$7-38$ CHAPTER $7$ Incremental Analysis

Current Designs would be able to modify an existing mold to produce the coolers. The cost of these mod$-$

ifications would be approximately $$3,000.$

Instructions

a$.$ Assuming that the company has available capacity, prepare an incremental analysis to determine

whether Current Designs should accept this special order to produce the coolers.

b$.$ Discuss additional factors that Mike and Diane should consider if Current Designs is currently oper$-$

ating at full capacity.

Situation $2$

Current Designs is always working to identify ways to increase efficiency while becoming more envi$-$

ronmentally conscious. During a recent brainstorming session, one employee suggested to Diane

Buswell, controller, that the company should consider replacing the current rotomold oven as a way

to realize savings from reduced energy consumption. The oven operates on natural gas, using $17,000$

therms of natural gas for an entire year. A new, energy$-$efficient rotomold oven would operate on $15,000$

therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane

determined that it would cost approximately $$250,000$ to purchase a new, energy$-$efficient rotomold

oven. She determines that the expected useful life of the new oven would be $10$ years, and it would

have no salvage value at the end of its useful life. Current Designs would be able to sell the current

oven for $$10,000.$

Instructions

a$.$ Prepare an incremental analysis to determine if Current Designs should purchase the new

rotomold oven, assuming that the average price for natural gas over the next $10$ years will be

$$0\mathrm{.}65$ per therm.

b$.$ Diane is concerned that natural gas prices might increase at a faster rate over the next $10$ years. If the

company projects that the average natural gas price of the next $10$ years could be as high as $$0\mathrm{.}85$ per

therm, discuss how that might change your conclusion in $($a$).$