Cari Heat (CH) Ltd. is currently faced with a critical decision regarding its production equipment. Cari Heat
Question:
Cari Heat (CH) Ltd. is currently faced with a critical decision regarding its production equipment. Cari Heat (CH) is evaluating two options for its production equipment: upgrading or replacing. The company manufactures and sells 7,500 heaters every year, each priced at $920. The current production equipment, which was acquired at a cost of
$2,150,000, has been in use for just two years and is subject to straight-line depreciation over a five-year useful life. Furthermore, it possesses no terminal disposal value, but it can be currently sold for $650,000.
The following table presents data for the two alternatives:
A | B | C |
1Choice | Upgrade | Replace |
2One-time equipment costs | $3,500,000 | $5,200,000 |
3Variable manufacturing cost per Heater | $180 | $90 |
4Remaining useful life of equipment (years) | 3 | 3 |
5Terminal disposal value of equipment Required | 0 | 0 |
By referenceto the abovedata:
- Please explain whether historical costs and future costs are relevant in decision-making. (5 marks)
Differentiate between quantitative and qualitative aspects in the decision-making process. (5 marks)
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