King Company makes a single product that it sells to retail stores. The firm’s f
ID: 2546562 • Letter: K
Question
King Company makes a single product that it sells to retail stores. The firm’s finishing department uses hand labor to perform its work on all products. A proposal has been made by the company’s vice president to acquire machinery that will perform most of the functions of this department. The finishing department has consistently produced 50,000 units a year, and that is the estimated production for the foreseeable future. A summary of the manufacturing costs of the department follows:
The machinery being considered will cost $960,000 and have an estimated useful life of Six years, with no salvage value. The machinery will cause the following changes in costs:
Prepare an analysis showing the effect on net income of purchasing the equipment. (Round your "per unit" answers to 2 decimal places.)
Assume that the use of the new machinery will increase the number of imperfect products produced by 2 percent of total production. These imperfect products must be reprocessed at a cost of $10 per unit, increasing variable manufacturing costs. What net annual increase or decrease in costs can be projected?
King Company makes a single product that it sells to retail stores. The firm’s finishing department uses hand labor to perform its work on all products. A proposal has been made by the company’s vice president to acquire machinery that will perform most of the functions of this department. The finishing department has consistently produced 50,000 units a year, and that is the estimated production for the foreseeable future. A summary of the manufacturing costs of the department follows:
Explanation / Answer
Statement Showing effect on Net income of Purchasing the Equipment to produce 50000 Unit W/Note for manufacturing cost for Purchasing Equipment Unit/Rate Total Cost Net Impact Direct Material $2.50 $125,000.00 Total Cost(a) Total Cost (b) a-b Direct Labour( $18.75-$9) $9.75 $487,500.00 Direct Material $125,000 $125,000 $0 Manufacturing Overhead Direct Labour $937,500 $487,500 $450,000 Variable Cost ($3.75-$1.75) $2.00 $100,000.00 Manufacturing Overhead Total Fixed Cost $6.70 $335,000.00 Variable Cost $187,500 $100,000 $87,500 Other Fixed Cost ($125000+$50000) Fixed Cost $125,000 $335,000 -$210,000 Depreciation Cost( $960000/6) Additional Variable Manufacturing Expense incurred on reprocessed $10,000 -$10,000 Additional Variable Manufacturing Expense on reprocessed imperfect Product (50000 unit*2%*$10 $10,000.00 Total Cost $1,375,000 $1,057,500 $317,500 Total Cost $1,057,500.00 Above Working Shows that Total cost to produce 50000 unit reduce by $317500 , Hence income will be increased by $317500 due to purchasing the equipment
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