Part 1 - Cool Cookie Company is considering replacing its giant dough mixer with a new one. The following data have been compiled to evaluate the decision.

Existing New

Original cost $16,000 $20,000

Annual operating cost $8,000 $6,000

Remaining life 10 years 10 years

Disposal value now $7,000 ---

What costs are relevant? What costs are sunk?

What should Cool Cookie Company do-keep the old mixer or buy the new?

For the option you picked, how much cash does the company save over 10 years (over the alternative)? [To answer this part, ignore the time value of money...in other words, assume a cost of capital (interest rate) of 0% in the future)...]

Part 2 - Bob's Fudge Factory currently makes fudge for retail and mail order customers. It also offers a variety of roasted nuts. Fudge sales have increased over the past year, so Bob is considering outsourcing the roasted nuts and using the roasting space to make additional fudge. A reliable supplier has quoted a price of $0.80 per pound for the roasted nuts. The following amounts reflect the in-house manufacturing costs per pound for the roasted nuts:

Direct materials $0.50

Direct labor 0.06

Unit-related support costs 0.10

Batch-related support costs 0.04

Product-sustaining support costs 0.05

Business-sustaining support costs 0.15

Total cost per pound $0.90

Should Bob's Fudge Factory outsource the roasted nuts? Why or why not? (Assume all the support costs above are avoidable if Bob outsources the roasting.)

Part 3 - ACME Manufacturing, Inc., is considering reorganizing its plant and increasing advertising. The following estimates have been prepared:

Before the change After the change

Total annual sales $700,000 $900,000

Costs as percentage of sales:

Direct materials 10% 9%

Direct labor 6% 4%

Support costs 9% 17%

What amount of annual change is projected for total support and manufacturing costs?

How will ACME's profit change with this reorganization? Should ACME go ahead with this plan?