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MAXImum [283]
2 years ago
5

Allen Construction purchased a crane 6 years ago for $130,000. They need a crane of this capacity for the next 5 years. Normal o

peration costs $35,000 per year. The current crane will have no salvage value at the end of 5 more years. Allen can trade in the current crane for its market value of $40,000 toward the purchase of a new one, which costs $150,000. The new crane will cost only $8,000 per year under normal operating conditions and will have a salvage value of $55,000 after 5 years. If MARR is 20%, determine which option is preferred
Business
1 answer:
Korvikt [17]2 years ago
5 0

Answer:

<u>For retaining of Old Machine Equipment</u>

Price of old equipment 3 yrs ago = $130,000

O & M cost per year = $35,000

Using the Cash flow approach

End of year   Cash flow 1   Old equipment

0                            $0            Initial Cash flow

1                         -$35,000     O & M cost per year

2                        -$35,000     O & M cost per year

3                        -$35,000     O & M cost per year

4                        -$35,000     O & M cost per year

5                        -$35,000     O & M cost per year

Hence, Annual worth = Initial cash flow + Annual cost

Annual worth = 0 - $35,000

Annual worth = -$35,000

<u>For buying of new equipment</u>

Cost of buying new crane = $150,000

Market value of old crane = $40,000

Time = 5 years

O & M cost per year = $8,000

Salvage value = $55,000

MARR = 20%

Using the Cash flow approach

End of year   Cash flow 1   New equipment

0                         $110,000    -$150,000 + $40,000

1                         -$8,000     O & M cost per year

2                        -$8,000     O & M cost per year

3                        -$8,000     O & M cost per year

4                        -$8,000     O & M cost per year

5                        $47,000     -$8,000 + $55,000

Annual worth = Initial cash flow + Annual cost + Salvage value

Annual worth = -$110,000(A/P 20%,5) - $8,000 + $55,000(A/P 20%,5)

Annual worth = -$110,000*(0.334) - $8,000 + $55,000*(0.134)

Annual worth = -$36,781.77 - $8,000 + $7,390.88

Annual worth = -$37,908.88

Conclusion: We should retain the old machine as it is more favorable than purchase of new equipment

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Answer:

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Expected return of the investment:

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Martinez Company’s relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its ave
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Answer:

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1. Total amount of product costs for 10,000 units:

= 10,000 * $13.90

= $139,000

2. Period costs for 10,000 units:

= 10,000 * $6.15

= $61,500

3. Variable cost per unit of 8,000 produced and sold:

= $11.55

4. Variable cost per unit of 12,500 produced and sold:

= $11.55

5. Total variable costs for 8,000 units produced and sold:

= 8,000 * $11.55

= $92,400

6. Total variable costs for 12,500 units produced and sold:

= 12,500 * $11.55

= $144,375

7. Average fixed manufacturing cost per unit produced for 8,000 units:

= $4.00

8. Average fixed manufacturing cost per unit produced for 12,500 units:

= $4.00

9. Total fixed manufacturing cost for 8,000 units:

= 8,000 x $4.00

= $32,000

10. Total fixed manufacturing cost for 12,500 units:

= 12,500 x $4.00

= $50,000

11. Total amount of manufacturing overhead costs for 8,000 units:

= 8,000 * $5.60

= $44,800

per unit = $5.60

Variable manufacturing overhead = $1.60

Fixed manufacturing overhead =     $4.00

Total per unit =                                  $5.60

12. Total amount of manufacturing overhead for 12,500 units:

= 12,500 x $5.60

= $70,000

per unit = $5.60

Variable manufacturing overhead = $1.60

Fixed manufacturing overhead =     $4.00

Total per unit =                                  $5.60

13. Contribution margin per unit:

Selling price =                                          $21.40

Variable manufacturing cost per unit =  $9.90

Contribution margin per unit                  $11.50

14. Total amounts of direct and indirect manufacturing costs for 12,000 units:

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Indirect manufacturing costs = $4.00 x 12,000 = $48,000

15. Incremental manufacturing cost if Martinez increases production from 10,000 to 10,001:

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Explanation:

a) Data and Calculations:

Average Cost Per Unit

Direct materials                              $ 5.40

Direct labor                                     $ 2.90

Variable manufacturing overhead $ 1.60

Total Variable Costs per unit        $ 9.90

Fixed manufacturing overhead    $ 4.00

Total product cost per unit          $13.90

Period Costs:

Fixed selling expense                   $ 2.40

Fixed administrative expense       $ 2.10

Sales commissions                         $ 1.10

Variable administrative expense $ 0.55

Total period costs  per unit           $6.15

All Variable costs:

Variable production costs             $9.90

Sales Commission                           $1.10

Variable administrative expense $ 0.55

Total Variable costs                      $11.55

All Fixed Costs:

Fixed manufacturing overhead    $ 4.00

Fixed selling expense                   $ 2.40

Fixed administrative expense       $ 2.10

Total fixed costs per unit               $8.50

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