McDermott Company developed a new industrial component called IC-75 that offers superior performance relative to the comparablecomponent sold by McDermott's primary competitor. The competing part sells for $1,380 and needs to be replaced after 2,180 hours ofuse. It also requires $290 of preventive maintenance during its useful life.The IC-75's performance capabilities are similar to its competing product with two important exceptions-it needs to be replaced after4,360 hours of use and it requires $390 of preventive maintenance during its useful life.Required:From a value-based pricing standpoint:1. What is the reference value McDermott should consider when pricing IC-75?2. What is the differentiation value offered by IC-75 relative the competitor's offering for each 4,360 hours of usage?3. What is IC-75's economic value to the customer over its 4,360-hour life?4. What range of possible prices should McDermott consider when setting a price for IC-75?1. Reference value2. Differentiation value3. Economic value to the customer4. Range of possible prices

Based on the value-based pricing analysis, McDermott Company should consider setting a price for…

Answered: McDermott Company developed a new…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter10: Short-term Decision Making

Section: Chapter Questions

Problem 7PA: Trifecta Distributors has decided to discontinue manufacturing its X Plus model. Currently, the...

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Jonfran Company manufactures three different models of paper shredders including the waste container, which serves as the base. While the shredder heads are different for all three models, the waste container is the same. The number of waste containers that Jonfran will need during the following years is estimated as follows: The equipment used to manufacture the waste container must be replaced because it is broken and cannot be repaired. The new equipment would have a purchase price of 945,000 with terms of 2/10, n/30; the companys policy is to take all purchase discounts. The freight on the equipment would be 11,000, and installation costs would total 22,900. The equipment would be purchased in December 20x4 and placed into service on January 1, 20x5. It would have a five-year economic life and would be treated as three-year property under MACRS. This equipment is expected to have a salvage value of 12,000 at the end of its economic life in 20x9. The new equipment would be more efficient than the old equipment, resulting in a 25 percent reduction in both direct materials and variable overhead. The savings in direct materials would result in an additional one-time decrease in working capital requirements of 2,500, resulting from a reduction in direct material inventories. This working capital reduction would be recognized at the time of equipment acquisition. The old equipment is fully depreciated and is not included in the fixed overhead. The old equipment from the plant can be sold for a salvage amount of 1,500. Rather than replace the equipment, one of Jonfrans production managers has suggested that the waste containers be purchased. One supplier has quoted a price of 27 per container. This price is 8 less than Jonfrans current manufacturing cost, which is as follows: Jonfran uses a plantwide fixed overhead rate in its operations. If the waste containers are purchased outside, the salary and benefits of one supervisor, included in fixed overhead at 45,000, would be eliminated. There would be no other changes in the other cash and noncash items included in fixed overhead except depreciation on the new equipment. Jonfran is subject to a 40 percent tax rate. Management assumes that all cash flows occur at the end of the year and uses a 12 percent after-tax discount rate. Required: 1. Prepare a schedule of cash flows for the make alternative. Calculate the NPV of the make alternative. 2. Prepare a schedule of cash flows for the buy alternative. Calculate the NPV of the buy alternative. 3. Which should Jonfran domake or buy the containers? What qualitative factors should be considered? (CMA adapted)
ZZOOM, Inc., has decided to discontinue manufacturing its Z Best model. Currently, the company has 4,600 partially completed Z Best models on hand. The government has put a recall on a particular part in the Z Best model, so each base model must now be reworked to accommodate the style of the new part. The company has spent $110 per unit to manufacture these Z Best models to their current state. Reworking each Z Best model will cost $22 for materials and $25 for direct labor. In addition, $9 of variable overhead and $34 of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be allocated per unit. If ZZOOM completes the Z Best models, it can sell them for $180 per unit. On the other hand, another manufacturer is interested in purchasing the partially completed units for $105 each and converting them into Z Plus models. Prepare a differential analysis per unit to determine if ZZOOM should complete the Z Best models or sell them in their current state.
Trifecta Distributors has decided to discontinue manufacturing its X Plus model. Currently, the company has 4,600 partially completed X Plus models on hand. The government has put a recall on a particular part in the X Plus model, so each base model must now be reworked to accommodate the style of the new part. The company has spent $110 per unit to manufacture these X Plus models to their current state. Reworking each X Plus model will cost $20 for materials and $20 for direct labor. In addition, $7 of variable overhead and $32 of allocated fixed overhead (relating primarily to depreciation of plant and equipment) will be allocated per unit. Il Trifecta completes the X Plus models, it can sell them for $160 per unit. On the other hand, another manufacturer is interested in purchasing the partially completed units for $104 each and converting them into Z Plus models. Prepare a differential analysis per unit to determine if Trifecta should complete the X Plus models or sell them in their current state.
Alderon Enterprises is evaluating a special order it has received for a ceramic fixture to be used in aircraft engines. Alderon has recently been operating at less than full capacity, so the firm's management will accept the order if the price offered exceeds the costs that will be incurred in producing it. You have been asked for advice on how to determine the cost of two raw materials that would be required to produce the order. A) The special order will require 800 gallons of Endor, a highly perishable material that is purchased as needed. Alderon currently has 1,200 gallons of Endor on hand, since the material is used in virtually all of the company's products. The last time endor was purchased, Alderon paid $5.00 per gallon. However, the average price paid for the endor in stock was only $4.75. The market price for the Endor is quite volatile, with the current price at $5.50. If the special order is accepted, Alderon will have to place a new order next week to replace the…
