Ames Beverage makes several different types of sodas in cans for distribution throughout the Midwest. To get the products into the cans, it uses a very expensive ($25,000,000) high- speed filling line. The company is considering buying another filling line because, according to its capacity analysis, which is done by comparing actual utilization to budgeted utilization, it is running at an average of 85% of its existing capacity. Marketing has come up with a new, and quite large, customer that will cause the company to exceed its budgeted capacity numbers, a problem management is concerned about. Before managers do any thing, however, Mark Watson, the VP of manufacturing, wants to get a better idea of how well the company is using its existing capacity. He provides you with the following information.

• The line is rated to run 1,500 cans per minute.

• Actual output is only 1,275 cans per minute.

• The plant is budgeted to produce 720,000 cans per day this year.

• The plant runs one, eight- hour shift, five days a week.

• The output of the plant per day over the last three years has been 750,000 cans, 850,000 cans, and 800,000 cans.

• For practical purposes, engineering lowered the run rate in the manufacturer specifications from 2,000 cans a minute to the current rated line speed of 1,500 cans a minute. is done by comparing actual utilization to budgeted utilization, it is running at an average of 85% of its existing capacity. Marketing has come up with a new, and quite large, customer that will cause the company to exceed its budgeted capacity numbers, a problem management is concerned about. Before managers do any thing, however, Mark Watson, the V P of manufacturing, wants to get a better idea of how well the company is using its existing capacity. He provides you with the following information.

• The line is rated to run 1,500 cans per minute.

• Actual output is only 1,275 cans per minute.

• The plant is budgeted to produce 720,000 cans per day this year.

• The plant runs one, eight- hour shift, five days a week.

• The output of the plant per day over the last three years has been 750,000 cans, 850,000 cans, and 800,000 cans.

• For practical purposes, engineering lowered the run rate in the manufacturer specifications from 2,000 cans a minute to the current rated line speed of 1,500 cans a minute.

REQUIRED:

a. Develop a capacity utilization variance analysis for Ames Beverage using the information above. Make sure to calculate all four variances.

b. Should Ames buy a new machine? Why or why not? Use a business case structure to make your arguments.