1.

A machine purchased three years ago for $314,000 has a current book value using straight-line depreciation of $181,000; its operating expenses are $38,000 per year. A replacement machine would cost $226,000, have a useful life of nine years, and would require $12,000 per year in operating expenses. It has an expected salvage value of $72,000 after nine years. The current disposal value of the old machine is $84,000; if it is kept 9 more years, its residual value would be $19,000.

Required:

a.

Calculate the total costs in keeping the old machine and purchase a new machine.

b. Should the old machine be replaced?

2.

Patterson Company operates three segments. Income statements for the segments imply that profitability could be improved if Segment A were eliminated.

PATTERSON COMPANY Income Statements for the Year 2014
Segment	A			B			C
Sales	$	165,000		$	253,000		$	258,000
Cost of goods sold		(122,000	)		(84,000	)		(80,000	)
Sales commissions		(16,000	)		(26,000	)		(23,000	)
Contribution margin		27,000			143,000			155,000
General fixed oper. exp. (allocation of president’s salary)		(40,000	)		(48,000	)		(28,000	)
Advertising expense (specific to individual divisions)		(3,000	)		(16,000	)		0
Net income	$	(16,000	)	$	79,000		$	127,000

Required:

b.

Prepare comparative income statements for the company as a whole under two alternatives: (1) the retention of Segment A and (2) the elimination of Segment A.

3.

Jordan Bicycle Manufacturing Company currently produces the handlebars used in manufacturing its bicycles, which are high-quality racing bikes with limited sales. Jordan produces and sells only 6,000 bikes each year. Due to the low volume of activity, Jordan is unable to obtain the economies of scale that larger producers achieve. For example, Jordan could buy the handlebars for $40 each; they cost $43 each to make. The following is a detailed breakdown of current production costs.

Item	Unit Cost			Total
Unit-level costs
Materials	$	18		$	108,000
Labor		9			54,000
Overhead		3			18,000
Allocated facility-level costs		13			78,000
Total	$	43		$	258,000

After seeing these figures, Jordan’s president remarked that it would be foolish for the company to continue to produce the handlebars at $43 each when it can buy them for $40 each.

Required:

a.	Calculate the total relevant cost.

         

b.	Do you agree with the president’s conclusion?

Answer rating: 100% (QA)

1a Total cost of assets A B 314000 226000 Add cost of operation 38... View the full answer