Practice Problems.docx - Managerial Accounting – Revision...

Managerial Accounting – Revision
Question 1
A. The Dynamic Company Ltd produces 30,000 lids for which manufacturing cost per unit is as follows:
Direct materials $2
Direct manufacturing labor 1
Variable manufacturing overhead 3
Fixed manufacturing overhead allocated 2
Total manufacturing cost per unit $8
Plato has offered to sell 30,000 units of the lid to Dynamic Company for $7 per unit. If Dynamic Company
accepts Plato’s offer, $2 per unit of the fixed overhead allocated would be eliminated. Should Dynamic
Company make the lids or buy it from Plato?
B. Macro Company owns five machines that it uses in its manufacturing operations. Each of the
machines was purchased four years ago at a cost of $120,000. Each machine has an estimated life of
Old Machines New Machine
Original cost $120,000 each $680,000
Useful life 10 years 6 years
Current age 4 years 0 years
Remaining useful life 6 years 6 years
Accumulated depreciation $240,000 Not acquired yet
Book value $360,000 Not acquired yet
Current disposal value $24,000 each Not acquired yet
Terminal disposal value (6 years from now) $0 $0
Annual cash operating costs $190,000 each $400,000
Ignore the time value of money and income taxes. Should Macro Company Manufacturing replace the old
machines with the new machine? Explain.
Answer