Question

You are the chair of the Network's ad hoc task force. Your charge is to evaluate...

You are the chair of the Network's ad hoc task force. Your charge is to evaluate the two alternatives and to make a recommendation on which one to accept, if revenues would be identical for the two alternatives, and hence the decision can be made solely on the basis of costs. As part of the analysis, the costs of the two alternatives must be estimated on a per procedure basis and an annual basis. In addition, any relevant qualitative factors must be considered before the recommendation is made. To keep the base case analysis manageable, the task force was instructed to assume that the operating costs remain constant over the useful life of the equipment. For comparative purposes, this assumption is not too egregious because the activities are roughly the same for both alternatives and, hence, inflation would have a somewhat neutral impact on the cost comparison. In addition, the System CFO has asked the task force to perform some sensitivity (scenario) analyses. He is concerned about the accuracy of the cost detail inputs. Although he is confident about many of the estimates, he thinks others are more arbitrary. Those activity cost inputs considered to be most uncertain are supplies cost per unit; billing and collection cost per unit; general administration cost per unit; and transportation, setup, and breakdown cost per unit. Thus, first, the task force must redo the analysis assuming that these inputs are higher than the base case values by 10 and 20 percent. Activity cost inputs less than the base case values could also be examined, but the critical issue here is not to underestimate the total costs involved in the two alternatives. Second, the task force must determine what would happen to the cost estimates if the useful life of the capital equipment were as short as three years or as long as seven years. Another concern was that the useful life of the equipment depended on the alternative chosen; that is, there would be less wear and tear under Alternative 1 than under Alternative 2. Finally, the task force must assess the impact of a purchase discount: Would the discount amount influence the ultimate decision? You believe that performing a sensitivity analysis on the number of procedures would be helpful, but you realize this task would require recalculation of the per unit cost inputs, an effort thought to be too time-consuming to undertake at this point in the analysis.

Homework Answers

Answer #1

Yes the discount value can change the preference for any of the alternative.

The discount value will affect the final price of the alternative. If all the other things remains the same for the both alternatives then the final price of the alternatives will be totally dependent on the value of discount.

As it is given that the wear and tear is less in alternative 1 as compared to alternative 2 so a little amount of discount will be negligible and the choice will remain for alternative 1.

If the discount value is much larger then the choice may shift to alternative 2.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are the chair of the Network's ad hoc task force. Your charge is to evaluate...
You are the chair of the Network's ad hoc task force. Your charge is to evaluate the two alternatives and to make a recommendation on which one to accept, if revenues would be identical for the two alternatives, and hence the decision can be made solely on the basis of costs. As part of the analysis, the costs of the two alternatives must be estimated on a per procedure basis and an annual basis. In addition, any relevant qualitative factors...
Instructions You are the chair of the Network's ad hoc task force. Your charge is to...
Instructions You are the chair of the Network's ad hoc task force. Your charge is to evaluate the two alternatives and to make a recommendation on which one to accept, if revenues would be identical for the two alternatives, and hence the decision can be made solely on the basis of costs. As part of the analysis, the costs of the two alternatives must be estimated on a per procedure basis and an annual basis. In addition, any relevant qualitative...
Task #2: Tomewin Water Company Role and Context You are a newly-hired financial analyst with Tomewin...
Task #2: Tomewin Water Company Role and Context You are a newly-hired financial analyst with Tomewin Water Company (TWC), a company operating in most states of Australia, which specialises in bottling purified water sourced from Tweed Valley springs. TWC is considering adding to its product mix a ‘healthy’ bottled water geared towards children, aimed at improving both its business focus and the return to shareholders. Scenario TWC currently has 30,000,000 ordinary shares outstanding that trade at a price of $41...
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich Company....
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich Company. “We need to make a decision quickly.” The company is trying to decide whether it should rent new equipment and continue to make its carburetors internally or whether it should discontinue production of its carburetors and purchase them from an outside supplier. The alternatives follow:      Alternative 1: Rent new equipment for producing the carburetors for $147,000 per year.      Alternative 2: Purchase carburetors from an...
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich Company....
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich Company. “We need to make a decision quickly.” The company is trying to decide whether it should rent new equipment and continue to make its carburetors internally or whether it should discontinue production of its carburetors and purchase them from an outside supplier. The alternatives follow:      Alternative 1: Rent new equipment for producing the carburetors for $207,000 per year.      Alternative 2: Purchase carburetors from an...
You have been asked to evaluate two different machines and provide a recommendation to your boss....
You have been asked to evaluate two different machines and provide a recommendation to your boss. Machine A costs $165,000 up front, has a 4-year life, and an annual after-tax OCF of negative $13,000 per year. Machine B costs $180,000 up front, has a 5-year life, and an annual after-tax OCF of negative $11,750. If the discount rate is 8 percent, what is the equivalent annual cost of each machine? What is the recommendation you would make to your boss...
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich Company....
“That old equipment for producing carburetors is worn out,” said Bill Seebach, president of Hondrich Company. “We need to make a decision quickly.” The company is trying to decide whether it should rent new equipment and continue to make its carburetors internally or whether it should discontinue production of its carburetors and purchase them from an outside supplier. The alternatives follow:      Alternative 1: Rent new equipment for producing the carburetors for $140,000 per year.      Alternative 2: Purchase carburetors from an...
Matchless Computer Company has been purchasing carrying cases for its portable computers at a purchase price...
Matchless Computer Company has been purchasing carrying cases for its portable computers at a purchase price of $56 per unit. The company, which is currently operating below full capacity, charges factory overhead to production at the rate of 45% of direct labor cost. The fully absorbed unit costs to produce comparable carrying cases are expected to be as follows: Direct materials $28 Direct labor 21 Factory overhead (45% of direct labor) 9.45 Total cost per unit $58.45 If Matchless Computer...
NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base...
NEW PROJECT ANALYSIS You must evaluate a proposal to buy a new milling machine. The base price is $138,000, and shipping and installation costs would add another $20,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $75,900. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $9,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on...
You must evaluate a proposal to buy a new milling machine. The base price is $148,000,...
You must evaluate a proposal to buy a new milling machine. The base price is $148,000, and shipping and installation costs would add another $11,000. The machine falls into the MACRS 3-year class, and it would be sold after 3 years for $103,600. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The machine would require a $9,000 increase in net operating working capital (increased inventory less increased accounts payable). There would be no effect on revenues, but pretax...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT