Problem:

Barrera Equipment Manufacturing, built a new facility in Year 2000 but has only been able to use 60% of the capacityinmanufacturingits major machine products. Managementwould like to use the excess capacity and has three possibilities.Only one of the three may be selected.

Alternative A:The company could produce an additional 6,000 units per year of its most popular machine and develop a foreign market.Management estimates that additional freight costs would amount to P200 per machine and fixed factory overhead would increase by P60,000.

To cover the additional cost, the selling price per machine would be increasedby P300 per machine.

Alternative B:The company could produce and market a new laser lathe.The capacity could be used to produce 2,000 units per year that would sell for P1,800 each.Management has estimated the following unit variable costs:

Direct materials P 600.

Direct labor 300.

Variable Overhead 450.

Variable Selling 50.

P1,400.

The new lathe would require additional fixed cost:P200,000 in fixed overhead; and P80,000 in fixed selling.

Alternative C:The Paco-Pole Company has offered to lease the facilities at P30,000 per month plus 10% of the net revenuesgenerated by the facilities.Net revenues are estimated at P1,500,000 per year.

Required:

1.Which of the three alternatives should management select?Prepare separate Income Statementfor each alternativeto support yourverdict.

2.Whatis the Opportunity costs of the decision?