Ex.1

Leopal Company is considering replacing a freight elevator. The current freight elevator has a book value of $37,500 and a remaining useful life of four years, at which time its salvage value will be zero. The current market value of the freight elevator is $5,000. Variable operating costs per year are $201,600 per year. Leopal has identified the following two possible replacement options. Prepare an analysis of the alternatives and whether either option should be used to replace the current elevator.

	Option A	Option B
Cost	$124,600	$140,200
Variable operating costs per year	$177,000	$163,600

Exercise 2. (18 Points).

Generalware, Inc. sells a single product and reports the following results from sales of 100,000 units:

Sales ($45 unit) ... $4,500,000

Less costs and expenses:

Direct materials ($16/unit). $1,600,000

Direct labor ($9/unit).. 900,000

Variable overhead ($3/unit)... 300,000

Fixed overhead ($8.10/unit).......... 810,000

Variable administrative ($4.50/unit). 450,000

Fixed administrative ($4/unit)... 400,000

Total costs and expenses... $(4,460,000)

Operating income $ 40,000

A foreign buyer wants to purchase 15,000 units. However, they are willing to pay only $36 per unit for this one-time order. They also agree to pay all freight costs. To fill the order, Generalware will incur normal production costs. Total fixed overhead will have to be increased by $60,000 to pay for equipment rentals and insurance. No additional administrative costs (variable or fixed) will be incurred in association with this special order.

Required:

(1) Should Generalware accept the order if it does not affect regular sales? Explain.

(2) Assume that Generalware can accept the special order only by giving up 5,000 units of its normal sales. Should the company accept the special order under these circumstances?