Paragraph Styles Question 1: Kobbercia Kopper Pots is wondering whether to repla
ID: 2586882 • Letter: P
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Paragraph Styles Question 1: Kobbercia Kopper Pots is wondering whether to replace a machine used to make a specialty line of kitchen pans. The decision will not affect any of the other products made at the plant. Coincidently the existing machine and the new one have identical estimated useful lives, sx years. The existing one cost $960,000 when purchased, which was less than a month ago. Normally they would keep it, as it will be pretty embarrassing to replace it now. They will only get $560,000 for the existing one if they replace it, a loss of $400,000. But somebody in the company found a better model. Here's some of the facts: Neither machine will have any salvage value at the end of the six $10,000 per year (which was not required with the existing machine), and can run at twice Savings are estimated at $9,000 per month. General factory overhead (rent, insurance, and years. The new machine costs $1,200,000. The new one requires extra maintenance of the speed of the existing machine. Because it runs faster they will save on labor and electric. other fixed costs) is applied to cost of goods manufactured based direct labor hours (rate- $50 of overhead applied per direct labor hours). The reduction of labor hours for this specialty line will be 100 hours per month Required: Show CLEARLY the calculations that support either keeping the old machine of buying the new one. (Ignore time value of money and taxes) nt ok, I have a lot of-stuffen there-your job is to find which is relevant to the decision, and organize it so the proper choice is dlear, and supported with the income effect of that choice Question 2: Klink-A-Dink Ltd is thinking of doing some outsourcing of components for its bicycles. They have an offer from a very reputable supplier to sell them one component for F4 FS F6 F7 F8 F9 F10 F11 F12Explanation / Answer
If the company replaces the machine then the relevant net savings per year will be as follows:- (Amt in $)
Total savings for useful life of machine = $158,000*6 years = $948,000
Sale of old machine = $560,000
Purchase cost of new machine = $1,200,000
Net Inflow over 6 years from replacing the old machine = $948,000+$560,000-$1,200,000 = $308,000
As there is a net cash inflow of $308,000 from replacing the machine the company should replace the old machine with the new machine.
(The purchase cost of old machine is sunk cost and thus irrelevant for the decision.)
Saving in Labor and electric ($9,000*12) 108,000 Saving in General Overheads (100 hours*12 months*$50) 60,000 Less: Extra maintenance cost (10,000) Net Savings per year 158,000Related Questions
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