MSI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Monte Legend Company (MLC) to produce 10,000 units of the module per year for $16 each. The following information pertains to MSI’s production of the control modules: Direct materials $ 9 Direct labor 4 Variable manufacturing overhead 2 Fixed manufacturing overhead 3 Total cost per unit $ 18 MSI has determined it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, MSI has no specific use in mind for the space that is currently dedicated to the control module production. Required: 1. Compute the difference in cost between making and buying the control module. 2. Should MSI buy the modules from MLC or continue to make them? 3-a. Suppose the MSI space currently used for the modules could be utilized by a new product line that would generate…
MSI is considering outsourcing the production of the handheld control module used with some of its products. The company has received a bid from Monte Legend Co. (MLC) to produce 10,000 units of the module per year for $16 each. The following information pertains to MSI’s production of the control modules: Direct materials $ 9 Direct labor 4 Variable manufacturing overhead 2 Fixed manufacturing overhead 3 Total cost per unit $ 18 MSI has determined that it could eliminate all variable costs if the control modules were produced externally, but none of the fixed overhead is avoidable. At this time, MSI has no specific use in mind for the space that is currently dedicated to the control module production. Suppose that the MSI space currently used for the modules could be utilized by a new product line that would generate $35,000 in annual profit. Recompute the difference in cost between making and buying under this scenario.
Jireh Limited also manufactures prefab components for the housing industry. They have just been offered a new four year contract to supply a component, subject to them meeting certain quality requirements set by GREDA Ghana. The production manager is concerned that the current machine, which has been fully depreciated, will not be able to meet the stringent quality controls that will be required because the technology is obsolete, and the machine is unreliable. The company currently spends £50,000 per year to maintain and operate this machine which has no secondhand market value. On the basis of the production managerʼs recommendation, management has decided to replace the current machine. It is estimated that the replacement machine will cost £1 million with a four-year useful life. The companyʼs depreciation policy is to use a 20% reducing balance method over the life of the asset. As part of the purchase agreement for the new machine, the suppliers are offering a special maintenance…
A process control manager is considering two robots to improve materials handling capacity in the production of rigid shaft couplings that mate dissimilar drive components. Robot X has a first cost of $84,000, an annual M&O cost of $31,000, a $40,000 salvage value, and will improve revenues by $96,000 per year. Robot Y has a first cost of $146,000, an annual M&O cost of $28,000, a $47,000 salvage value, and will increase revenues by $119,000 per year. The company’s MARR is 15% per year and it uses a 3-year study period for economic evaluations. Which one should the manager select (a) on the basis of ROR values, and (b) on the basis of the incremental ROR value? (c) Which is the correct selection basis? Perform the analysis by hand or spreadsheet, as instructed.
Selma Corporation uses Part PB7 in one of its products. The company's Accounting Department reports the following costs to produce 7,000 units of the PB7 that are needed every year. An outside supplier has offered to make the part and sell it to the company for RM28.30 each. If this offer is accepted, the supervisor's salary and all of the variable costs, including direct labor, can be avoided. The special equipment used to make the part was purchased many years ago and has no salvage value or other use. The allocated general overhead represents fixed costs of the entire company. If the outside supplier's offer were accepted, only RM9,000 of these allocated general overhead costs would be avoided. Should Selma Corporation buy PB7 from the supplier or continue producing the part internally? Shows the effect on the company's total net operating income by comparing both alternatives.
The Electric Division of Ecological Products Co. has developed a wind generator that requires a special "S" ball bearing. The Ball Bearing Division of Ecological Products Co. has the capability to produce such a ball bearing. Unfortunately, the Ball Bearing Division is operating at capacity and will need to reduce production of another existing product, the "T" bearing, by 1,000 units per month to provide the 600 "S" bearings needed each month by the Electric Division. The "T" bearing currently sells for $50 per unit. Variable costs incurred to produce the "T" bearing are $30 per unit; variable costs to produce the new "S" bearing would be $60 per unit. The Electric Division has found an external supplier that would furnish the needed "S" bearings at $100 per unit. Assume that both the Electric Division and Ball Bearing Division are independent, autonomous investment centers. 1. Refer to Ecological Products Co. What is the maximum price per unit that Electric Division would be willing…
UTAH CORP. is a chemical manufacturer that supplies various products to industrial users. The company plans to introduce a new chemical solution called Bysap, for which it needs to develop a standard product cost. The following labor information is available on the production of Bysap. The product, which is bottled in 10-liter containers, is primarily a mixture of Byclyn, Salex, and Protet. The finished product is highly unstable, and one 10-liter batch out of six is rejected at the final inspection. Rejected batches have no commercial value and are thrown out. It takes a worker 35 minutes to process one 10-liter batch of Bysap. Employees work on eight-hour a day, including one hour per day for rest breaks and cleanup. What is the standard labor time to produce one 10-liter batch of Bysap? 2. MAINE INC.’s direct labor costs for the month of May are as follows: Standard direct labor hours allowed 12,500 Actual direct labor…
Hall, Incorporated manufactures two components, Standard and Ultra, that are designed for the same function, but are made of different metals for operational performance reasons. The metal used in Standard is easy to work with and there are few quality issues or reworking required on the machines. The metal used in Ultra is more difficult to work with and often needs additional machine time and rework. Data on expected operations and direct costs for the next fiscal year follow: Standard Ultra Total Units produced 37,000 11,000 48,000 Direct labor-hours used 111,000 22,500 133,500 Machine-hours used 18,500 22,500 41,000 Direct materials costs $ 2,845,000 $ 2,886,000 $ 5,731,000 Direct labor costs 2,520,000 855,000 3,375,000 The planning process team at Hall, Incorporated has estimated the following manufacturing overhead costs for the next fiscal year: Account Amount Administration $ 825,400 Engineering 2,537,000 Machine operation and maintenance 820,000…

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