The Enhanced Products Division of Forrest Industries Makes Ceramic Pots

question 24

Essay

The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants.During the current year,the division produced 10,000 pots and incurred the following costs: $\begin{array}{|l|r|}\hline \text { Unit-level materials costs }(10,000 @ ~ \$ 15) & \$ 150,000 \\\hline \text { Unit-level labor costs }(10,000 @ \$ 20) & 200,000 \\\hline \text { Unit-level overhead costs }(10,000 @ \$ 16) & 160,000 \\\hline \text { Depreciation expenses on equipment* } & 30,000 \\\hline \text { Other manufacturing overhead** } & 36,000\\\hline\end{array}$ *The equipment was purchased for $150,000 and has a current book value of $120,000,remaining useful life of four years,and a zero salvage value.If the company does not use the equipment,it can be leased for $8,000 per year.
**Includes supervisors' salaries and rent for manufacturing plant.
Required:
The division is considering replacing the equipment used to manufacture its ceramic pots.Replacement equipment can be purchased at a price of $200,000.The new equipment,which is expected to last 4 years and have a salvage value of $20,000,will reduce unit-level labor costs by 25 percent.Assuming the division desires to maintain its production and sales at 10,000 ceramic pots per year,prepare a schedule that shows the relevant cost of operating the existing equipment versus the cost of operating the new equipment.Should the existing equipment be replaced? Why or why not?

Evaluate the significance of economic profit versus accounting profit in business sustainability.

Analyze the impact of market dynamics such as supply, demand, and price changes on a firm’s cost structure and production decisions.

Understand how technology, taxes, and government regulations affect a firm's cost curves.

Apply the concepts of variable costs, fixed costs, and sunk costs to real-life business scenarios.

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Definitions:

Evergreen Broadleaf Trees

Evergreen broadleaf trees are types of trees that retain their green leaves throughout the year and possess broad, flat leaves rather than needle-like or scale-like leaves.

Rainfall

Precipitation in the form of water droplets that falls from clouds to the ground.

Eutrophication

Nutrient enrichment of an aquatic habitat.

Nutrient Concentrations

The amount of nutrients present in a given volume or mass of soil, water, or air, important for the growth and health of plants and animals.