Several years ago Velvet Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for rental revenue of $40,000 per year. The renter’s lease will expire next month, and rather than renewing the lease, Velvet Company has decided to use the building itself to manufacture a new product.
Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby in order to store finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The company will continue to
Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to customers will be $10 per unit. Electrical costs of operating machines will be $2 per unit. To have funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of $6,000 per year.
Required: Prepare an answer sheet with the following column headings:
Name of the Cost
Variable Cost
Fixed Cost
Direct Materials
Direct Labor
Manufacturing
Period Cost
Opportunity Cost
Sunk Cost
List the different costs associated with the new product decision down the extreme left column (under Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be X’s under several column headings for a single cost. (For example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.)
Trending nowThis is a popular solution!
Step by stepSolved in 2 steps with 1 images
- Cullumber, Inc. is considering the purchase of a warehouse directly across the street from its manufacturing plant. Cullumber currently warehouses its inventory in a public warehouse across town. Rent on the warehouse and delivering and picking up inventory cost Cullumber $50880 per year. The building will cost Cullumber $477000. Cullumber will depreciate the building for 20 years. At the end of 20 years, the building will have a $132500 salvage value. Cullumber's required rate of return is 12%. Click here to view the factor table. Using the present value tables, the building's net present value is (round to the nearest dollar) O $1017600. O $46077. O $393783. O $-83217.arrow_forwardDuluth Medico purchased a digital imageprocessing machine three years ago at a cost of$50,000. The machine had an expected life of eightyears at the time of purchase and an expected salvagevalue of $5,000 at the end of the eight years. Theold machine has been slow at handling the increasedbusiness volume, so management is consideringreplacing the machine. A new machine can be purchased for $75,000, including installation costs.Over its five-year life, the machine will reduce cashoperating expenses by $30,000 per year. Sales arenot expected to change. At the end of its useful life,the machine is estimated to be worthless. The oldmachine can be sold today for $10,000. The firm’sinterest rate for project justification is known to be15%. The firm does not expect a better machine(other than the current challenger) to be available forthe next five years. Assuming that the economic service life of the new machine, as well as the remaininguseful life of the old machine, is five years,(a)…arrow_forwardKim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $80,700, the accumulated depreciation is $32,300, its remaining useful life is 5 years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $167,900. The automatic machine has an estimated useful life of 5 years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: PresentOperations ProposedOperations Sales $255,800 $255,800 Direct materials $87,200 $87,200 Direct labor 60,500 — Power and maintenance 5,600 29,900 Taxes, insurance, etc. 2,000 6,700 Selling and administrative expenses 60,500 60,500 Total expenses $215,800 $184,300…arrow_forward
- CH Kilo Inc. is evaluating a proposal to supply warehouse space to a potential customer as well as maintain all the required warehouse records. Kilo has a storage barn not currently in use; however, it will require the installation of additional shelving and a special concrete pad for delivery truck access Kilo's existing accountant will assume the additional accounting duties and receive an additional $8,000 per annum. The potential customer will pay a fee to Kilo based on the volume of product stored. Required: Which of the following items is not a relevant consideration in deciding whether Kilo should provide the warehouse space to the potential customer? (You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer, Any boxes left with a question mark will be automatically graded as incorrect.) Original purchase price of the storegeben…arrow_forwardCullumber Roofing is faced with a decision. The company relies very heavily on the use of its 60-foot extension lift for work on large homes and commercial properties. Last year, Cullumber Roofing spent $67,200 refurbishing the lift. It has just determined that another $31,000 of repair work is required. Alternatively, it has found a newer used lift that is for sale for $132,500. The company estimates that both lifts would have useful lives of 5 years. The new lift is more efficient and thus would reduce operating expenses from $93,000 to $70,600 each year. Cullumber Roofing could also rent out the new lift for about $8,000 per year. The old lift is not suitable for rental. The old lift could currently be sold for $19,500 if the new lift is purchased. The new lift and old lift are estimated to have salvage values of zero if used for another 5 years.Prepare an incremental analysis showing whether the company should repair or replace the equipment. (Enter negative amounts using either a…arrow_forwardOn March 17, Advanced Technologies purchased a patent related to laser surgery techniques. The purchase price of the patent is $1,340,000. The patent is expected to benefit the company for the next five years. The company had the following additional costs: $34,000 in legal fees associated with the purchase and filling of the patent, $49,000 to advertise its new laser surgery techniques, and $59,000 to train employees. None of these additional costs were included in the purchase price or paid to the seller. Now assume that instead of purchasing the patent, Advanced Technologies spent $1,340,000 to develop the patent internally, consisting of personnel ($870,000), equipment ($342,000), and materials ($128,000). All additional costs were incurred for the same amount. What is the recorded cost of the patent? Total capitalized costarrow_forward
