$7-38$ CHAPTER $7$ Incremental Analysis

Current Designs would be able to modify an existing mold to produce the coolers. The cost of these mod$-$

ifications would be approximately $$3,000.$

Instructions

a$.$ Assuming that the company has available capacity, prepare an incremental analysis to determine

whether Current Designs should accept this special order to produce the coolers.

b$.$ Discuss additional factors that Mike and Diane should consider if Current Designs is currently oper$-$

ating at full capacity.

Situation $2$

Current Designs is always working to identify ways to increase efficiency while becoming more envi$-$

ronmentally conscious. During a recent brainstorming session, one employee suggested to Diane

Buswell, controller, that the company should consider replacing the current rotomold oven as a way

to realize savings from reduced energy consumption. The oven operates on natural gas, using $17,000$

therms of natural gas for an entire year. A new, energy$-$efficient rotomold oven would operate on $15,000$

therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane

determined that it would cost approximately $$250,000$ to purchase a new, energy$-$efficient rotomold

oven. She determines that the expected useful life of the new oven would be $10$ years, and it would

have no salvage value at the end of its useful life. Current Designs would be able to sell the current

oven for $$10,000.$

Instructions

a$.$ Prepare an incremental analysis to determine if Current Designs should purchase the new

rotomold oven, assuming that the average price for natural gas over the next $10$ years will be

$$0\mathrm{.}65$ per therm.

b$.$ Diane is concerned that natural gas prices might increase at a faster rate over the next $10$ years. If the

company projects that the average natural gas price of the next $10$ years could be as high as $$0\mathrm{.}85$ per

therm, discuss how that might change your conclusion in $($a$).$Instructions

a$.$ Prepare an incremental analysis to determine if Current Designs should purchase the new

rotomold oven, assuming that the average price for natural gas over the next $10$ years will be

$$0\mathrm{.}65$ per therm.

b$.$ Diane is concerned that natural gas prices might increase at a faster rate over the next $10$ years. If the

company projects that the average natural gas price of the next $10$ years could be as high as $$0\mathrm{.}85$ per

therm, discuss how that might change your conclusion in $($a$).$

Situation $3$

One of Current Designs' competitive advantages is found in the ingenuity of its owner and CEO, Mike

Cichanowski. His involvement in the design of kayak molds and production techniques has led to Cur$-$

rent Designs being recognized as an industry leader in the design and production of kayaks. This inge$-$

nuity was evident in an improved design of one of the most important components of a kayak, the seat.

The "Revolution Seating System" is a one$-$of$-$a$-$kind, rotating axis seat that gives unmatched, full$-$contact,

under$-$leg support. It is quickly adjustable with a lever$-$lock system that allows for a customizable seat

position that maximizes comfort for the rider.

Having just designed the "Revolution Seating System," Current Designs must now decide whether

to produce the seats internally or buy them from an outside supplier. The costs for Current Designs to

produce the seats are as follows.

Current Designs will need to produce $3,000$ seats this year; $25\%$ of the fixed overhead will be avoided if

the seats are purchased from an outside vendor. After soliciting prices from outside suppliers, the com$-$

pany determined that it will cost $$50$ to purchase a seat from an outside vendor.

Instructions

a$.$ Prepare an incremental analysis showing whether Current Designs should make or buy the "Revo$-$

lution Seating System."

b$.$ Would your answer in $($a$)$ change if the productive capacity released by not making the seats could

be used to produce income of $$20,000?$