Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
16th Edition
ISBN: 9780134642468
Author: Srikant M. Datar, Madhav V. Rajan
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Textbook Question
Chapter 11, Problem 11.32E
Relevance of equipment costs. Janet’s Bakery is thinking about replacing the convection oven with a new, more energy-efficient model. Information related to the old and new ovens follows:
Old Oven | New Oven | |
Original cost | $21,000 | $40,000 |
6,000 | Not acquired yet | |
Book value | $15,000 | Not acquired yet |
Current disposal value | $10,000 | Not acquired yet |
Installation cost | Not applicable | $2,000 |
Annual operating cost | $12,000 | $5,000 |
Useful life | 7 years | 5 years |
Current age | 2 years | 0 years |
Remaining useful life | 5 years | 5 years |
Terminal disposal value (in 5 years) | $0 | $0 |
Ignore the effect of income taxes and the time value of money.
- 1. Which of the costs and benefits above are relevant to the decision to replace the oven?
- 2. What information is irrelevant? Why is it irrelevant?
- 3. Should Janet’s Bakery purchase the new oven? Provide support for your answer.
- 4. Is there any conflict between the decision model and the incentives of the manager who has purchased the “old” oven and is considering replacing it only two years later?
- 5. At what purchase price would Janet’s Bakery be indifferent between purchasing the new oven and continuing to use the old oven?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
In trying to decide whether or not to replace a sorting/baling machine in a solid waste recycling operation, an engineer calculated the annual worthvalues for the in-place machine and a challenger. On the basis of these costs, the defender should be replaced:a. now.b. 1 year from now.c. 2 years from now.d. 3 years from now.
Kelly Slater desires to purchase a new front office computer system for his Surfers Paradise Inn. After considerable discussion with purveyors, he has narrowed his choices to systems sold by M. Fanning ltd. and Jamie O’Brien and Co. The associated costs of each system are as follows:
M. Fanning ltd.
O’Brien and Co.
Initial Costs
29,000
31,000
Annual Costs:
Labour
22,000
22,000
Utilities
800
600
Supplies
1,500
1,500
Maintenance
2,500
1,500
Salvage Value (in 8 years)
3,000
5,000
Required:
1.Which are sunk costs?
2.Identify the irrelevant costs and explain why these costs are irrelevant!
3.Prepare a comparative cost analysis for the two alternatives. Ignore the time value of money and taxes. Include the relevant costs.
4.Which alternative do you recommend purchasing? Explain why!
Hartley's Meat Pies is considering replacing its existing delivery van with a new one. The new van can offer considerable savings in operating costs. Information about the existing van and the new van follow: Existing van New van Original cost $50,000 $92,000 Annual operating cost $19,500 $14,000 Accumulated depreciation $34,000 — Current salvage value of the existing van $25,500 — Remaining life 9 years 9 years Salvage value in 9 years $ 0 $ 0 Annual depreciation $1778 $10,222 If Hartley's Meat Pies replaces the existing delivery van with the new one, over the next 8 years operating income will:
increase by $98,000
decrease by $98,000
increase by $60,000
decrease by $60,000
Chapter 11 Solutions
Horngren's Cost Accounting, Student Value Edition Plus MyLab Accounting with Pearson eText - Access Card Package (16th Edition)
Ch. 11 - Prob. 11.1QCh. 11 - Define relevant costs. Why are historical costs...Ch. 11 - All future costs are relevant. Do you agree? Why?Ch. 11 - Distinguish between quantitative and qualitative...Ch. 11 - Describe two potential problems that should be...Ch. 11 - Variable costs are always relevant, and fixed...Ch. 11 - A component part should be purchased whenever the...Ch. 11 - Prob. 11.8QCh. 11 - Managers should always buy inventory in quantities...Ch. 11 - Management should always maximize sales of the...
