ACCT $2017$ Management Accounting

Graded Activity $2$ Sem # $12324(30\%)$

Group Activity

Case Study

Cari Heat $($CH$)$ Ltd$.$ is currently faced with a critical decision regarding its production

equipment. Cari Heat $($CH$)$ is evaluating two options for its production equipment:

upgrading or replacing. The company manufactures and sells $7,500$ heaters every year, each

priced at $$920.$ The current production equipment, which was acquired at a cost of

$$2,150,000,$ has been in use for just two years and is subject to straight$-$line depreciation over

a five$-$year useful life. Furthermore, it possesses no terminal disposal value, but it can be

currently sold for $$650,000.$

The following table presents data for the two alternatives:

A B C

$1$ Choice Upgrade Replace

$2$ One$-$time equipment costs $$3,500,000$ $$5,200,000$

$3$ Variable manufacturing cost per Heater $$180$ $$90$

$4$ Remaining useful life of equipment $($years$)33$

$5$ Terminal disposal value of equipment

Required

$00$

$4.$ Nick Koe is CH$$s manager, who will be relocated after one year and whose bonus is based

on operating income. Given unchanged data, evaluate Nick's decision$-$making process and

which alternative he would choose, taking into account his relocation and bonus dependence.

$(20$ Marks$)$