The Webster Corporation is a manufacturer of an electronic circuit board called the EC. which it...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The Webster Corporation is a manufacturer of an electronic circuit board called the "EC". which it sells in the intermediate market. The following information is available about the EC (revenue and costs are provided on a per unit basis): Revenue Manufacturing costs: Material Labour Manufacturing overhead Total Manufacturing costs Annual volume, in units Plant capacity $25.00 10.00 20.00 24,000 24,000 $80.00 $55.00 Demand for the product is such that the plant operates 3 shifts per day, five days per week, or approximately 2,000 machine hours per shift per year. The $10.00 per unit labour cost represents the cost of the employee to run the machine (MI) and the cost of the inspector. Machine operators are paid $30.00 per hour. Inspectors are paid $10.00 per hour. Manufacturing overhead costs are approximately 40% fixed, based on operating the plant at full capacity. Overhead is allocated based on labour hours. Webster is considering the purchase of a new machine, M2 that has a capital cost of $300,000. This machine would produce a second product, the Super EC (SEC). The product would use the EC as its base, and then the new equipment would add advanced circuitry. The demand for the SEC is increasing, but Webster would be the dominant producer in the field. The product is distinct from the EC and the demand for that product would not change. Company management estimates that revenue for the new product will be $212.00 per unit. It will take twice as long, in terms of labour hours, to produce a unit of SEC on M2 as it does to produce a unit of EC on MI, but inspection time will remain the same. Variable overhead costs on the M2 are expected to be 25% higher than on MI. In addition to the EC board, $65.00 of materials will be added to complete the SEC. Webster plans to operate the M2 on the same basis it operates M1. If the demand for the product is sufficient, M2 would operate 6,000 machine hours per year. There will be no increase in fixed costs. All administrative costs are considered fixed. Sales commissions equal 5% of sales on the EC and it is anticipated that this commission rate would apply to the SEC as well. The new machine is classified as a class 8 asset for tax purposes. The CRA requires that assets in this class be written off using the declining balance method at a CCA rate of 20%. Company management is uncertain, however, as to the demand for the SEC. They have forecast the demand as follows Year 1 Year 2 Years 3-5 6,000 units 10,000 units 12,000 units 6,000 units 10,000 units 12,000 units 10,000 units 12,000 units Incremental Volume Probability .6 3 .1 .3 .6 .l .3 .7 It is anticipated that the machine will have a useful life of 5 years, after which it will be sold for $25,000. The CCA class will remain open. The company's combined corporate tax rate is 40% and it requires a 14% return, after tax, on projects with the level of risk associated with the SEC. The vice president of marketing has indicated that unless the M2 is purchased, the company's ability to compete in the target market segment will be impeded within five years. She feels the company has an opportunity to become a market leader in the field. Required: Prepare a report to the president. The report should include a supported recommendation for the proposed acquisition of M2, as well as any relevant qualitative issues. The Webster Corporation is a manufacturer of an electronic circuit board called the "EC". which it sells in the intermediate market. The following information is available about the EC (revenue and costs are provided on a per unit basis): Revenue Manufacturing costs: Material Labour Manufacturing overhead Total Manufacturing costs Annual volume, in units Plant capacity $25.00 10.00 20.00 24,000 24,000 $80.00 $55.00 Demand for the product is such that the plant operates 3 shifts per day, five days per week, or approximately 2,000 machine hours per shift per year. The $10.00 per unit labour cost represents the cost of the employee to run the machine (MI) and the cost of the inspector. Machine operators are paid $30.00 per hour. Inspectors are paid $10.00 per hour. Manufacturing overhead costs are approximately 40% fixed, based on operating the plant at full capacity. Overhead is allocated based on labour hours. Webster is considering the purchase of a new machine, M2 that has a capital cost of $300,000. This machine would produce a second product, the Super EC (SEC). The product would use the EC as its base, and then the new equipment would add advanced circuitry. The demand for the SEC is increasing, but Webster would be the dominant producer in the field. The product is distinct from the EC and the demand for that product would not change. Company management estimates that revenue for the new product will be $212.00 per unit. It will take twice as long, in terms of labour hours, to produce a unit of SEC on M2 as it does to produce a unit of EC on MI, but inspection time will remain the same. Variable overhead costs on the M2 are expected to be 25% higher than on MI. In addition to the EC board, $65.00 of materials will be added to complete the SEC. Webster plans to operate the M2 on the same basis it operates M1. If the demand for the product is sufficient, M2 would operate 6,000 machine hours per year. There will be no increase in fixed costs. All administrative costs are considered fixed. Sales commissions equal 5% of sales on the EC and it is anticipated that this commission rate would apply to the SEC as well. The new machine is classified as a class 8 asset for tax purposes. The CRA requires that assets in this class be written off using the declining balance method at a CCA rate of 20%. Company management is uncertain, however, as to the demand for the SEC. They have forecast the demand as follows Year 1 Year 2 Years 3-5 6,000 units 10,000 units 12,000 units 6,000 units 10,000 units 12,000 units 10,000 units 12,000 units Incremental Volume Probability .6 3 .1 .3 .6 .l .3 .7 It is anticipated that the machine will have a useful life of 5 years, after which it will be sold for $25,000. The CCA class will remain open. The company's combined corporate tax rate is 40% and it requires a 14% return, after tax, on projects with the level of risk associated with the SEC. The vice president of marketing has indicated that unless the M2 is purchased, the company's ability to compete in the target market segment will be impeded within five years. She feels the company has an opportunity to become a market leader in the field. Required: Prepare a report to the president. The report should include a supported recommendation for the proposed acquisition of M2, as well as any relevant qualitative issues.
