Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

7-59 Cost savings: replacement decision Rossman Instruments, Inc., is considering leasing new state-of-the-art machinery at an annual cost of $900,000. The new machinery has a

7-59 Cost savings: replacement decision Rossman Instruments, Inc., is considering leasing new state-of-the-art machinery at an annual cost of $900,000. The new machinery has a fouryear expected life. It will replace existing machinery leased one year earlier at an annual lease cost of $490,000 committed for five years. Early termination of this lease contract will incur a $280,000 penalty. There are no other fixed costs. The new machinery is expected to decrease variable costs from $42 to $32 per unit sold because of improved materials yield, faster machine speed, and lower direct labor, supervision, materials handling, and quality inspection requirements. The sales price will remain at $56. Improvements in quality, production cycle time, and customer responsiveness are expected to increase annual sales from 36,000 units to 48,000 units. The variable costs stated earlier exclude the inventory carrying costs. Because the new machinery is expected to affect inventory levels, the following estimates are also provided. The enhanced

speed and accuracy of the new machinery are expected to decrease production cycle time by half and, consequently, lead to a decrease in work-in-process inventory level from 3 months to just 1.5 months of production. Increased flexibility with these new machines is expected to allow a reduction in finished goods inventory from 2 months of production to just 1 month. Improved yield rates and greater machine reliability will enable a reduction in raw materials inventory from 4 months of production to just 1.5 months. Annual inventory carrying cost is 20% of inventory value.

image text in transcribed
CATEGORY OLD MACHINE NEW MACHINE Average per unit cost of raw materials inventory $12 $11 Average per unit cost of work-in-process inventory 25 20 Average per unit cost of finished goods inventory 46 36 Variable cost per unit sold 42 32

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Accounting Plus

Authors: Robert Libby, Patricia Libby, Daniel Short

7th Edition

0077480015, 9780077480011

More Books

Students also viewed these Accounting questions

Question

=+b) Form the F-statistic by dividing the two mean squares.

Answered: 1 week ago

Question

8. What are the costs of collecting the information?

Answered: 1 week ago

Question

1. Build trust and share information with others.

Answered: 1 week ago