Alpine Sheet Metal uses one area of its plant for file storage.
The plant superintendent complains that this wasted space should be used productively or at least be rented to some other company. The files could be microfilmed at a one-time cost of $20,000. Annual maintenance and updating would cost
$4,000. The space could be leased to Deneau Truck Lines at an annual rental of $25,000.
A second option is to manufacture a new product line in this space. Marketing and cost estimates show that the new product can be expected to produce the following results each year:

The superintendent is disappointed to learn that the new product will contribute
relatively little profit and is inclined to rent the space to Deneau Truck Lines.

Required:
1. Identify the relevant costs for each alternative.
2. What would each alternative contribute to Alpine’s profits?
3. What questions should the superintendent ask about the cost analysis?

Transcribed Image Text:

Net sales.... Direct materials costs Direct labor costs Supervision and other costs Allocated plant costs (based on space occupied): Plant utilities, taxes, and insurance Plant supervision Plant maintenance and depreciation Total costs of new product line Income before income tax...........venes $ 50,000 32,000 50,000 $ 34,000 52,000 42,000 128,000 $ 268,000 260,000 $ 8,000