Prepare a Cost Reconciliation report for JTL MANUFACTURING using the weighted-average method.
JTL MANUFACTURING
Part 1
JTL MANUFACTURING mass-produces a special connector unit that it normally sells for $3.90. It sells approximately 35,000 of these units each year. The variable costs for each unit are $2.30. A company in Canada that has been unable to produce enough of a similar connector to meet customer demand would like to buy 15,000 of these units at $2.60 per unit. The production of these units is near full capacity at JTL MANUFACTURING, so to accept the offer from the Canadian company would require temporarily adding another shift to its production line. To do this would increase variable manufacturing costs by $0.30 per unit. However, variable selling costs would be reduced by $0.20 a unit.
An irrigation company has asked for a special order of 2,000 of the connectors. To meet this special order, JTL MANUFACTURING would not need an additional shift, and the irrigation company is willing to pay $3.10 per unit.
Instructions
Given the information above:
(a) What are the consequences of JTL MANUFACTURING agreeing to provide the 15,000 units to the Canadian company? Would this be a wise "special order" to accept?
(b) Should JTL MANUFACTURING accept the special order from the irrigation company?
Part 2
JTL MANUFACTURING has discovered that a small fitting it now manufactures at a cost of $1.00 per unit could be bought elsewhere for $0.82 per unit. JTL MANUFACTURING has fixed costs of $0.20 per unit that cannot be eliminated by buying this unit. JTL MANUFACTURING needs 460,000 of these units each year.
If JTL MANUFACTURING decides to buy rather than produce the small fitting, it can devote the machinery and labor to making a timing unit it now buys from another company. JTL MANUFACTURING uses approximately 500 of these units each year. The cost of the unit is $12.66. To aid in the production of this unit, JTL MANUFACTURING would need to purchase a new machine at a cost of $2,345, and the cost of producing the units would be $9.90 a unit.
Instructions
Given the information above:
(a) Without considering the possibility of making the timing unit, evaluate whether JTL MANUFACTURING should buy or continue to make the small fitting.
(b)
(1) What is JTL MANUFACTURING' opportunity cost if it chooses to buy the small fitting and start manufacturing the timing unit?
(2) Would it be wise for JTL MANUFACTURING to buy the fitting and manufacture the timing unit? Explain.
JTL MANUFACTURING
JTL MANUFACTURING puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, JTL MANUFACTURING then uses different methods to determine the best decisions for making capital outlays.
In 2014 JTL MANUFACTURING is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.
The following information is available to use in deciding whether to purchase the new backhoes.
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Old Backhoes
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New Backhoes
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Purchase cost when new
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$90,000
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$200,000
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Salvage value now
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$42,000
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Investment in major overhaul needed in next year
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$55,000
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Salvage value in 8 years
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$15,000
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$90,000
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Remaining life
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8 years
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8 years
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Net cash flow generated each year
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$30,425
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$43,900
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Instructions
(a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)
(1) Using the net present value method for buying new or keeping the old.
(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.)
(3) Comparing the profitability index for each choice.
(4) Comparing the internal rate of return for each choice to the required 8% discount rate.
(b) Are there any intangible benefits or negatives that would influence this decision?
(c) What decision would you make and why?
Attachment:- JTL-Inc-Last-Name-T-Z.rar