Financial Management

Good Essays
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

You May Also Find These Documents Helpful

  • Powerful Essays

    Questions

    • 2327 Words
    • 10 Pages

    According to the depreciation rates used by the company and described in the Production Cost Report, if a company adds 50 new workstations at a cost of $250,000 each and also spends $5 million for an addition to its assembly plant to accommodate the new workstations, then its annual depreciation costs will rise by…

    • 2327 Words
    • 10 Pages
    Powerful Essays
  • Powerful Essays

    Financial Analysis

    • 1518 Words
    • 5 Pages

    Firstly, the setting up cost is 85,000 including 5,000 the cost of old kitchen equipment. According to the conservative principle in the accounting theory, the fair value of the old machine actually is 5,000 rather than 20,000 (book value). Due to the market price of the machine is only one-quarter of original price, even it just has been used for one year, it is advisable for the managers to decide using the old but servable machine rather than purchasing a new one. On the other hand, the market price of the machine should be regarded as an opportunity cost. Selling the old machine could have brought 9,500 cash inflow to the company including the tax-related benefits which results from the difference between book value and market price. The formula is given by:…

    • 1518 Words
    • 5 Pages
    Powerful Essays
  • Powerful Essays

    Accounting 2101 Final

    • 1351 Words
    • 6 Pages

    7.) A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?…

    • 1351 Words
    • 6 Pages
    Powerful Essays
  • Satisfactory Essays

    Financial Management

    • 280 Words
    • 2 Pages

    Do Stocks have known and “provable” intrinsic values, or might different people reach different conclusions about intrinsic values? Explain.…

    • 280 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Garden Route Casino Essay

    • 1059 Words
    • 5 Pages

    The author analysed the table’s financial statements. In the tables department costs have already been cut and reduced in many areas with incremental savings of 10%. The author has identified a cost saving on the equipment expense line by extending the life span of the equipment. Currently equipment is being replaced every five years. The author will do a cost analysis and compare the cost saving by extending the lifespan of the equipment by an additional year.…

    • 1059 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    Financial Management

    • 361 Words
    • 2 Pages

    P6-1: You purchase 1,000 shares of Spears Grinders, Inc. stock for $45 per share. A year later, the stock pays a dividend of $1.25 per share, and it sells for $49.…

    • 361 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Principle of Finance

    • 2990 Words
    • 12 Pages

    purpose of buying new equipment four years from today. Today, it is adding another $5,000 to…

    • 2990 Words
    • 12 Pages
    Satisfactory Essays
  • Good Essays

    If Mosby will decide to purchase the RB911, the cost savings will be at least $100,000 less the common fixed overhead of $72,000, for a total of $28,000 annual savings. Thus, the increase in income amounts to $28,000. However, suppose that the total fixed costs of $160,000 are allocated as entirely common fixed costs, Mosby will have a net loss of at least -$60,000 (calculated as: $100,000 – $160,000). In this case, it is better that Mosby will produce the RB911 instead of having to purchase it from another supplier with the prescribed terms.…

    • 1009 Words
    • 5 Pages
    Good Essays
  • Satisfactory Essays

    Financial Management

    • 305 Words
    • 2 Pages

    Hello Jackie and thank you for your honest posting about nursing and financial management. I too have very little experience with marketing, budgeting , and economics. I consider myself a more scielnce person so this coarse was very challenging to me as well. I am embarrassed to say that I struggled sometimes with the subject matter just because I am not as finicaially as savy. Nurses have to have more knowledge about patients and costs of nursing expenses. I do not think you failed because as we fail we learn and this is what this coarse was really all about to expand our knowledge of nursing economics and management. I think nursing and compensation is going to change for the worst .I am afraid to say it and I realize that that goes against the grain but more people are going into nursing for the security of a job and not the passion so the demand and need will decrease I know there are a lot of jobs out there but they are not filled due to budgeting which is essential and necessary to keep costs down and to maintain budgets. As you say nurses are under paid and likely to stay that way because with the economic downturn the demand has decreased so the education requirements have increased. I think its key for us all to network and utilize our resources now more than ever. Developing relationships with people in our organizations we work for and networking builds coalitions to influence goals and resources which allocates lateral relationship building, where there is no influence or authority, helps nurses effectively attain their goals Finkler, Kovner, & Jones, 2007).SS…

    • 305 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Financial Management

    • 295 Words
    • 2 Pages

    1. What is the difference between stock price maximization and profit maximization? Under what conditions might profit maximization not lead to stock price maximization?…

    • 295 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    You have two alternatives – buy the new machine and sell the old machines or don’t buy the new machine and keep the old machine. How can you compare two investments with unequal lives? Which machine is the least cost machine?…

    • 512 Words
    • 3 Pages
    Good Essays
  • Good Essays

    QUIZ 2 STUDY GUIDE

    • 546 Words
    • 3 Pages

    According to the depreciation rates used by the company and described in the Production Cost Report, if a company adds 50 new workstations at a cost of $250,000 each and also spends $5 million for an addition to its assembly plant to accommodate the new workstations, then its annual depreciation costs will rise by…

    • 546 Words
    • 3 Pages
    Good Essays
  • Good Essays

    St. John's Paper

    • 771 Words
    • 4 Pages

    St. John’s Paper is considering purchasing equipment today that has a depreciable cost of $1 million. The equipment will be depreciated on a MACRS 5-year basis, which implies the following depreciation schedule:…

    • 771 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    Financial Management

    • 2540 Words
    • 11 Pages

    ➢ Capital Budgeting Decision:- Cost of capital may be used as the measuring road for adopting an investment proposal. The firm, naturally,…

    • 2540 Words
    • 11 Pages
    Powerful Essays
  • Good Essays

    Reto Sa

    • 837 Words
    • 4 Pages

    200,000. The new equipment would cost SFr. 600,000, delivered and installed, and was expected to…

    • 837 Words
    • 4 Pages
    Good Essays