The Todd Lease is operated by Tyler Corporation. The foreman of the Todd Lease must make a decision regarding the replacement of a pumping unit on the lease.

The foreman has identified three possible alternatives:

Alternative 1

Purchase a new pumping unit. The foreman has located a vendor willing to sell the unit needed for a delivered cost of $65,000 FOB destination (i.e., the manufacturer pays freight to the destination point).

Alternative 2

The Odessa Lease, which is also operated by Tyler Corporation, has a surplus pumping unit that could be used. If the Odessa Lease equipment is used, the Odessa Lease would be charged with the cost of repairing the unit that would then be transferred to the Todd Lease at Condition B.

Alternative 3

The Midland Lease, which is also operated by Tyler Company, has a surplus pumping unit that could be used. If the Midland Lease pumping unit is used, the equipment would be transferred unrepaired at Condition C.

Other information:

The current market price for the unit is $70,000.

REQUIRED: Determine what the foreman on the Todd Lease should do.

Transcribed Image Text:

Tyler's Working Interest Unit Repair Costs Trucking Costs Todd Lease Odessa Lease 100% 60% n/a $ 0 $10,000 2,000 Midland Lease 30% 5,000 3,000