Question

Boyer Digital Components Company assembles circuit boards by using a manually operated machine to insert electronic components. The original cost of the machine is $57,500, the accumulated depreciation is $23,000, its remaining useful life is five years, and its residual value is negligible. On May 4 of the current year, a proposal was made to replace the present manufacturing procedure with a fully automatic machine that has a purchase price of $119,600. The automatic machine has an estimated useful life of five years and no significant residual value. For use in evaluating the proposal, the accountant accumulated the following annual data on present and proposed operations:

	Present Operations		Proposed Operations
Sales	$182,300		$182,300
Direct materials	$62,100		$62,100
Direct labor	43,100		—
Power and maintenance	4,000		21,300
Taxes, insurance, etc.	1,400		4,800
Selling and administrative expenses	43,100		43,100
Total expenses	$153,700		$131,300

a. Prepare a differential analysis dated May 4 to determine whether to continue with the old machine (Alternative 1) or replace the old machine (Alternative 2). Prepare the analysis over the useful life of the new machine. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss.

Differential Analysis
Continue with Old Machine (Alt. 1) or Replace Old Machine (Alt. 2)
May 4
	Continue with Old Machine (Alternative 1)	Replace Old Machine (Alternative 2)	Differential Effects (Alternative 2)
Revenues:
Sales (5 years)	$fill in the blank 910f2a07dfabff1_1	$fill in the blank 910f2a07dfabff1_2	$fill in the blank 910f2a07dfabff1_3
Costs:
Purchase price	fill in the blank 910f2a07dfabff1_4	fill in the blank 910f2a07dfabff1_5	fill in the blank 910f2a07dfabff1_6
Direct materials (5 years)	fill in the blank 910f2a07dfabff1_7	fill in the blank 910f2a07dfabff1_8	fill in the blank 910f2a07dfabff1_9
Direct labor (5 years)	fill in the blank 910f2a07dfabff1_10	fill in the blank 910f2a07dfabff1_11	fill in the blank 910f2a07dfabff1_12
Power and maintenance (5 years)	fill in the blank 910f2a07dfabff1_13	fill in the blank 910f2a07dfabff1_14	fill in the blank 910f2a07dfabff1_15
Taxes, insurance, etc. (5 years)	fill in the blank 910f2a07dfabff1_16	fill in the blank 910f2a07dfabff1_17	fill in the blank 910f2a07dfabff1_18
Selling and admin. expenses (5 years)	fill in the blank 910f2a07dfabff1_19	fill in the blank 910f2a07dfabff1_20	fill in the blank 910f2a07dfabff1_21
Profit (Loss)	$fill in the blank 910f2a07dfabff1_22	$fill in the blank 910f2a07dfabff1_23	$fill in the blank 910f2a07dfabff1_24

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Power Serve Company expects to operate at 88% of productive capacity during May. The total manufacturing costs for May for the production of 30,800 batteries are budgeted as follows:

Direct materials	$435,600
Direct labor	160,200
Variable factory overhead	44,840
Fixed factory overhead	90,000
Total manufacturing costs	$730,640

The company has an opportunity to submit a bid for 2,000 batteries to be delivered by May 31 to a government agency. If the contract is obtained, it is anticipated that the additional activity will not interfere with normal production during May or increase the selling or administrative expenses.

What is the unit cost below which Power Serve Company should not go in bidding on the government contract? Round your answer to two decimal places.
$________ per unit

Answer 1

	Differential analysis:
a.						Continue with old machine (Alternative 1)	Replace old machine (Alternative 2)	Differential effect on income (Alternative 2)
	Revenues:
	Sales (5 years)			(182300*5)	a	911500	911500	0
	Costs:
	Purchase price					0	119600	-119600
	Direct materials			(62100*5)		310500	310500	0
	Direct labor			(43100*5)		215500	0	215500
	Power and maintenance					20000	106500	-86500
						(4000*5)	(21300*5)
	Taxes,insurance etc.					7000	24000	-17000
						(1400*5)	(4800*5)
	Selling and administrative expenses					215500	215500	0
						(43100*5)	(43100*5)
	Total costs				b	768500	776100	-7600
	Profit (loss)				a-b	143000	135400	-7600
	Proposal should not be accepted since accepting proposal results in a loss of $ 7600
	Lowest unit cost for bidding:
	Lowest unit cost for bidding=Variable cost per unit
	Variable cost per unit=Total variable cost/Unit production
	Total variable cost:
				$
	Direct materials			$435,600
	Direct labor			160,200
	Variable factory overhead			44,840
	Total			$640,640
	Variable cost per unit=640640/30800=$ 20.80
	Lowest unit cost for bidding=$ 20.80 per unit