Question
ABC industries manufactures a testing equipment (TC-1). ABC also installs the equipment at customers sites. Additional information on the Manufacturing and Installation Departments is as
ABC industries manufactures a testing equipment (TC-1). ABC also installs the equipment at customers sites. Additional information on the Manufacturing and Installation Departments is as follows.
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| Equipment | ||
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| Installed |
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Annual Capacity |
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| 400 units per year |
| 300 units per year | |||
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Equipment manufactured |
| 300 units per year |
| 300 units per year | ||||
and installed |
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ABC manufactures only 300 (TC-1) units per year because the Installation Department has only enough capacity to install 300 units. The equipment sells for $40,000 per (TC-1) unit installed and has direct material costs of $15,000 per (TC-1) unit installed. All costs other than direct material costs are fixed.
Required:
1. ABC engineers have found a way to reduce equipment manufacturing time. The new method would cost an additional $100 per unit and would allow ABC to manufacture 50 (TC-1) additional units. Should ABC implement the new method? Show your calculations.
2. ABC engineers have proposed a change in direct materials that would increase direct materials costs by $2,000 per (TC-1) unit. This change would enable ABC to install 320 (TC-1) units each year. If ABC makes the change, it will implement the new design on all (TC-1) units sold. Should ABC use the new design? Show your calculations.
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