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?

---

Definitions:

Service Business

is a type of business that provides intangible products or services to consumers instead of physical goods.

Financial Statement

A comprehensive report detailing a company's financial performance, position, and cash flows over a specific period.

Credit Terms

Conditions under which credit is extended by a lender to a borrower, detailing the repayment time frame, interest rate, and other conditions of the credit agreement.

Merchandise

Goods bought for resale in the course of business, typically in a retail or wholesale establishment.