Exterior Manufacturing makes doors, which it sells to home builders. The firm's finishing department is not mechanized. Employees use hand tools to finish the product. The factory superintendent has proposed that the firm acquire an electric-powered machine to perform some of the finishing functions.
Presently, 5,000 units per year are manufactured and sold. A summary of the manufacturing costs of the finishing department follows:
Direct materials ............................................$60,000
Direct labor ..................................................70,000
Manufacturing overhead:
Variable costs ...............................................10,000
Fixed costs ..................................................15,000
The machine being considered will cost $50,000 and have a useful life of five years, with no salvage value. The machine will cause the following changes in costs:
a. Direct labor will decrease by $10,000.
b. Indirect materials will decrease by $1 per unit.
c. No change in direct materials.
d. Fixed manufacturing overhead will decrease by $10,000 per year before considering depreciation on the new machine.
INSTRUCTIONS
1. Prepare an analysis showing the effect on net income of purchasing the equipment.
2. What other factors should be considered in making the decision?
Analyze: What direct labor costs are incurred per unit for the current manual process?