Ch. 11 - Prob. 11.11QCh. 11 - Cost written off as depreciation on equipment...Ch. 11 - Managers will always choose the alternative that...Ch. 11 - Prob. 11.14QCh. 11 - Prob. 11.15QCh. 11 - Qualitative and quantitative factors. Which of the...Ch. 11 - Special order, opportunity cost. Chade Corp. is...Ch. 11 - Prob. 11.18MCQCh. 11 - Keep or drop a business segment. Lees Corp. is...Ch. 11 - Relevant costs. Ace Cleaning Service is...Ch. 11 - Disposal of assets. Answer the following...Ch. 11 - Relevant and irrelevant costs. Answer the...Ch. 11 - Multiple choice. (CPA) Choose the best answer. 1....Ch. 11 - Special order, activity-based costing. (CMA,...Ch. 11 - Make versus buy, activity-based costing. The...Ch. 11 - Inventory decision, opportunity costs. Best Trim,...Ch. 11 - Relevant costs, contribution margin, product...Ch. 11 - Selection of most profitable product. Body Image,...Ch. 11 - Theory of constraints, throughput margin, relevant...Ch. 11 - Closing and opening stores. Sanchez Corporation...Ch. 11 - Prob. 11.31ECh. 11 - Relevance of equipment costs. Janets Bakery is...Ch. 11 - Equipment upgrade versus replacement. (A. Spero,...Ch. 11 - Special order, short-run pricing. Diamond...Ch. 11 - Short-run pricing, capacity constraints. Fashion...Ch. 11 - International outsourcing. Riverside Clippers Corp...Ch. 11 - Relevant costs, opportunity costs. Gavin Martin,...Ch. 11 - Opportunity costs and relevant costs. Jason Wu...Ch. 11 - Opportunity costs. (H. Schaefer, adapted) The Wild...Ch. 11 - Make or buy, unknown level of volume. (A....Ch. 11 - Make versus buy, activity-based costing,...Ch. 11 - Prob. 11.42PCh. 11 - Product mix, special order. (N. Melumad, adapted)...Ch. 11 - Theory of constraints, throughput margin, and...Ch. 11 - Theory of constraints, contribution margin,...Ch. 11 - Closing down divisions. Ainsley Corporation has...Ch. 11 - Dropping a product line, selling more tours....Ch. 11 - Prob. 11.48PCh. 11 - Dropping a customer, activity-based costing,...Ch. 11 - Equipment replacement decisions and performance...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Keep or Buy, Sunk Costs Heather Alburty purchased a previously owned, 2004 Grand Am for 8,900. Since purchasing the car, she has spent the following amounts on parts and labor: Unfortunately, the new stereo doesnt completely drown out the sounds of a grinding transmission. Apparently, the Grand Am needs a considerable amount of work to make it reliable transportation. Heather estimates that the needed repairs include the following: In a visit to a used car dealer, Heather has found a 2005 Neon in mint condition for 9,400. Heather has advertised and found that she can sell the Grand Am for only 6,400. If she buys the Neon, she will pay cash, but she would need to sell the Grand Am. Required: 1. CONCEPTUAL CONNECTION In trying to decide whether to restore the Grand Am or to buy the Neon, Heather is distressed because she already has spent 11,300 on the Grand Am. The investment seems too much to give up. How would you react to her concern? 2. CONCEPTUAL CONNECTION Assuming that Heather would be equally happy with the Grand Am or the Neon, should she buy the Neon, or should she restore the Grand Am?arrow_forwardAssume that a company is choosing between two alternatives—keep an existing machine or replace it with a machine. The costs associated with the two alternatives are summarized as follows: Existing Machine New Machine Purchase cost (new) $ 15,000 $ 26,000 Remaining book value $ 6,000 Overhaul needed now $ 5,000 Annual cash operating costs $ 11,500 $ 7,000 Salvage value (now) $ 2,000 Salvage value (eight years from now) $ 1,000 $ 6,000 If the company overhauls its existing machine, it will be usable for eight more years. If it buys the new machine, it will be used for eight years. Based on a net present value analysis with a discount rate of 14%, what is the financial advantage (disadvantage) of replacing the existing machine with a new machine?arrow_forwardMotor City Rentals is trying to decide whether it should keep its existing car detailing machine or purchase a new one that has state of the art technological advancements (which translate into cost savings) over the existing machine. Information on each machine follows: - Old machine New machine Original cost $9,000 $20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value of old machine 2,000 Salvage value in 10 years 500 1,000 Remaining life 10 yrs. 10 yrs. The incremental cost to purchase the new machine is Group of answer choices $11,000 $18,000. $20,000. $13,000.arrow_forward
