Cost savings: replacement decision Rossman Instruments, Inc., is considering leasing new state-of-the-art machinery at an annual cost of $900,000. The new machinery has a fouryear expected life. It...

1 answer below »
Answer the following questions in the light of case study attached:(a) Determine the total value of annual benefits from the new machinery. Include changes in inventory carrying costs. (b) Should Rossman replace its existing machinery with the new machinery? Present your reasoning with detailed steps identifying relevant costs and revenues. (c) Discuss whether a manager evaluated on the basis of Rossman’s net income will have the incentive to make the right decision as evaluated in part b.



Cost savings: replacement decision Rossman Instruments, Inc., is considering leasing new state-of-the-art machinery at an annual cost of $900,000. The new machinery has a fouryear expected life. It will replace existing machinery leased one year earlier at an annual lease cost of $490,000 committed for five years. Early termination of this lease contract will incur a $280,000 penalty. There are no other fixed costs. The new machinery is expected to decrease variable costs from $42 to $32 per unit sold because of improved materials yield, faster machine speed, and lower direct labor, supervision, materials handling, and quality inspection requirements. The sales price will remain at $56. Improvements in quality, production cycle time, and customer responsiveness are expected to increase annual sales from 36,000 units to 48,000 units. The variable costs stated earlier exclude the inventory carrying costs. Because the new machinery is expected to affect inventory levels, the following estimates are also provided. The enhanced 296 Chapter 7 Measuring and Managing Process Performance CATEGORY OLD MACHINE NEW MACHINE Average per unit cost of raw materials inventory $12 $11 Average per unit cost of work-in-process inventory 25 20 Average per unit cost of finished goods inventory 46 36 Variable cost per unit sold 42 32 speed and accuracy of the new machinery are expected to decrease production cycle time by half and, consequently, lead to a decrease in work-in-process inventory level from 3 months to just 1.5 months of production. Increased flexibility with these new machines is expected to allow a reduction in finished goods inventory from 2 months of production to just 1 month. Improved yield rates and greater machine reliability will enable a reduction in raw materials inventory from 4 months of production to just 1.5 months. Annual inventory carrying cost is 20% of inventory value. Answer the following questions: a) Determine the total value of annual benefits from the new machinery. Include changes in inventory carrying costs. b) Should Rossman replace its existing machinery with the new machinery? Present your reasoning with detailed steps identifying relevant costs and revenues. c) Discuss whether a manager evaluated on the basis of Rossman’s net income will have the incentive to make the right decision as evaluated in part b.
Answered Same DayJul 01, 2021

Answer To: Cost savings: replacement decision Rossman Instruments, Inc., is considering leasing new...

Harshit answered on Jul 04 2021
130 Votes
Solution
(a) Due to the reduction in the expenses in the business, some amount was saved. The reducti
on of cash outflows helps the business to generate profits.
Step-1
Calculate the increase in contribution margin
    Sr. No.
    Particulars
    Old Machine
    New Machine
    (a)
    Annual Sales
    36,000
    48,000
    (b)
    Unit Sale Price
    56
    56
    (c )
    Less: Variable Cost
    42
    32
    (d)
    Contribution Per Unit (b)-(c)
    14
    24
    (e)
    Total Contribution (d) * (a)
    504,000
    1,152,000
Hence, the contribution margin has increased by $648,000 from $504,000 to $1,152,000.
Step-2
Calculate the decrease in inventory carrying costs
    Particulars
    Old Machine
    New Machine
    Annual Sales
    36000 units
    48000 units
    Raw Material Inventory
    4 month production
    1.5 months production
    Raw Material per Unit
    $12
    $11
    Work in Progress Inventory
    3 month production
    1.5 months production
    Work in Progress cost/unit
    $25
    $20
    Finished Goods Inventory
    2 month production
    1 months production
    Finished...
SOLUTION.PDF

Answer To This Question Is Available To Download

Related Questions & Answers

More Questions »

Submit New Assignment

Copy and Paste Your Assignment Here