Crayon Company Limited (CCL) is experiencing a temporary slowdown in demand due to the after effects of the financial crisis. The company is operating at 80% capacity and is struggling with what to do with its surplus workers. CCL expects demand to return to normal capacity in nine months. Most of its workers are highly skilled and hard to replace. The company could do one or more of three things with these extra workers:
i. Lay off the 30 surplus workers, requiring severance pay and other de-hiring costs of $400,000.
ii. Continue to pay the idle workers and be assured of having them available in nine months when they will be needed. Salary, benefits, and other direct costs would total at least $700,()()().
iii. Engage these workers in building new machinery. Besides the costs of these workers, additional materials costing $1,000,000 would be required. Based on how the company allocated overhead, $75,000 in fixed overhead costs could be assigned to these new machines if the labourers were working on this project.
Senior management has decided against laying off the workers as it would seriously harm labour relations and replacing the workers later would be difficult, time consuming, and require significant training and hiring costs.
Required:
a. According to economics, finance, and net present value analysis, what would be the relevant costs associated with this project (i.e., using the workers to build new machinery)?
b. According to financial accounting, what would be the cost of these machines?
c. If the company chooses to build the machines instead of laying off the workers, will this decision affect net income in the current period? If so, by how much will income change?