Question

1.

Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $534,000 or a new model 220 machine costing $422,000 to replace a machine that was purchased 5 years ago for $473,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired.

Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L.

Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $422,000 in the new machine, the money could be invested in a project that would return a total of $469,000.

In making the decision to invest in the model 220 machine, the opportunity cost was:

2.

Erkkila Inc. reports that at an activity level of 6,400 machine-hours in a month, its total variable inspection cost is $425,930 and its total fixed inspection cost is $179,493.

What would be the average fixed inspection cost per unit at an activity level of 6,700 machine-hours in a month? Assume that this level of activity is within the relevant range.

3.

Streif Inc., a local retailer, has provided the following data for the month of June:

Merchandise inventory, beginning balance	$	46,000
Merchandise inventory, ending balance	$	52,000
Sales	$	260,000
Purchases of merchandise inventory	$	128,000
Selling expense	$	13,000
Administrative expense	$	40,000

The net operating income for June was:

4.

Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $502,000 or a new model 220 machine costing $443,000 to replace a machine that was purchased 11 years ago for $470,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired.

Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L.

Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $443,000 in the new machine, the money could be invested in a project that would return a total of $487,000.

In making the decision to buy the model 220 machine rather than the model 370 machine, the sunk cost was:

Answer 1

The opportunity cost is the value from next best alternative use I.e. money from investing I.e. $469,000

2.Average fixed cost = total fixed cost/activity level

=179493/6700

=$26.79 per machine hour

3.net operating income = sales -(opening inventory + purchases - closing inventory) - selling expense- admin expense

= 260,000 -(46000+128000-52000) - 13000-40,000

=$85000

Sunk cost is the cost already incurred which cannot be changed

I.e. $470,000

I.e. cost incurred 11 years ago