Question

A Company is considering replacing its laminate coating machine. Historically, Company has used the machine in the production of its SRM100 product. Coated SRM100s can be sold for $80/unit, while uncoated SRM100s sell for $50/unit. The additional variable costs for coating total $15/unit. Demand for coated SRM100s is 15000 units/year. Demand for uncoated SRM100s is 13000 units/year. Company is considering the following two solutions and must select one of these paths forward: Solution A: Purchase a new coater from Biggs Co. for $60,000. The machine has a useful life of 5 years with zero salvage, and a capacity of 10,000 units/year. The wongometer will need to be replaced in year 3 for $5,000. Solution B: Lease a coater from Coaters R Us for $5,500/year. The machine has a useful life of 5 years and under the lease agreement, Company will pay a lease termination fee of $1500 at the end of the year. The wongometer will need to be replaced in year 3 for $5,000. The leased coater has a capacity of 10,200 units/year. Using the above information, answer the following two questions. For the purpose of this analysis, ignore taxes. 1.      Using the “Incremental Cost Approach” in your analysis, which solution should Foreman select? Show your calculations. Keep in mind the concept of relevant costs. 2. What is the ideal product mix for coated versus uncoated SRM100s under the solution you have recommended.

Answer 1

(1)Statement showing incremental revenue for both the lease out and buy of coater machine

It is better to choose solution B of lease a coater machine from coater R U. The incremental revenue under lease is more by 19,500 when compared to purchase a coater eventhough, the if we considered the lease termination fee of 1500 in the last year the incremental revenue under lease is more by 18,000 in last year. So always better take lease of coater machine coating SRM100 product.

Wongometer replacement cost in 3rd year is irrelavent because wiil be borned under both the situations of lease out and buying the coater machine.

(2) Ideal Product Mix as per solution 1 above