Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Cost savings: replacement decision Rossman Instruments, Inc. is considering leasing new state - of - the - art machinery at an annual cost of $
Cost savings: replacement decision
Rossman Instruments, Inc. is considering leasing new stateoftheart machinery at an annual cost of
$ The new machinery has a year expected life. It will replace existing machinery leased
year earlier at an annual lease cost of $ committed for years. Early termination of
this lease contract will incur a $ penalty. There are no other fixed costs.
The new machinery is expected to decrease variable costs from $ to $ 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 $
Improvements in quality, production cycle time, and cutomer responsiveness are expected to
increase annual sales from units to 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 workinprocess inventory level from months to just
under months of production. Increased flexibility with these new machines is expected to
allow a reduction in finished goods inventory from months of production to just month.
Improved yield rates and greater machine reliability will enable a reduction in raw materials
inventory from months of production to just months. Annual inventory carrying cost is of
inventory value.
Category Old Machine New Machine
Average per unit cost of raw materials inventory $ $
Average per unit cost of workinprocess inventory
Average per unit cost of finished goods inventory
Variable cost per unit sold
a What is the total value of annual benfits from the new machinery, including changes in
inventory carrying costs? Round all calculations to whole dollar amounts.
$Answer
b Rossman's will incur an early termination penalty on the existing equipment lease. Would you
still advise the company to replace the existing equipment? Answer
Yes
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started