Question

tament NJ 12 İNALYSTS 1. Badonsky Manufacturing needs to obtain a gear-cutting machine, which can purchased for $75,000. Badonsky estimates that repair maintenance, insurance property tax expense will be $20,000 for the machine's five-year life. At the end machine's life, it will have no salvage value. As an alternative, Badonsky can lea machine for five years for $18,000 per year. If the machine is leased, Badonsky required to pay only for routine maintenance on the machine, which is estimated $8,000 over the machine's life. All other costs will be paid by the lessor Prepare a differential analysis to determine whether Badonsky should purchase lease the machine 2. Grayson Enterprises currently manufactures part A-14 one of the component used to assemble the company's main product Specialty Parts has offered to mak A-14 for $12.50 per unit Grayson's per-unit cost to make part A-14 is $14 75, as follows Direct materials $5.00 Direct labor 600 Variable factory overhead 1.75 Fixed factory overhead 200 None of Grayson's fixed overhead costs will be eliminated if the part is purchased However, the plant space currently used to manufacture the part can be leased to another company for $30.000 per year Assuming that Grayson needs 100,000 parts per year should the company continue make part A-14 or buy it? 3. ABD Valley Orchards sells apples for $15.00 per bushel The company has

Answer 1

1			Differential analysis
						Buy (Alternative 1)	Lease (Alternative 2)	Differential effect on income (Alternative 2)
						a	b	a-b
	Purchase price					-75000	0	75000
	Lease rental			(18000*5)		0	-90000	-90000
	Maintenance cost					-20000	-8000	12000
	Total					-95000	-98000	-3000
	Badonsky should buy the machine since it has lower cost than leasing
2	Make or buy:
						$	$
	Purchase cost of the part			(100000*12.50)			1250000
	Less: Savings
	Direct materials			(100000*5)		500000
	Direct labor			(100000*6)		600000
	Variable factory overhead			(100000*1.75)		175000
	Lease rental from the space					30000	1305000
	Increase in income due to buying						55000
	Company should buy the part since it results in an incremental income of $ 55000