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

$00$

$1.$ Prepare a schedule, for the remaining $3$ years, reflecting whether CH should upgrade its

production line or replace it$?(20$ Marks$)$

$2.$ Assuming that all other data are as given previously stated, calculate CH$\text{'}$s maximum

allowable cost for replacement versus upgrading, where there is a negotiable one$-$time

replacement of the production equipment? $(10$ Marks$)$

$3.$ Assume that the capital expenditures to replace and upgrade the production equipment are

as given in the original exercise, but that the production and sales quantity is not known. For

what production and sales quantity would CH:

a$)$ Upgrade the equipment? $(5$ Marks$)$

b$)$ Replace the equipment? $(5$ Marks$)$

$4.$ 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$)$

$5.$ By reference to the above data:

a$)$ Explain whether historical costs and future costs are relevant? $(5$ Marks$)$

b$)$ Differentiate between quantitative and qualitative aspects in the process of decision$-$

making? $(5$ Marks$)$