Subject: Shamrock manufacturing
The Shamrock Manufacturing Chicago plant manager, Sean Fitzpatrick is contemplating replacing a large piece of manufacturing equipment. Mr. Fitzpatrick is also inline for a promotion to Shamrocks larger Houston plant within the next year, and is hesitant to make any decisions that will reduce short-run operating income and his performance evaluation. While the prospective replacement equipment promises to reduce cash operating costs, it costs $90,000, as well as the loss on disposal cost of the old equipment, which has not fully depreciated. Prior to making a decision, Mr. Fitzgerald must identify all relevant costs and chose a decision for the best interest of Shamrock (Datar, Rajan, 2013).
The available data to consider in this case is the old machines purchase price ($150,000); the current book value of the old machine ($60,000); the market value of the old machine ($36,000); the cost of the new equipment ($90,000); and the reduction in annual cash operating costs ($32,500). All historical costs are considered irrelevant, as they have already occurred and have no effect on future costs. The only relevant costs that should be considered for this decision are the future cash operating costs, the disposal value of the old machine, and the cost of the new machine that will be deprecated over the next two years. Based on the #1 and #2 worksheets in Appendix A of this document, year one yields an increase in expenditures of $6500, but includes the $24,000 loss of disposal of the old machine, which is irrelevant. The only relevant data is the total two-year costs shown on worksheet #2 that shows a reduction in total relevant cash flow of $11,000. The results of worksheet #1 are not beneficial for Mr. Fitzgerald, but the overall results in year two benefit Shamrock. Based on the #3 worksheet, with a lower new equipment cost ($77,000), year one breaks even, which is irrelevant, and the total...
Please join StudyMode to read the full document