The Local School Board Is Considering the Purchase of a Computer

question 16

Multiple Choice

The local school board is considering the purchase of a computer. It will cost $100,000 and will be sold back to the dealer at the end of 6 years for $8,000. If the required rate of return is 14%, what is the minimal annual cost saving required to justify the purchase? Ignore income taxes.

• A) $25,714
• B) $23,142
• C) $24,776
• D) $23,656

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Definitions:

Fixed Manufacturing Overhead

Costs in manufacturing that do not vary with the level of production, including factory rent, salaries of permanent staff, and equipment depreciation.

Machine-Hours

A measure of the amount of time machines are operated in the manufacturing process, used as a basis for allocating costs.

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate manufacturing overhead costs to products based on a selected activity base such as labor hours or machine hours.

Direct Labor-Hours

The total hours of labor directly involved in manufacturing a product, used in calculating labor costs and efficiency in production.