Q-3. MM currently carries out process B the output from which can be sold for $20 per unit and has variable costs of $7.50 per unit. Process B has directly attributable fixed operating costs of $ 40000 per annum. MM also carries out process C by using equipment that has running costs of $ 25000 per annum. The equipment could be sold now for $50000 (but this would incur dismantling costs of $7500) or in one years time for $45000 with dismantling costs of $8750.

Process B could be adapted so that it incorporated process C.

(a) The existing process B machinery would have to be removed, either now at a dismantling cost of $12500 and with the sale of the machinery for $100000 or in one years time for $75000 with dismantling costs of $13750.

(b) Alternative process B machinery would have to be leased. This would cost $10000 per annum and have annual fixed costs of $30000.

The existing process B machinery originally costs $250000 which bought five years ago. It is being depreciated at 10% per annum.

Required:

Prepare an analysis on an incremental opportunity cost basis to decide on financial grounds whether to adopt process B immediately or to delay it for one year. Ignore the time value of money. (10)