Question

Question 2 Oak Harbor Woodworks is considering a new labor-saving machine that rents for $15,000 per year. The machine will be used on the company's butcher block production line. Data concerning the company's annual sales and costs of butcher blocks with and without the new machine are shown below: Current situation Situation with the new machine Units produced and sold... .5,000 6,000 Selling price per unit...... $40 $39 Direct materials cost per unit. $14 $13 Direct labor cost per unit. $8 $5 Variable overhead cost per unit $2 $2 Fixed expenses, other... $62,000 $62,000 Fixed expenses, rental of new machine $15,000 Requirements: Given the data above, what do you think your decision should be? Should you prefer the current situation or should you prefer new machine? Note: 1. You must NOT go outside for data collection. You have do the assignment based on your judgement and using the concept from books, slides, google, internet etc. 2. Assignment can be done in MS Excel/MS Word/ hand written 3. In case of hand written, you have to make it a PDF file to upload. 4. No word limit

Answer 1

		Current Situation		Situation with New Machine	Impact
Sale		5000		6000
Sale Value		200000		234000	Sale Price Declined
Direct Material	14	70000	13	78000	Decrease in Materail Cost
Direct Labour	8	40000	5	30000	Decrease in Labour Cost
Variable OH	2	10000	2	12000	No Change in Variable OH
Variable Cost		120000		120000	No Change in Variable Expenses on Overall basis
Contribution		80000		114000
Contribution Per Unit		16		19	Increase in Contribution
Less: Fixed Expenses		62000		62000	As Nature is fixed
Less: Rental Cost		0		15000	As Added extra due to New Machien
Profit		18000		37000	Increased ( 19000$ )
But we cant tale decision onl on the basis of Increase in profit, because as with the installation of New Machine has no change s in variable Cost, and Fixed cost, also Sale price is declined by 1 $ and increase in production volume. But this is adding the Rental cost to the extent of 15K $ on annual basis. Same need to be evaluated.
So Accordingly
Change in Sale Value		234000 $ - 200000 $ = 34000 $
Other Fixed Cost		15000$                      = 15000 $
Difference			19000$
Hence, with the installation of New Machinery by incremental costing able to earn 19000 $ over and above the fixed rental cost.
Hence, It is advisable can undertake the new machinery.