The Enhanced Products Division of Forrest Industries Makes Ceramic Pots

question 13

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?

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Definitions:

Law Of Diminishing Returns

An economic principle stating that if one factor of production is increased while others remain constant, the overall returns will eventually decrease after a certain point.

Economies Of Scale

The situation when a firm’s average total cost of producing a product decreases in the long run as the firm increases the size of its plant (and, hence, its output).

Variable Inputs

Factors of production that change in quantity as the level of output changes, such as labor or raw materials, in contrast to fixed inputs like machinery or land.

Property Resources

Assets or materials owned by individuals or entities, including land, buildings, and intellectual property, used in the production of goods and services.