Please show work and/or explain how answer was found:

Abbott Suit Corporation is a manufacturer of two types of jogging suits: nylon and cotton Abbott Suit (ASC) corporation manufactures BOTH nylon AND cotton jogging suits.

On 1/1/20, Erin Rogers ESTIMATES the following fixed PRODUCT costs:

Janitorial Salaries for manufacturing facility $40,000

Rent on Manufacturing Facility $20,000

ABBOTT SUIT CORPORATION USES MACHINE HOURS TO ALLOCATE UTILITIES

ABBOTT SUIT CORPORATION USES MACHINE HOURS TO ALLOCATE JANITORIAL SALARIES AND DEPRECIATION FOR MACHINERY and direct labor hours to allocate rent.

Erin Rogers, UW-M graduate, creates the following standards for the two jogging suits:

	Nylon Jogging Suits		Cotton Jogging Suits
	Std.qty/suit	Std.price/input	Std.qty/suit	Std.price/input
Direct Materials	2 yds/suit	$10/yd	3 yds/suit	$20/yd
Direct Labor	5 dlh/suit	$10/dlh	4 dlh/suit	$5/dlh
VOH utilities	5 mh/suit	$10/mh	2 mh/suit	$10/mh

1. FOR PURPOSES OF THIS QUESTION, ASSUME THAT THE STANDARDS ABOVE are 100% accurate (assume all were ZERO variances). Also, assume that:
   1. Nylon jogging suits sell for $300/nylon jogging suit;
   2. Cotton jogging suits sell for $200/cotton jogging suit;
   3. Annual demand (i.e. how many customers would purchase if possible) for cotton jogging suits is 2,000 suits and the annual demand for nylon jogging suits is also 2,000 suits.
   4. The sewing machine which is needed for BOTH nylon and cotton jogging suits has a CAPACITY of 6,000 machine hours (or it will break).

Currently, there is a company that produces a new and improved sewing machine. Information for the new machine is as follows:

• The cost of the new machine is $1,000,000 and it has a useful life of 4 years.
• The salvage value of the new machine at the end of the 4 years is $100,000.
• The new machine HAS NO IMPACT ON THE ANNUAL DEMAND FOR JOGGING SUITS and no impact on the price that customers are willing to pay for them.
• However, the new machine has an annual capacity of 6,000 machine hours BUT reduces the number of machine hours per suit to 4 mh/nylon jogging suit and 1mh/cotton jogging suit.
• The new machine will have no impact on the $10/mh or $2/mh PDOHRates.
• The old machine also has a useful REMAINING life of 4 years;
• The old machines acquisition value is $2,000,000 and currently has a net book value of $800,000.
• The salvage value of the old machine is $400,000 if sold today, 0 if sold 4 years from now.
• The company will still have to maintain its manufacturing facility and the janitor that upkeeps it.

Indicate if the company should buy the new machine or keep the old machine. Please show your work. Keep in mind to be relevant, a revenue/expense must (a) occur in the future AND (b) be different between courses of action.

HINTS for THIS PROBLEM

1. This is a CONSTRAINED resource problem. Therefore, your STATUS QUO will be to obtain the optimal product mix with the old machine.
2. Please use the 5-line CVP format income statement and use your answer to #1 as your status quo and your status quo will have a format that looks like this:

Sales X,XXX

Total Variable Cost y.yyy

Contribution Margin z,zzz

Total Fixed Costs I,iii

Operating Income l,lll

3. Then, analyze the new and improved sewing machines impact on the optimal product mix.
4. Use a 5-line CVP format income statement per your answer to #3;
5. REMEMBER that this is OVER THE COURSE OF 4 years;
6. Analyze the impact of other remaining relevant costs;
7. Make your recommendation.

RELEVANT COSTING PROBLEM #2 (this is a 1 year analysis)

Favreau Equipment and Associated Rentals (FEAR) approaches Abbott Suit Corporation and says hey, I see that youre not keeping up with demand. I have an offer for you: you can RENT this state-of-the-art sewing machine, which can run up to 8,000 hours a year. It will, however, cost you $45,000 in rent. Do you take the offer? SHOW YOUR WORK. Please note that the status quo is the one you used in #2 above.

RELEVANT COSTING PROBLEM #3 (this is a 1 year analysis)

During a recent football game, Erin Rogers, Quarterback for the Acme Meat Packers, is spotted during warmups with his environmentally conscious wife wearing a special environmentally-friendly cotton jogging suit. Michael MacArthur head of marketing approaches the company with the following idea:

If we put $20,000 worth of advertising into this AND buy the environmentally-conscious cotton, our cost/yard of cotton will be $60/ydbut we will still only need 3 yards/suit and it will have no effect on direct labor or the time on the sewing machine.BUT we can sell 4,000 for $500 a cotton suit! Is Mikes idea a good one? SHOW YOUR WORK. Again, the status quo is the same as the one you used in #2 above.