Roberts Machining specializes in fabricating metal racks that hold electronic equipment such as telephone switching units, power supplies, and so forth. Roberts designs and produces the metal stamping dies used to fabricate the racks. It is currently fabricating several racks for GTE. A new rack, the 1160, is scheduled to begin production. The die used to fabricate this rack cost Roberts $ 49,000 to design and build. This die was completed last week, and production of the 1160 is scheduled to begin next week. Rack 1160 is a specialized custom product only for GTE. GTE and Roberts have a one- year contract whereby Roberts agrees to manufacture and GTE agrees to purchase a fixed number of 1160 racks over the next 12 months for a fixed price per rack. The 1160 rack will not be produced beyond one year. This contract generates profits of $ 358,000 (after deducting the die’s cost of $ 49,000). Roberts’s accounting system recorded all expenditures for the 1160 die as a fixed asset with a one- year life. If this die is scrapped today or in one year’s time, it has a scrap value of $ 6,800.
Easton, another metal fabricator, has offered to buy the 1160 die from Roberts for $ 588,000 and will supply 1160 racks to GTE. GTE has agreed to this supplier substitution. Roberts estimates that if it sells the 1160 tools and dies to Easton, it will lose a current cash equivalent of $ 192,000 of future profits that would have been generated from GTE and similar customers, but now this business will go to Easton. (Ignore all tax effects.)

a. List all the alternatives in Roberts’s opportunity set with respect to the 1160 die.
b. Calculate the net cash flows associated with each alternative in Roberts’s opportunity set listed in part (a).
c. What is the opportunity cost of each alternative in the opportunity set listed in part (a)?
d. What action should Roberts take with respect to the 1160 die?

  • CreatedDecember 15, 2014
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