RIGO CORPORATION
Consider each part independently.
Part One
The RIGO Meat Corporation is considering whether it should replace an old machine. The new machine will produce 25% more units than the old machine in the same amount of time. The purchase of the new machine will cause fixed selling costs to increase, but variable selling costs will not be affected. The new machine will require installation by a specialty engineering firm. If the new machine is purchased, the old machine can be sold for a residual value. The old machine requires frequent maintenance to keep it running. The new machine will require maintenance only once per year. The new machine will be paid by cash.
REQUIRED:
For each of the following costs, indicate whether the cost is a differential (incremental) cost, a sunk (irrelevant) cost, or neither. Explain each of your answers.
1. Cost of new machine
2. Cost of old machine
3. Fixed selling costs
4. Variable selling costs
5. Maintenance cost of new machine
6. Maintenance costs of old machine
Part Two
The RIGO Corporation currently makes two types of chairs, Alpha and Beta. The company now has an opportunity to make a third chair, Gamma. In doing so, it will forgo some of the Beta. Very briefly explain what is an opportunity cost in this example.
RIGO CORPORATION
Consider each part independently.
Part One
The RIGO Meat Corporation is considering whether it should replace an old machine. The new machine will produce 25% more units than the old machine in the same amount of time. The purchase of the new machine will cause fixed selling costs to increase, but variable selling costs will not be affected. The new machine will require installation by a specialty engineering firm. If the new machine is purchased, the old machine can be sold for a residual value. The old machine requires frequent maintenance to keep it running. The new machine will require maintenance only once per year. The new machine will be paid by cash.
REQUIRED:
For each of the following costs, indicate whether the cost is a differential (incremental) cost, a sunk (irrelevant) cost, or neither. Explain each of your answers.
1. Cost of new machine
2. Cost of old machine
3. Fixed selling costs
4. Variable selling costs
5. Maintenance cost of new machine
6. Maintenance costs of old machine
Part Two
The RIGO Corporation currently makes two types of chairs, Alpha and Beta. The company now has an opportunity to make a third chair, Gamma. In doing so, it will forgo some of the Beta. Very briefly explain what is an opportunity cost in this example.
Related questions
Differential Analysis for Machine Replacement Proposal
Flint Tooling Company is considering replacing a machine thathas been used in its factory for two years. Relevant dataassociated with the operations of the old machine and the newmachine, neither of which has any estimated residual value, are asfollows:
| Old Machine | |
| Cost of machine, eight-year life | $38,000 |
| Annual depreciation (straight-line) | 4,750 |
| Annual manufacturing costs, excluding depreciation | 12,400 |
| Annual nonmanufacturing operating expenses | 2,700 |
| Annual revenue | 32,400 |
| Current estimated selling price of the machine | 12,900 |
| New Machine | |
| Cost of machine, six-year life | $57,000 |
| Annual depreciation (straight-line) | 9,500 |
| Estimated annual manufacturing costs, exclusive ofdepreciation | 3,400 |
Annual nonmanufacturing operating expenses and revenue are notexpected to be affected by purchase of the new machine.
Required:
1. Prepare a differential analysis as ofNovember 8 comparing operations using the present machine(Alternative 1) with operations using the new machine (Alternative2). The analysis should indicate the differential income that wouldresult over the six-year period if the new machine is acquired. Ifan amount is zero, enter zero "0". Use a minus sign to indicate aloss.
| DifferentialAnalysis | |||
| Continue withOld Machine (Alt. 1) or Replace Old Machine (Alt. 2) | |||
| November8 | |||
| Continue with Old Machine (Alternative1) | Replace Old Machine (Alternative 2) | Differential Effect on Income (Alternative2) | |
| Revenues: | |||
| Proceeds from sale of old machine | $ | $ | $ |
| Costs: | |||
| Purchase price | |||
| Annual manufacturing costs (6 yrs.) | |||
| Income (Loss) | $ | $ | $ |
Lexigraphic Printing Company is considering replacing a machine that has been used in its factory for four years. Relevant data associated with the operations of the old machine and the new machine, neither of which has any estimated residual value, are as follows:
| Old Machine | |
|---|---|
| Cost of machine, 10-year life | $89,000 |
| Annual depreciation (straight-line) | 8,900 |
| Annual manufacturing costs, excluding depreciation | 23,600 |
| Annual non-manufacturing operating expenses | 6,100 |
| Annual revenue | 74,200 |
| Current estimated selling price of machine | 29,700 |
| New Machine | |
|---|---|
| Purchase price of machine, six-year life | $119,700 |
| Annual depreciation (straight-line) | 19,950 |
| Estimated annual manufacturing costs, excluding depreciation | 6,900 |
Annual non-manufacturing operating expenses and revenue are not expected to be affected by purchase of the new machine.
| Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 1. | Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income The difference between the differential revenue and the differential costs. that would result over the six-year period if the new machine is acquired. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. | List other factors that should be considered before a final decision is reached. 1. Prepare a differential analysis as of April 30 comparing operations using the present machine (Alternative 1) with operations using the new machine (Alternative 2). The analysis should indicate the total differential income The difference between the differential revenue and the differential costs. that would result over the six-year period if the new machine is acquired. Refer to the lists of Labels and Amount Descriptions for the exact wording of the answer choices for text entries. For those boxes in which you must enter subtracted or negative numbers use a minus sign. If there is no amount or an amount is zero, enter "0". A colon (:) will automatically appear if required. Question not attempted.
Solution
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