1.) Kohbercia 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, six 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 $550,000 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 years. The new machine costs $1,200,000. The new one requires extra maintenance of$10,000 per year (which was not required with the existing machine), and can run at twice the speed of the existing machine. Because it runs faster they will save on labor and electric.Savings are estimated at $9,000 per month. General factory overhead (rent, insurance, and other fixed costs) is applied based on their internal rate of $50 per labor hour. 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.
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$22- They need 100,000 component parts a year. That component is carried in inventory at$29, as follows:
Materials $ 6
Labor 8
Variable Overhead 3
Fixed Overhead 9
Maintenance of equipment 3
Total Inventory Cost $29
The maintenance costs are a fixed contract with an outside vendor. The contract is cancellable at any time. The Fixed Overhead is 40% attributable to general factory overhead,with the rest coming from the salary of a production manager. The production manager will be let go if the components are outsourced.
Required: Show CLEARLY the calculations supporting the decision to outsource the part for $22- or to keep making it internally.