Expert Answer:
Related Book For
Accounting Information Systems basic concepts and current issues
ISBN: 978-0078025334
3rd edition
Authors: Robert Hurt
Posted Date:
Students also viewed these accounting questions
-
In the exercise in this case study the sampling method used is systematic sampling. Can you define this sampling method and explain how it works?
-
Agnes is an elderly woman with osteoporosis. She recently sustained a severe bone fracture for no apparent reason (she did not fall or otherwise injure herself). The fracture was not treated for some...
-
The following information applies to Question 7 and Question 8 You expect there is an equal chance that there will be a recession next year, the economy will be normal or there will be a boom on the...
-
1. Matching Match the graph of the rational function f (x) = (ax + b) / (cx + d) with the given conditions. (a) (b) (c) (d) (i) a > 0 (ii) a > 0 (iii) a 0 b 0 b > 0 b c > 0 c 0 c > 0 d 0
-
a. In your own words, explain the similarities and differences between accounting and bookkeeping. b. What systems do accountants use to create and modify a chart of accounts? c. What internal...
-
On January 1, 2012, Lombard Co. sells property for which it had paid $690,000 to Sargent Company, receiving in return Sargents zero-interest-bearing note for $1,000,000 payable in 5 years. What entry...
-
Journalize the following adjusting entries at December 31: 1. Services provided but not recorded, $1,500. 2. Salaries earned by employees but not recorded, $2,300. 3. Accrued interest on a note...
-
Genesis Sportswear Ltd. is a wholesale company that buys sports clothing from manufacturers and sells it to retail stores. It had the following transactions in its first year of operations. The...
-
A manufacturer is considering eliminating a segment because it shows the following $6,200 loss. All $20,600 of its variable costs are avoidable, and $37,400 of its fixed costs are avoidable. Segment...
-
Suppose that a learning algorithm is trying to find a consistent hypothesis when the classifications of examples are actually random. There are u Boolean attributes, and examples are drawn uniformly...
-
Identify the source of law - constitutional, statutory, or common law - that protects the right in question. would the case 44 liquormart vs rhode island be an issue of constitutional law as it deals...
-
Explain the concept of a software pipeline in the UNIX operating system, provide 2 different examples and explain them in detail.?
-
Share some additional information about operating systems. Look around the Internet for a complete comprehensive review of the most current versions of macOS, Windows, Ubuntu, iOS, or Android.The...
-
The price of a box of ramen noodles is $0.60 and the price of a pound of pasta is $0.75. What is the relative price of a box of ramen noodles? The relative price of a box of ramen noodles is
-
If the market risk premium is 8% and a stock has a risk premium of 4% what must be the stock's Beta given the expected reward to risk ratio in the economy?(Please write your answer in decimal format,...
-
Discuss your operating system(s). Feel free to share the tools mentioned in the description section, your computer settings, and update settings (Win11/10 (Lifewire),Links to an external site. macOS...
-
identify each of the items below as a phrase (P), or a clause that cannot stand alone, called a dependent clause (DC), or a clause that stands alone as a sentence, called an independent clause (IC) ...
-
A handrail, which weighs 120 N and is 1.8 m long. was mounted to a wall adjacent to a small set of steps (Figure P4.26). The support at A has broken, and the rail has fallen about the loose bolt at 8...
-
Point your Web browser to the texts new blog: bobhurtais.blogspot.com. Read the post titled Critical Thinking (dated 27 February 2011). Generate one question at each level of Blooms taxonomy for...
-
Multiple choice questions. 1. BRN Corporation has two divisions: California and Nevada. Both divisions have the same basic chart of accounts, which numbers current assets in the 100s, plant assets in...
-
Point your Web browser once again to www.download.com . Search for knowledge management software; choose one example and prepare a short oral report for the class on its capabilities and cost.
-
In the ammonia synthesis reaction \(\mathrm{N}_{2}+3 \mathrm{H}_{2}=2 \mathrm{NH}_{3}+22.4 \mathrm{kcal}\), the formation of \(\mathrm{NH}_{3}\) will be favoured by (a) High temperature (b) Low...
-
The internal energy of an ideal gas depends on (a) Temperature, specific heat and volume (b) Temperature and specific heat (c) Temperature, specific heat and pressure (d) Pressure, volume and...
-
For steady flow, the first law of thermodynamics (a) Is concerned with heat interaction (b) Is an energy balance for a specified mass of fluid (c) Accounts for all energy entering and leaving a...
Study smarter with the SolutionInn App