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Relevant Costs for Equipment Replacement Decision Health Scan, Inc. paid $50,000 for X-ray equipment four years ago. The equipment was expected to have a useful life of 10 years from the date of acquisition with annual operating costs of $35,000. Technological advances have made the machine purchased four years ago obsolete with a zero salvage value. An improved X-ray device incorporating the new technology is available at an initial cost of $41,000 and annual operating costs of $25,000. The new machine is expected to last only six years before it, too, is obsolete. Asked to analyze the financial aspects of replacing the obsolete but still functional machine, Health Scan's accountant prepared the following analysis. After looking over these numbers, the Center's manager rejected the proposal. Six-year savings ($35,000 - $25,000) x 6] $60,000 Cost of new machine (41,000) Undepreciated cost of old machine (30,000) Advantage (disadvantage) of replacement $(11,000) Calculate the net benefit (cost) of purchasing the new machine. Special Order: High-Low Cost Estimation SafeRide, Inc. produces air bag systems that it sells to North American automobile manufacturers. Although the company has a capacity of 300,000 units per year, it is currently producing at an annual rate of 180,000 units. SafeRide, Inc. has received an order from a German manufacturer to purchase 60,000 units at $11.00 each. Budgeted costs for 180,000 and 240,000 units are as follows: 180,000 Units 240,000 Units Manufacturing costs Direct materials $450,000 $600,000 Direct labor 315,000 420,000 Factory overhead 1,215,000 1,260,000 Total 1,980,000 2,280,000 Selling and administrative 765,000 780,000 Total $2,745,000 $3,060,000 Costs per unit Manufacturing $11.00 $9.50 Selling and administrative 4.25 3.25 Total $15.25 $12.75 Sales to North American manufacturers are priced at $23 per unit, but the sales manager believes the company should aggressively seek the German business even if it results in a loss of $1.75 per unit. She believes obtaining this order would open up several new markets for the company's product. The general manager commented that the company cannot tighten its belt to absorb the $105,000 loss ($1.75 x 60,000) it would incur if the order is accepted. (a) Determine the financial implications of accepting the order. (Hint: Use the high-low method to determine variable costs per unit.) Accepting the offer will increase profits by $ X (b) How would your analysis differ if the company were operating at capacity? Determine the advantage or disadvantage of accepting the order under full-capacity circumstances. Use a negative sign with your answer to indicate a net disadvantage, if applicable. x
