Question

King Company makes a single product that it sells to retail stores. The firm’s finishing department uses hand labor to perform its work on all products. A proposal has been made by the company’s vice president to acquire machinery that will perform most of the functions of this department. The finishing department has consistently produced 50,000 units a year, and that is the estimated production for the foreseeable future. A summary of the manufacturing costs of the department follows:

Direct materials	$	125,000
Direct labor		937,500
Manufacturing overhead:
Variable costs		187,500
Fixed costs		125,000

The machinery being considered will cost $960,000 and have an estimated useful life of Six years, with no salvage value. The machinery will cause the following changes in costs:

a.	Direct labor will decrease by $9 per unit.
b.	Direct materials will not change.
c.	Variable manufacturing overhead will decrease by $1.75 per unit.
d.	Fixed manufacturing overhead will increase by $50,000 per year.

1.	Prepare an analysis showing the effect on net income of purchasing the equipment. (Round your "per unit" answers to 2 decimal places.)

      

Analyze:

Assume that the use of the new machinery will increase the number of imperfect products produced by 2 percent of total production. These imperfect products must be reprocessed at a cost of $10 per unit, increasing variable manufacturing costs. What net annual increase or decrease in costs can be projected?

Answer 1

Statement Showing effect on Net income of Purchasing the Equipment to produce 50000 Unit					W/Note for manufacturing cost for Purchasing Equipment
						Unit/Rate	Total Cost
			Net Impact		Direct Material	$2.50	$125,000.00
	Total Cost(a)	Total Cost (b)	a-b		Direct Labour( $18.75-$9)	$9.75	$487,500.00
Direct Material	$125,000	$125,000	$0		Manufacturing Overhead
Direct Labour	$937,500	$487,500	$450,000		Variable Cost ($3.75-$1.75)	$2.00	$100,000.00
Manufacturing Overhead					Total Fixed Cost	$6.70	$335,000.00
Variable Cost	$187,500	$100,000	$87,500		Other Fixed Cost ($125000+$50000)
Fixed Cost	$125,000	$335,000	-$210,000		Depreciation Cost( $960000/6)
Additional Variable Manufacturing Expense incurred on reprocessed		$10,000	-$10,000		Additional Variable Manufacturing Expense on reprocessed imperfect Product (50000 unit*2%*$10		$10,000.00
Total Cost	$1,375,000	$1,057,500	$317,500		Total Cost		$1,057,500.00
Above Working Shows that Total cost to produce 50000 unit reduce by $317500 , Hence income will be increased by $317500 due to purchasing the equipment