Question

Management of Plascencia Corporation is considering whether to purchase a new model 370 machine costing $536,000 or a new model 220 machine costing $463,000 to replace a machine that was purchased 9 years ago for $484,000. The old machine was used to make product I43L until it broke down last week. Unfortunately, the old machine cannot be repaired.

Management has decided to buy the new model 220 machine. It has less capacity than the new model 370 machine, but its capacity is sufficient to continue making product I43L.
Management also considered, but rejected, the alternative of simply dropping product I43L. If that were done, instead of investing $463,000 in the new machine, the money could be invested in a project that would return a total of $488,000.

In making the decision to buy the model 220 machine rather than the model 370 machine, the differential cost was:




Differential cost = $536,000 − $463,000 = $73,000

differential cost = new model- other new model

Answer 1

The total cost of production varies with changes in labor and machine costs. Calculating total cost for each method after cost changes will determine the most cost-effective method. The example recalculates the total cost after an increase in machine cost to $55.

Step-by-step explanation:

The question involves evaluating the total cost of different methods of production under varying costs of labor and machines. If the cost of machines increases to $55 and the cost of labor remains at $40, the total costs for each method must be recalculated. Similarly, if the cost of a machine decreases to $50, while the cost of labor stays at $40, this also requires a new calculation of the total costs for each production method.

To determine which method to choose in both scenarios, one would perform the following calculations: For each method, multiply the number of hours of labor by the labor cost and add the product of the number of machine hours and the new machine cost. After recalculating, the method with the lowest total cost should be chosen.

Without specific details on the number of labor and machine hours for each method, an example would be: Method 1 previously had a total cost of $1,320 with labor costs at $720 and machine costs at $600. When the machine cost increases to $55, and assuming machine hours of 10 (simply to illustrate), the new machine cost would be $550 (10 hours * $55), and the total cost for Method 1 would now be $1,270 ($720 + $550).