Advanced Accounting - the Solomons Company Uses Roi to Measure of Its Operating Divisions. a Summary of the Annual Reports from Two Divisions Is Shown Below. the Company’s Cost of Capital Is 12%

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Advanced Accounting

1. Cost Considerations in Strategic Decisions

Brantford Bat Company (BBC) manufactures popular baseball bats that are prized by professional and amateur players. The current flexible cost of manufacturing the bat is $12 per unit. The cost of operating the lathe that produces the bat is about $600,000 per year. This cost includes maintenance and physical obsolescence costs.

BBC is now evaluating the possibility of purchasing a new lathe to manufacture the bat. The new lathe replaces the mechanical patterns currently used to manufacture lathes and relies instead on direct laser sensing by a computer within the lathe to compare the current size of the wood stock being turned on the lathe with a pattern stored in the computer’s memory. Although the new machine would not increase the capacity of the bat-making operation, which is 750,000 bats per year, it would reduce the flexible cost of producing the bats to $10 per unit. The cost of operating the new lathe would be about $1,400,000 per year.

If the current level of production and sales of this bat is 500,000 units, should the new lathe be purchased? Ignore the effect of income taxes in answering this question.

2. Yarker Computers manufactures workstations for the graphics design industry. At the moment, the company makes three computers with the following characteristics:

| COMPUTER 1 COMPUTER 2 COMPUTER 3 |

|Selling price $12,000 $11,000 $10,000 |

|Flexible costs $ 7,000 $ 8,500 $ 8,000 |

|Contribution margin $ 5,000...