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 company’s 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 Jonfran’s 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 Jonfran’s 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 do—make or buy the containers? What qualitative factors should be considered? (CMA adapted)

BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
BuyFind

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

Solutions

Chapter
Section
Chapter 19, Problem 31P
Textbook Problem

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:

Chapter 19, Problem 31P, Jonfran Company manufactures three different models of paper shredders including the waste , example  1

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 company’s 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 Jonfran’s 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 Jonfran’s current manufacturing cost, which is as follows:

Chapter 19, Problem 31P, Jonfran Company manufactures three different models of paper shredders including the waste , example  2

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. 1. Prepare a schedule of cash flows for the make alternative. Calculate the NPV of the make alternative.
  2. 2. Prepare a schedule of cash flows for the buy alternative. Calculate the NPV of the buy alternative.
  3. 3. Which should Jonfran do—make or buy the containers? What qualitative factors should be considered? (CMA adapted)

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Chapter 19 Solutions

Cornerstones of Cost Management (Cornerstones Series)
Ch. 19 - What are the principal tax implications that...Ch. 19 - Explain why the MACRS method of recognizing...Ch. 19 - Explain the important factors to consider for...Ch. 19 - Explain what a postaudit is and how it can provide...Ch. 19 - Explain what sensitivity analysis is. How can it...Ch. 19 - Jan Booth is considering investing in either a...Ch. 19 - WeCare Clinic is planning on investing in some new...Ch. 19 - Carsen Sorensen, controller of Thayn Company, just...Ch. 19 - Manzer Enterprises is considering two independent...Ch. 19 - Keating Hospital is considering two different...Ch. 19 - Warren Company plans to open a new repair service...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - The following cases are each independent of the...Ch. 19 - Each of the following scenarios is independent....Ch. 19 - Roberts Company is considering an investment in...Ch. 19 - NPV A clinic is considering the possibility of two...Ch. 19 - Refer to Exercise 19.11. 1. Compute the payback...Ch. 19 - Buena Vision Clinic is considering an investment...Ch. 19 - Consider each of the following independent cases....Ch. 19 - Gina Ripley, president of Dearing Company, is...Ch. 19 - Covington Pharmacies has decided to automate its...Ch. 19 - Postman Company is considering two independent...Ch. 19 - Lilly Company is planning to buy a set of special...Ch. 19 - An investment of 2,000 produces a net cash flow of...Ch. 19 - Which of the following is a deficiency of the...Ch. 19 - Assume there are two competing projects, X and Y....Ch. 19 - Thomas Company is investing 10,000 in a project...Ch. 19 - Assume that an investment of 100,000 produces a...Ch. 19 - Heaps Company produces jewelry that requires...Ch. 19 - Sweeney Manufacturing has a plant where the...Ch. 19 - Ron Booth, the CEO for Sunders Manufacturing, was...Ch. 19 - Kent Tessman, manager of a Dairy Products...Ch. 19 - Friedman Company is considering installing a new...Ch. 19 - Okmulgee Hospital (a large metropolitan for-profit...Ch. 19 - Mallette Manufacturing, Inc., produces washing...Ch. 19 - Jonfran Company manufactures three different...Ch. 19 - Brindon Thayn, president and owner of Orangeville...

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