The Enhanced Products Division of Forrest Industries makes ceramic pots that are used to hold large decorative plants. During 2013, the division produced 10,000 pots and incurred the following costs:
Unit-level materials costs (10,000 @ $15)- 150,000
Unit-level labor cost (10,000 @ $20)- 200,000
Unit level overhead cost (10,000 @$16)- 160,000
Depreciation expense on equipment*- 30,000
Other manufacturing overhead**- 36,000
*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.
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.
The division desires to maintain its production and sales at 10,000 ceramic pots per year:
a) What is the amount of the total relevant cost of operating the existing equipment?
b) What is the amount of the total relevant cost of operating the new equipment?
c) True or False: The existing equipment should be replaced.
