MANAGERIAL ACC- WATERWAYS SOLUTION WCP7

WCP 7
Part 2
a) Without considering the possibility of making the timing unit evaluate whether Waterways should buy or continue to make the small fitting.

Manufacturing cost - $ 1.00 per unit
Buying price - $ 0.82 per unit
Fixed cost (cannot be eliminate) - $ 0.20 per unit
Total unit (Small Fitting) - 460 000 units

Make
Buy
Net Income
Manufacturing Cost
$460 000

$ 460 000
Purchase

$377 200
$ (377 200)
Fixed Cost Not Eliminated

$ 92 000
$ (92 000)
Total Annual Cost
$ 460 000
$ 469 200
(9200)

b)
(1) What is Waterways opportunity cost if it choose to buy the small fitting and start manufacturing the timing unit?

Buying price - $ 12.66
Manufacturing cost - $ 9.90
Total unit (Timing unit) - 500 units
Cost of buying timer (500 × $12.66)
$ 6330
Cost of making timer (500 × $9.90)
($ 4950)
Opportunity cost
$ 1380 (2) Would it be wise for wise for Waterways to buy the fitting and manufacture the timing unit? Explain

Make
Buy
Net Income
Manufacturing Cost
$460 000

$ 460 000
Purchase

$377 200
$ (377 200)
Fixed Cost Not Eliminated

$ 92 000
$ (92 000)
Total Annual Cost
$ 460 000
$ 469 200
(9200)
Opportunity cost
$ 1380
0
$ 1380
Total cost
$ 461 380
$ 469 200
($ 7820)

If Waterways adds that amount to the cost of making the small fitting, the total cost still less than buying cost. The company would manufacturing the small fitting and buy the timing units.

Part 3
Instruction
Given the information above, what are the consequence of Waterways replacing the machine that is slowing down production because of breakdown?

Current Machine Produces - 50 units per day
New Machines Produce - 100 units per day
Manufacturing Cost - $ 6.50
Selling Price - $ 8.50
Production Runs - 260 days
Replacement Machine - $ 55 000
Current and New Machines - 2 years life time

Retain Machine
Replace Machine
Net Income +/-
Revenue (2 Years)

$ 221 000
$ 442 000
$ 221 000
Production costs (2 Years)

$ 169 000
$ 338 000
($ 169 000)
New machine cost

0
$