Cool Cookie Company is considering replacing its giant dough mixer with a new one. The following data have been compiled to evaluate the decision.
Original cost $16,000 $20,000
Annual operating cost $8,000 $6,000
Remaining life 10 years 10 years
Disposal value now $7,000 ---
What costs are relevant? What costs are sunk?
What should Cool Cookie Company do—keep the old mixer or buy the new?
For the option you picked, how much cash does the company save over 10 years (over the alternative)? [To answer this part, ignore the time value of money…in other words, assume a cost of capital (interest rate) of 0% in the future)…]
Bob's Fudge Factory currently makes fudge for retail and mail order customers. It also offers a variety of roasted nuts. Fudge sales have increased over the past year, so Bob is considering outsourcing the roasted nuts and using the roasting space to make additional fudge. A reliable supplier has quoted a price of $0.80 per pound for the roasted nuts. The following amounts reflect the in-house manufacturing costs per pound for the roasted nuts:
Direct materials $0.50
Direct labor 0.06
Unit-related support costs 0.10
Batch-related support costs 0.04
Product-sustaining support costs 0.05
Business-sustaining support costs 0.15
Total cost per pound $0.90
Should Bob's Fudge Factory outsource the roasted nuts? Why or why not? (Assume all the support costs above are avoidable if Bob outsources the roasting.)
ACME Manufacturing, Inc., is considering reorganizing its plant and increasing advertising. The following estimates have been prepared:
Before the change After the change
Total annual sales $700,000 $900,000
Costs as percentage of sales:
Direct materials 10% 9%
Direct labor 6% 4%
Support costs 9% 17%
What amount of annual change is projected for total support and manufacturing costs?
How will ACME's profit change with this reorganization? Should ACME go ahead with this plan?
This question was asked on Feb 01, 2011 and answered on Feb 03, 2011.
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