Hendricks Pizzeria is considering the purchase of a new Oven

1. Hendricks Pizzeria is considering the purchase of a new Oven to replace a machine that was purchased several years ago. Selected information on the two machines is given below:


Old New

Machine Machine

Original cost when new

$80,000

$85,000

Accumulated depreciation to date

$32,000

Current salvage value

$26,000

Annual operating cost

$ 4,000

$ 3,000

Remaining useful life

4 years

4 years

Required:

Compute the total advantage or disadvantage of using the new machine instead of the old machine over the next four years.

Assume that neither machine will have any salvage value at the end of four years.

(Ignore the time value of money in this problem.) (5 marks)

2. Dumont Co. normally produces and sells 30,000 units of Red-6 each month. Red-6 is a small electrical relay used in the automotive industry as a component part in various products. Selling price is $22 per unit, variable costs are $14 per unit, fixed manufacturing overhead costs total $150,000 per month, and fixed selling costs total $30,000 per month.

A major customer (one of the leading purchasers of Red-6) due to internal problems has reduced its usual order to only 8,000 units. Dumont projects that the problems will last for two months, after which time sales of Red-6 should return to normal. Due to the current low-level sales, Dumont is considering closing its factory for the two months.

If Dumont closes the factory, it is estimated that Fixed Manufacturing Overhead costs can be reduced to $105,000 per month and that fixed selling costs can be reduced by 10%. Startup costs at the end of the shutdown period would total $8,000. Dumont uses JIT production methods and no inventories are on hand.

Required:

Assume that the problems continue for two months, as projected, would you recommend that Dumont Co. close its own plant? (Show computations in good form.)

3. Holt Channing has proposed to the Board of Directors (BOD) that the company [Holt & Co.] should cease producing their own drums and instead outsource it. He believes that by manufacturing the drum inhouse the company is incurring more cost than if they were to outsource the drum. Specifically, at least one supplier has offered to provide the drums at a cost of $36 per drum. On the other hand, [Holt & Co], current cost of manufacturing one drum (based on 120,000 drums per year) is $46 broken down as follows:

Direct Material

$20.70

Direct Labor

12.00

Variable Overhead

3.00

Fixed Overhead ($5.60 being general company o/h, $3.20 is depreciation and $1.50 is supervision)

10.30

Total cost per drum

$46.00

The company uses 120,000 drums annually and would therefore save approximately $600,000 on an annual basis. Since the equipment being used to make the drums must be replaced (at a cost of $1,620,000, it has a 6-year useful life and no salvage value) if they are to continue making the drum inhouse. Alternatively, they can outsource the drums from the supplier at $36 each under a 6-year contract.

The BOD has been asked to decide whether to purchase new equipment or outsource the drums.

Required:

What are five (5) factors (other than the financial implications) that the company should consider in making their decision? (10 marks)

Here’s the SOLUTION

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