- Kingsville plans to buy a street-cleaning machine. A used cleaning vehicle will cost $80,000 and have a $10,000 salvage value at the end of its five year life. A new system with advanced features will cost $160,000 and have a $45,000 salvage value at the end of its five year life. The new system is expected to reduce labor hours compared with the used system. Current street cleaning activity requires the used system to operate 8 hours per day for 20 days per month. Labor costs $50 per hour and MARR is 12% per year. Find the breakeven labor hours for the new system. USE SOLVER FUNCTION IN EXCELarrow_forwardTo recover the waste heat from the processed fluid, a chemical industry planned to invest in a heat exchanger. Company has 4 investment options namely HE1, HE2, HE3 & HE4. Company expected at least 20 % annual return before taxes based on the purchased cost. HE1 HE2 HE3 HE4 Purchased Cost (OMR) 13000 17000 20000 38000 Maintenance Cost (as % of purchased cost) 18 20 25 22 Operation Cost (OMR) 4500 6000 8000 9000 Energy Saving (OMR) 12000 15000 18000 25000 Suggest the suitable heat exchanger to the company based on the following methods. Justify the statement. a) Incremental investment returns method b) Minimum return as a cost methodarrow_forwardMonroe Manufacturing owns a warehouse that has been used for storing finished goods for electro-pump products. As the company is phasing out the electro-pump product line, the company is considering modifying the existing structure to use for manufacturing a new product line. Monroe's production engineer feels that the warehouse could be modified to handle one of two new product lines. The cost and revenue data for the two product alternatives arc as follows: Product A Product BInitial cash expenditure:• Warehouse modification $115,000 $189,000• Equipment $250,000 $315,000Annual revenues $215,000 $289,000Annual O&M costs $126,000 $168,000Product life 8 years 8 yearsSalvage value…arrow_forward
- 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 differential cost was: A: 59,000 B: 27,000 C: 32,000 D: 17,000arrow_forwardJackson Inc. disposes of other companies’ toxic waste. Currently, Jackson loads the waste by handinto a truck, which requires labor of $20 per load. Jackson is considering a machine that wouldreduce the amount of time needed to load the waste. The machine would cost $200,000 but wouldreduce labor cost to $5 per load. Assume that Jackson averages 10,000 loads per year. How manyyears (rounded to 2 decimal places) would it take for Jackson to recover the cost of the new machine?arrow_forwardCentral Laundry and Cleaners is considering replacing an existing piece of machinery with a more sophisticated machine. The old machine was purchased 3 years ago at a cost of $50,600, and this amount was being depreciated under MACRS using a 5-year recovery period. The machine has 5 years of usable life remaining. The new machine that is being considered costs $75,200 and requires $3,900 in installation costs. The new machine would be depreciated under MACRS using a 5-year recovery period. The firm can currently sell the old machine for $55,300 without incurring any removal or cleanup costs. The firm is subject to a tax rate of 21%.The revenues and expenses (excluding depreciation and interest) associated with the new and the old machines for the next 5 years are given in the table attached. . (The second table1894 contains the applicable MACRS depreciation percentages.) Note:The new machine will have no terminal value at the end of 5 years. a. Calculate the initial cash flow…arrow_forward
- Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $511,000 or a new model 220 machine costing $471,000 to replace a machine that was purchased 7 years ago for $503,000. 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 $471,000 in the new machine, the money could be invested in a project that would return a total of $479,000. In making the decision to invest in the model 220 machine, the opportunity cost was: Multiple Choice $503,000 $471,000 $511,000 $479,000arrow_forwardYou have two machines under consideration for an improved automated wrapping process for Snickers Fun Size candy bars as detailed below. (a) Using an AW analysis, determine which should be selected at i = 15% per year. (b) Assume you want machine D to be selected and are willing to extend its estimated life, if necessary. Perform this analysis to ensure D’s selection using factors or a spreadsheet. Machine C D First cost, $ −40,000 −65,000 Annual cost, $/year −10,000 −12,000 Salvage value, $ 12,000 25,000 Life, years 3 6arrow_forwardCharleston Affair is considering replacing an outdated piece of machinery. Use the information below for the old piece of machinery and new machinery to prepare a differential analysis to determine if Charleston Affair should continue (Alternative 1) or replace (Alternative 2) the old machine. Assume 3% interest Old Machine: Estimated annual variable manufacturing costs $18,000 Estimated selling price $10,000 Estimated residual value $6,500 Estimated remaining useful life 7 years Assume $60K increase in income A New Machine Purchase price $110,000 Estimated annual variable manufacturing costs $5,000 Estimated residual value $1,500 Estimated useful life 7 yearsarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License