Question Relevant Costing
The Claypot division of Housewear Products Inc. makes ceramic pots that are used to hold large decorative plants. During 2012, the division produced 10,000 pots and incurred the following costs:
Unit-level materials costs (10,000 ® $15) $150,000
Unit-level labor costs (10,000 ® $20) 200,000
Unit•level overhead costs (10,000 ® $16) 160,000
Depreciation expenses on equipment* 30,000
Other manufacturing overhead** 36,000
*The equipment was purchased for $170,000 and has a current book value of $140,000, remaining useful life of four years, and a $20,000 salvage value at the end of its useful life. If the company does not use the existing equipment, it can be leased to another company for $20,000 per year for the next four years.
**Includes supervisors' salaries and rent for manufacturing plant.
Required:
The division is considering replacing the equipment used to manufacture its ceramic pots. Replacement equipment can be purchased at a price of $240,000. The new equipment, which is expected to last 4 years and have a salvage value of $40,000, will reduce unit-level labor costs by 40 percent.
(a) Assuming the division desires to maintain its production and sales at 10,000 ceramic pots per year, prepare a schedule that shows the relevant cost of operating the existing equipment versus the cost of operating the new equipment for a four year time period.
(b) Should the existing equipment be replaced based upon your quantitative analysis? Explain your answer.
(c) Discuss several other qualitative and/or quantitative factors that could influence the decision whether to replace the old equipment with the new equipment at this time. Be as specific as possible.