Question

Apex Manufacturing Corporation is considering a significant shift in the mix of products it manufactures. The costs associated with current and proposed production schedules are shown below by category:

Cost per month	Present			Proposed
Plant depreciation	$	52,000		$	52,000
Equipment depreciation		28,000			30,000
Raw material		276,000			284,000
Direct labor		312,000			334,000
Manufacturing overhead (excluding depreciation)		801,000			818,000

The proposed production schedule will require a one-time purchase of equipment costing $180,000. No change in selling or administrative cost from their present levels is expected.

Required:

1. What type of relevant cost analysis would be appropriate in this situation (special order, make-lease-buy, etc.)? Why?

2. What role does depreciation and equipment purchase cost play in this decision?

3. What is the minimum amount that revenue would have to increase per month to justify the proposed production schedule? Ignore taxes and the time value of money.

Essay

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Answer 1

Answer(1) Product mix decision would be appropriate in this situation. Since the company is considering change in the mix of product it manufacture, therefore product mix decision would be appropriate in this situation. Answer(2) Depreciation is non cash flow cost which do not involves the flow of cash. Therefore it is irrelevant in decision making. New equipment purchase cost is relevant in decision making. Because it involves outflow of cash. Answer(3) Calculation of minimum amount that revenue would have to increase per month to justify the proposed production schedule. Increase in cost of raw material= 284,000 - 276,000 8000 Increase in Direct labor = 334,000 - 312,000 22000 Increase in manufacturing 818,000 - 801,000 17,000 overhead door excluding depreciation Depreciation on new equipment 2,000 49000 Therefore there should be atleast 49,000 Increase in revenue.