Question

Laredo Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $3,000. The freight and installation costs for the equipment are $630. If purchased, annual repairs and maintenance are estimated to be $380 per year over the four-year useful life of the equipment. Alternatively, Laredo Corporation can lease the equipment from a domestic supplier for $1,380 per year for four years, with no additional costs.

Prepare a differential analysis dated March 15 to determine whether Laredo Corporation should lease (Alternative 1) or purchase (Alternative 2) the equipment. (Hint: This is a “lease or buy” decision, which must be analyzed from the perspective of the equipment user, as opposed to the equipment owner.) If an amount is zero, enter "0".

Differential Analysis
Lease (Alt. 1) or Buy (Alt. 2) Equipment
March 15
	Lease Equipment (Alternative 1)	Buy Equipment (Alternative 2)	Differential Effects (Alternative 2)
Costs:
Purchase price	$fill in the blank d4fd04fbf06c06e_1	$fill in the blank d4fd04fbf06c06e_2	$fill in the blank d4fd04fbf06c06e_3
Freight and installation	fill in the blank d4fd04fbf06c06e_4	fill in the blank d4fd04fbf06c06e_5	fill in the blank d4fd04fbf06c06e_6
Repair and maintenance (4 years)	fill in the blank d4fd04fbf06c06e_7	fill in the blank d4fd04fbf06c06e_8	fill in the blank d4fd04fbf06c06e_9
Lease (4 years)	fill in the blank d4fd04fbf06c06e_10	fill in the blank d4fd04fbf06c06e_11	fill in the blank d4fd04fbf06c06e_12
Total costs	$fill in the blank d4fd04fbf06c06e_13	$fill in the blank d4fd04fbf06c06e_14	$fill in the blank d4fd04fbf06c06e_15

------------------------------------------------------------------------

Youngstown Glass Company manufactures three types of safety plate glass: large, medium, and small. All three products have high demand. Thus, Youngstown Glass is able to sell all the safety glass that it can make. The production process includes an autoclave operation, which is a pressurized heat treatment. The autoclave is a production bottleneck. Total fixed costs are $308,000 for the company as a whole. In addition, the following information is available about the three products:

	Large		Medium		Small
Unit selling price	$353		$83		$365
Unit variable cost	(278)		(68)		(321)
Unit contribution margin	$ 75		$ 15		$ 44
Autoclave hours per unit	6		2		4
Total process hours per unit	18		4		12
Budgeted units of production	5,100		5,100		5,100

a. Determine the contribution margin by glass type and the total company operating income for the budgeted units of production.

	Large	Medium	Small	Total
Units produced	fill in the blank 1	fill in the blank 2	fill in the blank 3
Revenues	$fill in the blank 4	$fill in the blank 5	$fill in the blank 6	$fill in the blank 7
Variable costs	fill in the blank 8	fill in the blank 9	fill in the blank 10	fill in the blank 11
Contribution margin	$fill in the blank 12	$fill in the blank 13	$fill in the blank 14	$fill in the blank 15
Fixed costs				fill in the blank 16
Operating income				$fill in the blank 17

b. Prepare an analysis showing which product is the most profitable per bottleneck hour. Round the "Unit contribution margin per production bottleneck hour" amounts to the nearest cent.

	Large	Medium	Small
Contribution margin	$fill in the blank 18	$fill in the blank 19	$fill in the blank 20
Autoclave hours per unit	fill in the blank 21	fill in the blank 22	fill in the blank 23
Unit contribution margin per production bottleneck hour	$fill in the blank 24	$fill in the blank 25	$fill in the blank 26

Answer 1