Financial Management
C. George (Controls) Ltd manufactures a thermostat that can be used in a range of kitchen appliances. The manufacturing process is, at present, semi-automated. The equipment used cost £540,000 and has a carrying amount of £300,000. Demand for the product has been fairly stable and output has been maintained at 50,000 units a year in recent years.
The following data, based on the current level of output, have been prepared in respect of the product:
Using existing equipment
Per unit
£
£
Selling price
12.40
Labour
(3.30)
Materials
(3.65)
Overheads:
Variable
(1.58)
Fixed
(1.60)
(10.13)
Operating profit
2.27
Although the existing equipment is expected to last for a further four years before it is sold for an estimated £40,000, the business has recently been considering purchasing new equipment that would completely automate much of the production process. This would give rise to production cost savings. The new equipment would cost £670,000 and would have an expected life of four years, at the end of which it would be sold for an estimated £70,000. If the new equipment is purchased, the old equipment could be sold for £150,000 immediately.
The assistant to the business’s accountant has prepared a report to help assess the viability of the proposed change, which includes the following data:
Using new equipment
Per unit
£
£
Selling price
12.40
Labour
(1.20)
Materials
(3.20)
Overheads:
Variable
(1.40)
Fixed
(3.30)
(9.10)
Operating profit
3.30
Depreciation charges will increase by £85,000 a year as a result of purchasing the new machinery; however, other fixed costs are not expected to change.
In the report the assistant wrote:
The figures shown above that relate to the
The following data, based on the current level of output, have been prepared in respect of the product:
Using existing equipment
Per unit
£
£
Selling price
12.40
Labour
(3.30)
Materials
(3.65)
Overheads:
Variable
(1.58)
Fixed
(1.60)
(10.13)
Operating profit
2.27
Although the existing equipment is expected to last for a further four years before it is sold for an estimated £40,000, the business has recently been considering purchasing new equipment that would completely automate much of the production process. This would give rise to production cost savings. The new equipment would cost £670,000 and would have an expected life of four years, at the end of which it would be sold for an estimated £70,000. If the new equipment is purchased, the old equipment could be sold for £150,000 immediately.
The assistant to the business’s accountant has prepared a report to help assess the viability of the proposed change, which includes the following data:
Using new equipment
Per unit
£
£
Selling price
12.40
Labour
(1.20)
Materials
(3.20)
Overheads:
Variable
(1.40)
Fixed
(3.30)
(9.10)
Operating profit
3.30
Depreciation charges will increase by £85,000 a year as a result of purchasing the new machinery; however, other fixed costs are not expected to change.
In the report the assistant wrote:
The figures shown above that relate to the