In order to meet customer demands for higher product quality, to comply with federally-mandated environmental regulations, and to reduce production costs, HCC must spend $2,000,000 within the next three years to upgrade equipment. The upgrade is expected to result in production efficiencies that will lower material and labor costs by reducing defective products, process waste, in-process inventory, and production man-hours through simplified work processes. It has been over a decade since significant modifications were made to the production facilities. Those changes were mostly technical in nature and did not substantially alter work processes or reduce overall employment. The average productivity gain in the industry for the past five years has been 3% per year. Financing for the loan to purchase the equipment
In the case of Mendel Paper Company which produces four basic paper products lines at one of its plants: computer paper, napkins, place mats, and poster board. Although the plant superintendent, Marlene Herbert is pleases with increased sales he is also concerned about the costs. The superintendent is concerned with the high fixed cost of production, the increases in fixed overhead and even variable overhead. He feels that the production of place mat should be discontinued. His reason for the discontinuation is that the special printing is driving up the variable overhead to the point where the company may not find it profitable to continue with the line. After reviewing the future predictions of the
When making a purchase to improve on many areas of operations there are always factors to take into consideration. There will be a great amount of capital expenditure for this equipment; however the potential for higher return on investment is remarkable. The initial cost of purchasing the MAGNETOM is approximately $ 1 million. There will be an additional cost of $500,000 to operate and maintain the machine. These costs will be reimbursed within the first eight months of extensive utilization if the all marketing for the machine is on point. Since we are currently paying a technician to operate our out of date machinery, there is no reason why this prediction cannot become reality. There will also be an offset of income inherited by the lack of errors made by the technicians after they have trained for the new machine . ("Magnetom espree -," 2013)
ML had developed a policy of selling manual machines and renting automatic machines. Manual machines did not cost much, did not require service, and could be modified to attach different fasteners inexpensively. Automatic machines were rented on an annual basis because they would have been more expensive to sell and it provided annual income to ML. However, about 700 of the rented machines were returned each year. During the time that machines were in inventory, ML would modify the machines to attach different fasteners. This was expensive with an average cost per modification of $2000. If all 700 machines were modified during a given year this would have cost $1.4 million per year. It was also industry practice to provide preventative maintenance and
All investments in short- and long-term assets will be liquidated and the proceeds will be received (recorded) in year 11. Investments in working capital will be recovered at cost. It is estimated that the trucks could be sold for $200,000 and the equipment for $120,000. The depreciation method to use is the MACRS under which the trucks qualify as a 5-year property and the equipment as a 7-year property (Table 7.4 in “Chapter 7: Making Investment Decisions with the NPV rule” (chapter page 152) presents the respective percentage to use for MACRS). There are also start-up costs (expenses) in the amount of $50,000 during the first year of operations. Cost of good sold has two components: (1) a fixed component as presented in table A below and reflects salaries (does not include depreciation) and a variable component. The variable part of cost of goods sold (CGS) is estimated to 30% of sales in each year. In addition, the company will incur in Selling and Administration (S&A) expenses. S&A includes advertising, promotions, sales and distributor salaries, and other direct personnel salaries and S&A also has to
Based on the current operating report, the plant is missing the targeted production line with a shortfall of 10%. Even with a 90% production rate for the first three months of the contract, the plant is not meeting the expected $100,000 profit budget and is operating at a loss of $672,000 (over the expected $90,000 expected profit budget based on the 90% production rate). Based on current modeling, this is a significant loss of profits. Danshui Plant No. 2 needs to formulate an aggressive production schedule and profit modeling for the remaining 9 months of the contract to meet the contract required, to avoid significant profit losses during the term of the contract, and satisfy the Apple Corporation to gain future contracts.
Madison industries offered to sell the reworked machinery to Johnson as special order for $68,400. Johnson agreed to pay the price when it takes delivery in two months. The additional identifiable costs to rework for the machinery to Johnson’s specifications are as follows:
Make a simple adjustment by recalculating the depreciation from five years to ten years. Since the machine is paid, the depreciation really does not matter.
On the off chance that costs, unit costs, deals blend, working proficiency, or other significant components change, then the general CVP investigation and connections additionally should be adjusted. On account of these suppositions, cost information are of constrained
Particular attention to future proofing, look at budgets and costings for machinery lifeline compared with costs.
ABC Company is planning to introduce the new product line which would utilize the spare manufacturing capacity. The product line will add up additional raw material, more time intensive labor but it will also provide higher revenue and gross margin to reach growth targets. The product will need advertising and sales promotion activities to promote customer awareness. The company will have to plan strategies satisfying the competition in market. As the product is new, initially it will cost more, the company should analyze other revenue sources to meet the cost of expansion. The risk that should be taken into consideration with the project would be the ability to have an adequate cash flow to justify the $42,000- investment for the equipment purchased.
The number and timing of capital replacements of systems or products depend on the estimated life of the system, so replacement cost must be calculated in also. It is helpful for companies to use the same sources that provide cost estimates for initial investments to obtain estimates of replacement costs and expected useful lives (Blanchard, 2004).
The cost for machinery in setting up the machine is very high initial cost, included manufacturing plant as well as the cost of transportation has reduced the margin of profit (Baharudin, Wahid, 2006). However, IBS has demonstrated that the savings in the construction time is able to compensate the higher construction cost incurred (Baharudin, Wahid, 2006).