Methairie Products inc. makes an unassembled products that sell for $60 each. Th
ID: 2474678 • Letter: M
Question
Methairie Products inc. makes an unassembled products that sell for $60 each. The product cost per unit is $25.00. Metairie Products, Inc. is considering assembling the products and selling the finished products at $80 per unit. Additional cost of $12 is required. Required: What decision should Metairie Company make? Sell the products before assembling them or sell them after assembling them? Show your computation. Jessie Owens Company has an old machine that cost it $200,000 with a book value of only $90,000 The old machine has a remaining life of 5 years. The old machine can be sold for $30,000 cash today. On the other hand, a new machine with similar features is available at a cost of $300,000. The new machine has a life span of 5 years and no salvage value. The new machine will reduce the variable cost from $600,000 to $500,000 every year. Required: Should the Company retain the old machine? Especially since both have life expectancy of 5 years. Should the company replace the old machine? If yes, why? Show your computation.Explanation / Answer
answer 1.
Metairie products must sell assembled product if the additional revenue covers additional cost,
additional revenue = $20
additional cost = $12
additional profit = $ 8
so, the company must sell assembled product as it would increase the profit.
answer2.
a. company should not retain the old machine as the old machine does not give any additional cost saving to the company.
b. company should replace the old machine as the cost saving from new machine will give additional benefit to the company:
cost of new machine 300000
salvage value of old (30000)
net cost of new machine 270000
gain per year from new machine 100000*5 = $500000
so net gain from purchase of new machine = 500000-270000
= $230000