Question

Current Designs 7-1 (Part 2) Current Designs faces a number of important decisions that require incremental analysis. Current Designs is always working to identify ways to increase efficiency while becoming more environmentally conscious. During a recent brainstorming session, one employee suggested to Diane Buswell, controller, that the company should consider replacing the current rotomold oven as a way to realize savings from reduced energy consumption. The oven operates on natural gas, using 18,700 therms of natural gas for an entire year. A new, energy-efficient rotomold oven would operate on 16,500 therms of natural gas for an entire year. After seeking out price quotes from a few suppliers, Diane determined that it would cost approximately $275,000 to purchase a new, energy-efficient rotomold oven. She determines that the expected useful life of the new oven would be 10 years, and it would have no salvage value at the end of its useful life. Current Designs would be able to sell the current oven for $11,000.

Prepare an incremental analysis to determine if Current Designs should purchase the new rotomold oven, assuming that the average price for natural gas over the next 10 years will be $0.70 per therm. (Enter decrease in net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000 or (15,000).) Retain Oven Replace Oven Net Income Increase (Decrease) Variable manufacturing costs $ $ $ New oven cost Proceeds from scrapping old oven Total $ $ $ Current Designs shouldshould not purchase the new rotomold oven.

Diane is concerned that natural gas prices might increase at a faster rate over the next 10 years. If the company projects that the average natural gas price of the next 10 years could be as high as $0.75 per therm, discuss how that might change your conclusion in (a). (Enter decrease in net income then enter with a negative sign preceding the number or parenthesis, e.g. -15,000 or (15,000).) Retain Oven Replace Oven Net Income Increase (Decrease) Variable manufacturing costs $ $ $ New oven cost Proceeds from scrapping old oven Total $ $ $ Current Designs should notshould purchase the new rotomold oven.

Answer 1

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Current Designs
Answer 1	Retain	Replace	Difference
Variable manufacturing costs	130,900.00	115,500.00	15,400.00
New oven cost		275,000.00	(275,000.00)
Proceeds from scrapping old oven		(11,000.00)	11,000.00
Total	130,900.00	379,500.00	(248,600.00)
Decision: Should not buy.
Answer 2	Make	Buy	Difference
Variable manufacturing costs	140,250.00	123,750.00	16,500.00
New oven cost		275,000.00	(275,000.00)
Proceeds from scrapping old oven		(11,000.00)	11,000.00
Total	140,250.00	387,750.00	(247,500.00)
Decision: Should not buy.