King Company makes a single product that it sells to retail stores. The firm's finishing department uses

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King Company makes a single product that it sells to retail stores. The firm's finishing department uses hand labor to perform its work on all products. A proposal has been made by the company's vice president to acquire machinery that will perform most of the functions of this department. The finishing department has consistently produced 50,000 units a year, and that is the estimated production for the foreseeable future. A summary of the manufacturing costs of the department follows:
Direct materials ........................................ $125,000
Direct labor ............................................. 937,500
Manufacturing overhead:
Variable costs .......................................... 187,500
Fixed costs ............................................. 125,000
The machinery being considered will cost $960,000 and have an estimated useful life of six years, with no salvage value. The machinery will cause the following changes in costs:
a. Direct labor will decrease by $9 per unit.
b. Direct materials will not change.
c. Variable manufacturing overhead will decrease by $1.75 per unit.
d. Fixed manufacturing overhead will increase by $50,000 per year.
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: Assume that the use of the new machinery will increase the number of imperfect products produced by 2 percent of total production. These imperfect products must be reprocessed at a cost of $10 per unit, increasing variable manufacturing costs. What net annual increase or decrease in costs can be projected?
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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College Accounting Chapters 1-30

ISBN: 978-0077862398

14th edition

Authors: John Price, M. David Haddock, Michael Farina

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