A typewriter manufacturer is considering dropping its manual typewriter product line due to consistent losses from this model over the past three years. The recent poor performance of this product (known as Model \(\mathrm{A}\) ) is reflected below:

The decreasing trends in sales and avoidable fixed costs are expected to continue in 20X9. Both the cost of direct materials and direct labor are expected to increase by \(5 \%\) in \(20 \mathrm{X} 9\) unless a new attachment for the production equipment, estimated to have a two-year life, is purchased for \(\$ 150,000\). The new attachment would replace another attachment purchased only two years ago at a cost of \(\$ 200,000\) which was expected to have a four-year life at the time of its purchase. If the new attachment is purchased, the cost of labor and materials would not increase in 20X9.
{Required.}

(a) Assuming the new attachment is not purchased for the current equipment, should the company continue to manufacture and sell Model A typewriters? Explain your answer clearly by labeling all supporting calculations.

(b) Should the new attachment to the current equipment be purchased?
Explain your answer clearly, labeling all supporting calculations.

(c) What effect, if any, would the capacity made available by discontinuing Model A production have on your decision on whether to purchase the new attachment?

(d) What qualitative factors could affect your responses in

(a) and (b)?

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Sales (average price $100/unit). Variable cost........... Direct materials ($40/unit). ($10/unit) Direct labor ($20/unit) Variable manufacturing Other variable costs ($5/unit) Total variable costs Selling expenses (10% of sales) 20X6 $14,600,000 Total variable and selling expenses.. $12,410,000 20X7 $14,400,000 720,000 $10,800,000 1,440,000 $12,240,000 20X8 $14,200,000 $ 5,680,000 2,840,000 1,420,000 710,000 $10,650,000 1,420,000 $12,070,000 $ 5,840,000 2,920,000 $ 5,760,000 2,880,000 1,160,000 1,440,000 730,000 $10,950,000 1,460,000 Contribution margin $ 2,190,000 $ 2,160,000 $ 2,130,000 Fixed costs: Avoidable...... $ 2,022,000 $ 1,997,000 Unavoidable (3% of sales) 438,000 Total Operating loss $ 2,460,000 $ (270,000) $ 2,429,000 $ (269,000) 432,000 $ 1,972,000 426,000 $ 2,398,000 $ (268,000)