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Case 13-33

Woolrich Company's market research division has a projected a substantial increase in

demand over the next several years for one of the company's products.

To meet this demand, the company will need to produce units as follows:

Year

Production in Units

1

20,000

2

30,000

3

40,000

year 4-10

45,000

At present, the company is using a single model 2600 machine to manufacture this product. To increase its production capacity, the company is considering two alternatives:

Alternative #1 the company could purchase another model 2600 machine that would operate along with the one it now onwns.

The following information is available on this alternative:

a.

The model 2600 machine now in use was purchased for $165,000 four years ago. Its present book value is $99,000, and its present market value is $90,000.

b.

A new model 2600 machine cost $180,000 now. The old machine will have to be replaced in six years at a cost of $200,000.

The replacement machine will have a market value of about $100,000 when it is four years old.

c.

The variable cost required to produce one unit of product using the model 2600 machine is given under the "general information" on the next page.

d.

Repairs and maintance cost each year on a single model 2600 machine total $3,000.

Alternative #2. The company could purchase a model 5200 machine and use the old model 2600 machine as standby equipment.

The model 5200 machine is a high-speed unit with a double the capacity of the model 2600 machine. The following information is available on this alternative:

a.

The cost of a new model 5200 machine is $$250,000.

b.

A new model 2600 machine cost $180,000 now. The old model 2600 machine will have a to be replace in six years at a cost of $200,000. The replacement machine will have a market value of about $100,000 when it is four years old.

c.

The model 5200 machine is more costly to maintain than the model 2600 machine. Repair and maintenance on the model 5200 machine and on a model 2600

machine used as a standby would total $4,600 per year.

The following general information is available on the two alternatives:

a.

Both model 2600 machine and the model 5200 machine have a 10 year life from the time they are first used in production.

The scrap value of both machines is negigible and can be ignored. Straight-line depreciation is used by the company.

b.

The two machine models are not equally effient. Comparative variable cost per unit of product are as follows:

Model 2600

Model 5200

Direct materials per unit:

$0.36

$0.40

Direct labor per unit:

0.50

0.22

Supplies and lubricants per unit:

0.04

0.08

Total variable cost per unit:

$0.90

$0.70

c.

No other factory costs would change as a result of the decision between the two machines.

d.

Woolrich Company uses an 18% discount rat

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