4 Special order decision LO 13-2

Packer Concrete Company pours concrete slabs for single-family dwellings. Wolff Construction Company, which operates outside Packers normal sales territory, asks Packer to pour 43 slabs for Wolffs new development of homes. Packer has the capacity to build 330 slabs and is presently working on 140 of them. Wolff is willing to pay only $2,550 per slab. Packer estimates the cost of a typical job to include unit-level materials, $930; unit-level labor, $590; and an allocated portion of facility-level overhead, $750.

Required

Calculate the contribution to profit from the special order.

CONTRIBUTION TO PROFIT ( )

5 Using the contribution margin approach for a special order decision LO 13-2

Unit-level costs

$

228,000

Fixed costs

60,000

Total cost (a)

288,000

Markup (a 0.25)

72,000

Total sales (b)

$

360,000

Sales price per unit (b 12,000)

$

30

Required

a-1.

Elsea has excess capacity and receives a special order for 5,000 clocks for $22 each. Calculate the contribution margin per unit from the special order.

CONTRIBUTION MARGIN ( ) PER UNIT

a-2. SHOULD ELSEA ACCEPT THE SPECIAL ORDER? YES OR NO

8 Asset replacement decision LO 13-5

A machine purchased three years ago for $316,000 has a current book value using straight-line depreciation of $177,000; its operating expenses are $36,000 per year. A replacement machine would cost $239,000, have a useful life of ten years, and would require $10,000 per year in operating expenses. It has an expected salvage value of $71,000 after ten years. The current disposal value of the old machine is $81,000; if it is kept 10 more years, its residual value would be $16,000.

Required

Calculate the total costs in keeping the old machine and purchase a new machine.

KEEP OLD MACHINE PURCHASE NEW MACHINE

TOTAL COSTS ( ) ( )