"That old equipment for producing oil drums is worn out," said Bill Seebach, president of Hondrich Company. "We need to make adecision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internallyor whether it should discontinue production and purchase them from an outside supplier. The alternatives follow:SavedAlternative 1: Rent new equipment for producing the oil drums for $208,000 per year.Alternative 2: Purchase oil drums from an outside supplier for $18.90 each.Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs arebased on a current activity level of 40,000 units per year:Direct materialsDirect labourVariable overheadFixed overhead ($2.60 supervision, $1.90 depreciation, and $5.00 general company overhead)Total cost per unit$5.408.002.009.50$24.90The new equipment would be more efficient and, according to the manufacturer, would reduce direct labour costs and variableoverhead costs by 25%. Supervision cost ($104,000 per year) and direct materials cost per unit would not be affected by the newequipment. The new equipment's capacity would be 65,000 oil drums per year.The total general company overhead would be unaffected by this decision.Total relevant cost (40,000 subassemblies)Required:1. Seebach is unsure what the company should do and would like an analysis showing the unit costs and total costs for each of the twoalternatives given above. Assume that 40,000 oil drums are needed each year.a. What will be the total relevant cost of 40,000 subassemblies if they are manufactured internally as compared to being purchased? 15esa-3. Which course of action would you recommend if 52,000 assemblies are needed each year?O Purchase from the outside supplierO Indifferent between the two alternativesO Manufacture internallyb-1. What will be the total relevant cost of 65,000 subassemblies if they are manufactured internally?Total relevant cost (65,000 subassemblies)b-2. What would be the per unit cost of subassembly manufactured internally? (Do not round intermediate calculations. Round youranswer to 2 decimal places.)Per unit cost of subassembly+b-3. Which course of action would you recommend if 65,000 assemblies are needed each year?O Indifferent between the two alternativesPurchase from the outside supplier< Prev6 of 6Next >

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"That old equipment for producing oil drums is worn out," said Bill Seebach, president of Hondrich Company. "We need to make a decision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: Alternative 1: Rent new equipment for producing the oil drums for $208,000 per year. Alternative 2: Purchase oil drums from an outside supplier for $18.90 each. Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 units per year:

"That old equipment for producing oil drums is worn out," said Bill Seebach, president of Hondrich Company. "We need to make a decision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: Alternative 1: Rent new equipment for producing the oil drums for $208,000 per year. Alternative 2: Purchase oil drums from an outside supplier for $18.90 each. Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 units per year:

