Problems

Allred Inc. is trying to decide whether to purchase Machine A or Machine B. Below are the associated costs. Which are relevant?

	Machine A	Machine B	Relevant or Not Relevant?
Cost of Machine	$46,000	$50,000
Setup Costs	$5,000	$5,000
Costs incurred for research of the machine	$400	$600
Annual operating costs for the machine	$6,000	$5,000

Outsourcing Decision

Animals United currently outsources pet beds for their product line.The beds are purchased for $30 each.The company is considering making the beds instead and have looked at the costs involved.They are:

Unit-level material cost$7

Unit-level labor cost$3

Unit-level overhead cost$2

Batch-level cost (100 per batch)$150

Product-level supervisor salary$20,000

Allocated facility level cost$16,000

Assume the company has demand for 500 beds.If they decide to make the beds, what are the total relevant costs?

Should Animals United buy or make the beds?

Special Order Decision

Integrated Masters Inc. is currently operating at 50% capacity and manufacturing 50,000 units of a patented electronic component.The cost structure of the component is as follows:

Raw Materials	$1.50 per unit
Direct Labor	$1.50 per unit
Variable Overhead	$2.00 per unit
Fixed Overhead	$100,000 per year

An Italian firm has offered to purchase 30,000 units at a price of $6 per unit.The normal selling price per unit is $8.This special order will not impact any of Integrated Masters current business.The company has computed its cost per unit as $7 so it is reluctant to accept this offer.

Should Integrated Masters accept this Special Order?Show the calculation that helps you develop your answer.

Asset Replacement Decision

Roadrunner Freight Company owns a truck that cost $42,000.Currently, the trucks book value is $24,000 and its expected remaining useful life is four years.Roadrunner has the opportunity to purchase for $31,200 a replacement truck that is extremely fuel efficient.Fuel cost for the old truck is expected to be $6,000 per year more than fuel cost for the new truck.The old truck is paid for but, in spite of being in good condition, can be sold for only $14,400.

Should Roadrunner replace the old truck with the new fuel-efficient model, or should it continue to use the old truck until it wears out?Include your calculations with your answer.