Han Products manufactures 55,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is as follows:

Direct materials	$	6.00
Direct labour		12.00
Variable overhead		5.00
Fixed overhead		10.50
Total cost per part	$	33.50

An outside supplier has offered to sell 48,000 units of part S-6 each year to Han Products for $29.50 per part. If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $104,000. However, Han Products has determined that 30% of the fixed overhead being applied to part S-6 will be avoided if part S-6 is purchased from the outside supplier.

Required:

1.What is the net dollar advantage or disadvantage of accepting the outside supplier's offer?

2.What is the annual rental value at which the company will be indifferent between the two options?

Troy Engines Ltd. manufactures a variety of engines for use in heavy equipment. The company has always produced all of the necessary parts for its engines, including all of the carburetors. An outside supplier has offered to produce and sell one type of carburetor to Troy Engines Ltd. for a cost of $51 per unit. To evaluate this offer, Troy Engines Ltd. has gathered the following information relating to its own cost of producing the carburetor internally:

1. Direct materials cost $30 per unit.
2. Troy Engines pays its direct labour employees $20 per hour; each carburetor requires 30 minutes of labour time.
3. Variable manufacturing overhead is allocated at 30% of direct labour cost.
4. Total fixed manufacturing cost amounts to $15 per unit, of which 60% is allocated common cost and the remaining 40% covers depreciation of special equipment and supervisory salaries. The special equipment has no resale value. Supervisory personnel will be transferred to a different department if the company decides to purchase the carburetor from the outside supplier.
5. Yearly production of this type of carburetor is 16,600 units.

Required:

Assume that the company has no alternative use for the facilities that are now being used to produce the carburetors. Compute the total differential cost per unit for producing and buying the product.

Suppose that if the carburetors were purchased, Troy Engines Ltd. could use the freed capacity to launch a new product. The segment margin of the new product would be $150,000 per year. Compute the total differential cost for producing and buying the product.

Santosh Plastics Inc. purchased a new machine one year ago at a cost of $66,000. Although the machine operates well and has five more years of operating life, the president of Santosh Plastics is wondering if the company should replace it with a new electronic machine that has just come on the market.

The new machine costs $99,000 and is expected to slash the current annual operating costs of $46,200 by two-thirds. The new machine is expected to last for five years, with zero salvage value at the end of five years. The current machine can be sold for $11,000 if the company decides to buy the new machine.The company uses straight-line depreciation.

In trying to decide whether to purchase the new machine, the president has prepared the following analysis:

Book value of the old machine	$	55,000
Less: Salvage value		11,000
Net loss from disposal	$	44,000

"Even though the new machine looks good," said the president, "we can't get rid of that old machine if it means taking a huge loss on it. We'll have to use the old machine for at least a few more years."

Sales are expected to be $231,000 per year, and selling and administrative expenses are expected to be $138,600 per year, regardless of which machine is used.

Required:

1.Prepare a comparative income statement covering the next five years, assuming:

a.The new machine is not purchased.

b.The new machine is purchased.

(Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

2.Compute the net advantage of purchasing the new machine using only relevant costs in your analysis.(Do not round intermediate calculations.)

3. What is the minimum saving in annual operating costs that must be achieved in order for the president to consider buying the new machine?