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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"That old equipment for producing oil drums is worn out," said Jillian Rafuse, president of Hondrich Company. "We need to make a decision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: Alternative 1: Rent new equipment for producing the oil drums for $96,000 per year. Alternative 2: Purchase oil drums from an outside supplier for $17.15 each. Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs are based on a current activity level of 30,000 units per year: Direct materials $ 5.00 Direct labour 9.00 Variable overhead 3.20 Fixed overhead ($1.60 supervision, $1.80 depreciation, and $4.00 general company overhead) Total cost per unit 7.40 $24.60 The new equipment would be more efficient and, according to the manufacturer, would…
"That old equipment for producing oil drums is worn out,” said Jillian Rafuse, president of Hondrich Company. "We need to make a decision quickly." The company is trying to decide whether it should rent new equipment and continue to make its oil drums internally or whether it should discontinue production and purchase them from an outside supplier. The alternatives follow: Alternative 1: Rent new equipment for producing the oil drums for $100,000 per year. Alternative 2: Purchase oil drums from an outside supplier for $17.40 each. Hondrich Company's costs per unit of producing the oil drums internally (with the old equipment) are given below. These costs are based on a current activity level of 40,000 units per year: Direct materials Direct labour Variable overhead Fixed overhead ($1.25 supervision, $1.80 depreciation, and $4.00 general company overhead) Total cost per unit $ 6.00 8.00 3.20 7.05 $24.25 The new equipment would be more efficient and, according to the manufacturer, would…
Difend Cleaners has been considering the purchase of an industrial dry-cleaning machine. The existing machine is operable for three more years and will have a zero disposal price. If the machine is disposed now, it may be sold for $170,000. The new machine will cost $360,000 and an additional cash investment in working capital of $170,000 will be required. The new machine will reduce the average amount of time required to wash clothing and will decrease labor costs. The investment is expected to net $130,000 in additional cash inflows during the first year of acquisition and $290,000 each additional year of use. The new machine has a three-year life, and zero disposal value. These cash flows will generally occur throughout the year and are recognized at the end of each year. Income taxes are not considered in this problem. The working capital investment will not be recovered at the end of the asset's life. What is the net present value of the investment, assuming the required rate of…
A local waste management company needs to purchase a new garbage truck. The company has two truck models under consideration. The purchase price for Model A is $90, 000. The maintenance and operation costs are $10,000/year. Model B is less expensive to acquire ($60,000 at purchase), but costs more on operation and maintenance. Details of the costs are shown in the table below. Interest rate is 4%. Please help this company to decide which truck they should purchase. Year Model A Truck Model B Truck Purchase Price (beginning of year) $90,000 $60,000 Annual Operation and Maintenance (end of year) 1 $10,000 $20,000 2 $10,000 $20,000 3 $10,000 $20,000 4 $10,000 $20,000 Calculate the present values of total costs for Model A Truck and Model B Truck, respectively. (Interest rate: 4%) *Results round to the nearest 2 decimal places. (Note: you may consider using an Excel…
Carla Vista Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Carla Vista Roofing spent $77,400 refurbishing the lift. It has just determined that another $45,500 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $194,000. The company estimates that both lifts would have useful lives of 5 years. The new lift is more efficient and thus would reduce operating expenses from $110,000 to $84,200 each year. Carla Vista Roofing could also rent out the new lift for about $11,500 per year. The old lift is not suitable for rental. The old lift.could currently be sold for $28,500 if the new lift is purchased. The new lift and old lift are estimated to have salvage values of zero if used for another 5 years. Prepare an incremental analysis showing whether the company should repair or replace the equipment. (Enter negative amounts using…
A packaging factory is considering the replacement of some equipment. The new plan is to install equipment to produce a new can that uses less energy and less metal than the old one. Current equipment was installed 5 years ago for $100 million and can be sold for $35 million. Due to obsolescence the depreciation of this equipment results in an annual depreciation of $4 million for the next years. If you keep this equipment for one more year your operating and maintenance costs will be $65 million increasing by $3 million/year each year thereafter. The new equipment will cost $130 million, with an economic life of 8 years and a salvage value of $10 million. Its operating and maintenance costs will be $49 million. For a TMAR = 15% p.a. what new equipment should be installed? Make a recommendation about it. (Answer: The solution would be to use the current equipment for another two years and then exchange it for new equipment.
Hey I'm having trouble with this problem, I'm not sure if 48,000 is pv or fv also I'm not sure if what to do with annual maintenance cost either. "Esquire Company needs to acquire a molding machine to be used in its manufacturing process. Two types of machines that would be appropriate are presently on the market. Machine A could be purchased for $48,000. It will last 10 years with annual maintenance costs of $1,000 per year. After 10 years the machine can be sold for $5,000.Machine B could be purchased for $40,000. It also will last 10 years and will require maintenance costs of $4,000 in year three, $5,000 in year six, and $6,000 in year eight. After 10 years, the machine will have no salvage value. Assume an interest rate of 8% properly reflects the time value of money in this situation and that maintenance costs are paid at the end of each year. Ignore income tax considerations.Calculate the present value of Machine A & Machine B. Which machine Esquire should purchase?"
Darcy Roofi ng is faced with a decision. The company relies very heavily onthe use of its 60-foot extension lift for work on large homes and commercial properties.Last year, Darcy Roofi ng spent $60,000 refurbishing the lift. It has just determined thatanother $40,000 of repair work is required. Alternatively, it has found a newer used liftthat is for sale for $170,000. The company estimates that both lifts would have useful livesof 6 years. The new lift is more effi cient and thus would reduce operating expenses byabout $20,000 per year. Darcy Roofi ng could also rent out the new lift for about $10,000per year. The old lift is not suitable for rental. The old lift could currently be sold for$25,000 if the new lift is purchased. Prepare an incremental analysis showing whether thecompany should repair or replace the equipment.
Scrooge McDuck Safe Limited is considering buying the hinges it uses in the manufacture of vaults from an outside vendor. Currently, Scrooge McDuck Safe Limited makes the hinges in its own manufacturing facility. Scrooge McDuck Safe Limited can buy the hinges for $1.50 each. The company uses 900,000 hinges each year. Fixed cost for Scrooge McDuck Safe Limited would not change if the company stopped making the hinges. Information about Scrooge McDuck Safe Limited's cost to manufacture the 900,000 casters follows: Per Unit $.50 .10 Total Direct material $450,000 90,000 360,000 225.000 $1,125,000 Direct labor Variable overhead Fixed overhead Total .40 25 $1.25 Required: A. Prepare a relevant cost schedule that indicates whether Scrooge McDuck Safe Limited should buy the hinges or continue to make them. B. If Scrooge purchased the hinges, management has approached you that a dial producer wishes to rent the vacant space for $150,000 to produce their dials. Does this change your decision??…
Carla Vista Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $56,760. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,600. At the end of 8 years, the company will sell the truck for an estimated $28,600. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset’s estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company’s cost of capital is 8%.
Beryl's Iced Tea currently rents a bottling machine for $52 000 per year, including all maintenance expenses. It is considering purchasing a machine instead and is comparing two options: a. Purchase the machine it is currently renting for $155 000. This machine will require $21 000 per year in ongoing maintenance expenses. b. Purchase a new, more advanced machine for $265 000. This machine will require $20 000 per year in ongoing maintenance expenses and will lower bottling costs by $15 000 per year. Also, $37 000 will be spent up front training the new operators of the machine. Suppose the appropriate discount rate is 8% per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each year, as is the rental of the machine. Assume also that the machines will be depreciated via the straight-line method over seven years and that they have a ten-year life with a negligible salvage value. The marginal corporate tax rate is 35%. Should Beryl's Iced Tea…
Wildhorse Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $56,210. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $7,700. At the end of 8 years, the company will sell the truck for an estimated $28,200. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset's estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company's cost of capital is 8%. Click here to view the factor table. (a) YOU SPOL CORY COR Compute the cash payback period and net present value of the proposed investment. (If the…