- A few years ago, Nuts, Bolts and Brackets, Inc purchased a small warehouse. The firm paid $2.200,000 for the warehouse and $300,000 for construction costs at that time. The owner. "Thunder Dan," (as the locals call him), decides if he wants to expand, he will need more space. He decides to expand the size of the current warehouse. This expansion will cost him about $400,000 to construct a new side to the building. Using the additional space wisely, Dan estimates that he will be able to generate about $70,000 more in sales per year, while incurring $41,500 in labor and variable costs of goods Calculate the amount of the Net Capital Expenditure (NCS) on the project below. Multiple Choice -$2,200,000 -230,000 -$370,000 -$400,000 $271,500 -$70,000arrow_forwardThe Bigbee Bottling Company is contemplating the replacement of one of its bottling machines with a newer and more efficient one. The old machine has a book value of $550,000 and a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old machine in 5 years, but it can sell it now to another firm in the industry for $250,000. The old machine is being depreciated by $110,000 per year, using the straight-line method. The new machine has a purchase price of $1,100,000, an estimated useful life and MACRS class life of 5 years, and an estimated salvage value of $160,000. The applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. It is expected to economize on electric power usage, labor, and repair costs, as well as to reduce the number of defective bottles. In total, an annual savings of $245,000 will be realized if the new machine is installed. The company's marginal tax rate is 35%, and it has a 12% WACC. a. What initial cash…arrow_forwardProWasher’s lawyer, Anna Turney, informed you that ProWasher has a legal obligation to dismantle and remove the equipment used to produce the dishwashers and clean up the rental premises as part of the lease agreement. The equipment, costing $10 million, was put into production on June 1, 2023 and has a useful life of 120 months. The dismantling and removal costs are estimated to be $3 million. What is the accountant supposed to do?arrow_forward
- A critical machine in BHP Billiton's copper refining operation was purchased 7 years ago for $160,000. Last year a replacement study was performed with the decision to retain it for 3 more years. The situation has changed. The equipment is estimated to have a value of $8000 if "scavenged" for parts now or anytime in the future. If kept in service, it can be minimally upgraded at a cost of $43,000 to make it usable for up to 2 more years. Its operating cost is estimated at $22,000 in the first year and $29,000 in the second year. Alternatively, the company can purchase a new system, the challenger, that will have an AWC of $-51,000 over its ESL. Use a MARR of 10% per year and annual worth analysis to determine when the company should replace the machine. The AW value of the challenger is $- ◻ ◻ and the AW value of the defender at the end of year 2 is $- 82,834.71 ◻ The company should replace the machine ◻ after two years A critical machine in BHP Billiton's copper refining operation was…arrow_forwardKim Kwon Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $94,400, the accumulated depreciation is $37,800, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $196,400. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations: Present Operations Proposed Operations Sales $299,200 $299,200 Direct materials $102,000 $102,000 Direct labor 70,800 — Power and maintenance 6,600 34,900 Taxes, insurance, etc. 2,400 7,800 Selling and administrative expenses 70,800 70,800 Total expenses $252,600…arrow_forwardOn January 2, 2021, Twilight Hospital purchased a $92,000 special radiology scanner from Blossom Inc. The scanner had a useful life of 4 years and was estimated to have no disposal value at the end of its useful life. The straight-line method of depreciation is used on this scanner. Annual operating costs with this scanner are $104,000. Approximately one year later, the hospital is approached by Dyno Technology salesperson, Jacob Cullen, who indicated that purchasing the scanner in 2021 from Blossom Inc. was a mistake. He points out that Dyno has a scanner that will save Twilight Hospital $24,000 a year in operating expenses over its 3-year useful life. Jacob notes that the new scanner will cost $109,000 and has the same capabilities as the scanner purchased last year. The hospital agrees that both scanners are of equal quality. The new scanner will have no disposal value. Jacob agrees to buy the old scanner from Twilight Hospital for $43,000. (a) If Twilight Hospital sells its old…arrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education