Question 1 - Keep or replace
Xinhong Company is considering replacing one of its manufacturing machines. The machine has a book value of $30,000 and a remaining useful life of 4 years, at which time its salvage value will be zero. It has a current market value of $49,000. Variable manufacturing costs are $33,200 per year for this machine. Information on two alternative replacement machines follows.
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Alternative A
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Alternative B
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Cost
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$115,000
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$113,000
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Variable manufacturing costs per year
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22,300
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10,100
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Required -
Calculate the total change in net income if Alternative A is adopted.
Calculate Ihe total change in net income if Alternative B is adopted.
Question 2 - Determining transfer prices
The Trailer division of Baxter Bicycles makes bike trailers that attach to bicycles and can carry children or cargo. The trailers have a retail price of $108 each. Each trailer incurs $33 of variable manufacturing costs. The Trailer division has capacity for 30,000 trailers per year and incurs fixed costs of $530.000 per year.
Required:
1. Assume the Assembly division of Baxter Bicycles wants to buy 4.000 trailers per year from the Trailer division. If the Trailer division can sell all of the trailers it manufactures to outside customers, what price should be used on transfers between Baxter Bicycles' divisions?
2. Assume the Trailer division currently only sells 10,900 trailers to outside customers, and the Assembly division wants to buy 4,000 trailers per year from the Trailer division. What is the range of acceptable prices that could be used on transfers between Baxter Bicycles' divisions?