeRide, Inc. has received an order from a German manufacturer to purchase 60,000 units at $7.00 each. Budgeted costs for 180,000 and 240,000 units are as follows:
|Selling and administrative
|Costs per unit
|Selling and administrative
Sales to North American manufacturers are priced at $25 per unit, but the sales manager believes the company should aggressively seek the German business even if it results in a loss of $5.75 per unit. She believes obtaining this order would open up several new markets for the company’s product. The general manager commented that the company cannot tighten its belt to absorb the $345,000 loss ($5.75 × 60,000) it would incur if the order is accepted.
(a) Calculate the net benefit (cost) of accepting the order from the German business.
(b) Calculate the net benefit (cost) of accepting the order from the German business, assuming the company is operating at full capacity.
Outsourcing (Make-or-Buy) Decision
Assume a division of Hewlett-Packard currently makes 8,000 circuit boards per year used in producing diagnostic electronic instruments at a cost of $33 per board, consisting of variable costs per unit of $26 and fixed costs per unit of $7. Further assume Sanmina-SCI offers to sell Hewlett-Packard the 8,000 circuit boards for $33 each. If Hewlett-Packard accepts this offer, the facilities currently used to make the boards could be rented to one of Hewlett-Packard’s suppliers for $29,000 per year. In addition, $3 per unit of the fixed overhead applied to the circuit boards would be totally eliminated.
Calculate the net benefit (cost) to HP of outsourcing the component from Samina-SCI. Use a negative sign with your answer, if appropriate.
Sell or Process Further
Port Allen Chemical Company processes raw material D into joint products E and F. Raw material D costs $4 per liter. It costs $100 to convert 100 liters of D into 60 liters of E and 40 liters of F. Product F can be sold immediately for $4 per liter or processed further into Product G at an additional cost of $6 per liter. Product G can then be sold for $14 per liter.
Determine whether Product F should be sold or processed further into Product G. Calculate the net benefit (cost) of further processing.
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