PIM Industries Incorporated manufactures electronics components. Each unit costs $50 before the final test. The final test rejects, onaverage, 4% of the 64,000 units manufactured per year. The average rejection rate of the industry is 2%. A consultant has determinedthat poor lighting is the most likely cause of this high rejection rate. It would cost $195,000 to install adequate lighting in the assemblydepartment, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,900 of operating costs peryear), the firm expects to reduce its rejection rate to no higher than the industry average.Required:1-a. What would be the projected five-year impact on operating profit?Five-year projected effect on operating income1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting?YesO No

Operating profits are the total earnings of the entity over a specific period of time that is…

Answered: PIM Industries Incorporated…

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 13E

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Mallette Manufacturing, Inc., produces washing machines, dryers, and dishwashers. Because of increasing competition, Mallette is considering investing in an automated manufacturing system. Since competition is most keen for dishwashers, the production process for this line has been selected for initial evaluation. The automated system for the dishwasher line would replace an existing system (purchased one year ago for 6 million). Although the existing system will be fully depreciated in nine years, it is expected to last another 10 years. The automated system would also have a useful life of 10 years. The existing system is capable of producing 100,000 dishwashers per year. Sales and production data using the existing system are provided by the Accounting Department: All cash expenses with the exception of depreciation, which is 6 per unit. The existing equipment is being depreciated using straight-line with no salvage value considered. The automated system will cost 34 million to purchase, plus an estimated 20 million in software and implementation. (Assume that all investment outlays occur at the beginning of the first year.) If the automated equipment is purchased, the old equipment can be sold for 3 million. The automated system will require fewer parts for production and will produce with less waste. Because of this, the direct material cost per unit will be reduced by 25 percent. Automation will also require fewer support activities, and as a consequence, volume-related overhead will be reduced by 4 per unit and direct fixed overhead (other than depreciation) by 17 per unit. Direct labor is reduced by 60 percent. Assume, for simplicity, that the new investment will be depreciated on a pure straight-line basis for tax purposes with no salvage value. Ignore the half-life convention. The firms cost of capital is 12 percent, but management chooses to use 20 percent as the required rate of return for evaluation of investments. The combined federal and state tax rate is 40 percent. Required: 1. Compute the net present value for the old system and the automated system. Which system would the company choose? 2. Repeat the net present value analysis of Requirement 1, using 12 percent as the discount rate. 3. Upon seeing the projected sales for the old system, the marketing manager commented: Sales of 100,000 units per year cannot be maintained in the current competitive environment for more than one year unless we buy the automated system. The automated system will allow us to compete on the basis of quality and lead time. If we keep the old system, our sales will drop by 10,000 units per year. Repeat the net present value analysis, using this new information and a 12 percent discount rate. 4. An industrial engineer for Mallette noticed that salvage value for the automated equipment had not been included in the analysis. He estimated that the equipment could be sold for 4 million at the end of 10 years. He also estimated that the equipment of the old system would have no salvage value at the end of 10 years. Repeat the net present value analysis using this information, the information in Requirement 3, and a 12 percent discount rate. 5. Given the outcomes of the previous four requirements, comment on the importance of providing accurate inputs for assessing investments in automated manufacturing systems.
At Stardust Gems, a faux gem and jewelry company, the setting department is a bottleneck. The company is considering hiring an extra worker, whose salary will be $67,000 per year, to ease the problem. Using the extra worker, the company will be able to produce and sell 9,000 more units per year. The selling price per unit is $20. The cost per unit currently is $15.85 as shown: What is the annual financial impact of hiring the extra worker for the bottleneck process?
PIM Industries Incorporated manufactures electronics components. Each unit costs $45 before the final test. The final test rejects, on average, 6% of the 60,000 units manufactured per year. The average rejection rate of the industry is 4%. A consultant has determined that poor lighting is the most likely cause of this high rejection rate. It would cost $175,000 to install adequate lighting in the assembly department, which would be useful for 5 years. With adequate lighting (which will cost an additional $6,500 of operating costs per year), the firm expects to reduce its rejection rate to no higher than the industry average. Required: 1-a. What would be the projected five-year impact on operating profit? Five-year projected effect on operating income 1-b. Based solely on the relevant cost analysis you performed, should the firm install the lighting? Yes O No
Jackson Inc. disposes of other companies’ toxic waste. Currently, Jackson loads the waste by handinto a truck, which requires labor of $20 per load. Jackson is considering a machine that wouldreduce the amount of time needed to load the waste. The machine would cost $200,000 but wouldreduce labor cost to $5 per load. Assume that Jackson averages 10,000 loads per year. How manyyears (rounded to 2 decimal places) would it take for Jackson to recover the cost of the new machine?
A small company that manufactures vibration isolation platforms is trying to decide whether it should immediately upgrade the current assemblysystem D, which is rather labor-intensive, with the more highly automated system C one year from now. Some components of the current system canbe sold now for $9000, but they will be worthless hereafter. The operating cost of the existing system is $192,000 per year. System C will cost $320,000 with a $50,000 salvage value after four years. Its operating cost will be $68,000 per year. If you are told to do a replacement analysis using an interest rate of 10% per year, which system do you recommend?
An oil refinery finds that it is necessary to treat the waste liquids from a new process before discharging them into a stream. In-house treatment will have an annual cost of $20,000 the first year, but process improvements will allow the annual cost to decline by $2,000 each subsequent year. As an alternative, an outside company will process the wastes for an initial cost of $10,500 and an annual fixed price of $8,500/year throughout the 11 year period. Either way, there is no need to treat the wastes after 11 years. Using the AW method, calculate the equivalent uniform annual cost (EUAC) of each alternative and determine how the waste should be processed. The company's MARR is 12%. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 12% per year. The EUAC for in-house treatment is $ positive cash flow.) The EUAC for outside treatment is S positive cash flow.) The most economical alternative is O A. outside treatment B. in-house treatment…
An automobile manufacturer is considering a change in an assembly line that should save moneyby reducing labor and material cost. The change involves the installation of four new robots thatwill automatically install windshields. The cost of the four robots, including installation and initial programming, is $400,000. Current practice is to amortize the initial cost of robots over two years on a straight-line basis. The process engineer estimates that one full-time technician will be needed to monitor, maintain, and reprogram the robots on an ongoing basis. This person will cost approximately $60,000 per year. Currently, the company uses four full-time employees on this job and each makes about $52,000 per year. One of these employees is a material handler, and this person will still be needed with the new process. To complicate matters, the process engineer estimates that the robots will apply the windshield sealing material in a manner that will result in a savings of $0.25 per…
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In evaluating projects, LeadTech’s engineers use a rate of 15%. One year ago a robotic transfer machine was installed at a cost of $38,000. At the time, a 10-year life was estimated, but the machine has had a downtime rate of 28%, which is unacceptably high. A $12,000 upgrade should fix the problem, or a labor-intensive process costing $3500 in direct labor per year can be substituted. The plant estimates indirect plant expenses at 60% of direct labor, and it allocates front office overhead at 40% of plant expenses (direct and indirect). The robot has a value in other uses of $15,000. What is the difference between the EUACs for upgrading and switching to the labor-intensive process?
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Bailey, Inc., is considering buying a new gang punch that would allow circuit boards to be produced more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Annual labor costs would increase $2,000 using the gang punch, but annual raw material costs would decrease $12,000. MARR is 5%/year. assuming that floor support and vibration dampening must be added for the gang punch. These one-time first costs are estimated to be $35,000. a. What is the present worth of this investment? b. What is the decision rule for judging the attractiveness of investments based on present worth? c. Should Bailey buy the gang punch?

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