the following information from exhibit 7: variable costs of the new machine is $100.000. Other costs $75.000 in installation and programming costs (only applicable in the first year) & $150,000 fixed costs. Finally, the utilization of the machine in the first year is 10% of 4,000 and in the following years this rises to 60%. The burden rates for the machine as a separate cost center are as followed: Table 5: burden rates (cost/hour) - as a separate cost center It is clear that due to the double declining balance method of depreciation and initial costs, burden rates are declining each year. In the first year the rate is significantly higher ($2.062,5) than in year 8 ($131.98). This is an important factor that influences the decision, as it is unclear whether customers are willing to pay this large amount. As part of the main test room This part analyses the burden rates when the company includes the machine as a part of the main test room. Data from both exhibit 5 and 7 were combined in the calculations: variable costs of the new machine $100.000 together with the existing is $987.379. Other costs include $75.000 in installation and programming (only applicable in the first
year), $150,000 fixed costs and existing costs of $1.126.958. Finally, the utilization of the new machine in the first year is 10% of 4,000 and in the following years this rises to 60%.The existing machine hours were 33,201. Lastly, depreciation of the new machines are added to existing depreciation costs of $88.779. When summarizing all information the burden rates for the machine as part of the main test room would be: Table 6: burden rates (cost/hour) - as part of the main test room Recommendation In this table it can be seen that the investment made for just one or two customer will also transfer costs to other customers. As previously mentioned, currently the burden rate is only $63,35. The new machine will increase the price (see last column of the table) due to its depreciation and engineering costs. Considering the fact it is only needed for one or two customers in the foreseeable future and based on the rates seen in column 6 of the last table, we can conclude that the burden rate of the main test room will be significantly distorted by the new machine. Under these circumstances, we would advise ETO to implement a separate cost center. When a separate cost center is applied for the machine, other customers will not be affected by price increases and ETO will be protected from losing a large portion of their customer base.
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- Fall '19
- Cost Accounting, EtO