(From Management Accounting Campus Report, contributed by Nabil Hassan) The Nabil Company makes a microcomputer desk ttiat it sells for $50 under a contract to a large computer retailer. The company operates one shift in its Ohio plant. The annual normal capacity is 100,000 units.

Direct labor is paid at the rate of $8.00 per hour. An employee can produce a desk in four hours. Eight board feet of hard board costing $0.25 per board foot are used in each desk. Indirect manufacturing costs (manufacturing overhead) at nomial capacity of 100,000 units are described by the following budget line:

Some years ago. The Nabil Company installed a saw which presently has a carrying value (book value) of $20,000 and is being depreciated $2,000 a year. At the time of installation, it was estimated that the saw would have no scrap value at the end of its useful life because the scrap value would equal its dismantling costs.
At present, a sales agent from The Hassan Company is encouraging The Nabil Company to replace the old saw, currently in operation, with its new computer-controlled saw. An advantage of the new machine is that it will cut direct labor time substantially; the time required to produce one desk will fall from four hours to two hours. However, because the new saw is more powerful than the present machine, it is expected that utility costs will increase by $0.10 per unit.
The new saw will cost $100,000, including installation charges and transportation.
The estimated useful life of the new saw is 10 years; it will be depreciated by the straightline method. At the end of 10 years, the salvage value is estimated to be $10,000.
The Hassan Company agrees that if Nabil will buy the new saw, they will buy the old saw for $4,000 with the no dismantling costs to be charged to Nabil. The income tax rate is 50%. The Nabil Company management expects a retum on investment of 15%. For income tax purposes, the loss on trade-in of the old machine is allowable as a tax deduction.
REQUIRED:
As financial analyst for The Oilers Company you are charged with analysis of the purchase of the new equipment. In the preparation of a report for the president, you will need to determine for consideration by management:
1- The contribution margin per unit, under current operating conditions;
2- The standard overhead rate (applied rate) per unit under current operating conditions:
3- The budget line for indirect manufacturing costs (manufactured overhead), assuming the new saw is purchased and installed;
4- The manufacturing overtiead standard rate (applied rate) of the new machine if nornial capacity of 100,000 units is expected to remain the same;
5- The contribution margin per unit assuming the sales price remains unchanged, if the new saw is purchased and installed;
6- The net additional investment of the machine, assuming The Oilers Company decides to install the new saw;
7- The expected net additional cash flow per year if the new saw is installed—assume the company sells all that it produces;
8- The present value index (profitability index) of the new equipment; and 9- Comment on the importance of the profitability index.

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= Total Costs Fixed Costs + Variable Cost Per Unit Total Costs = $25,000+ $0.30/unit