Assume that a company manufactures numerous component parts, one of which is called Part A....
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Accounting
Assume that a company manufactures numerous component parts, one of which is called Part A. The companys absorption costing system indicates that it costs $23.00 to make one unit of Part A as shown below:
Direct materials
$
10.00
Direct labor
6.00
Variable overhead
2.00
Fixed overhead
5.00
Total absorption cost per unit
$
23.00
The company is trying to decide between two alternatives: Alternative 1: Continue making 80,000 units of Part A per year using its existing equipment at the unit cost shown above. The equipment used to make this part does not wear out through use and it has no resale value. Alternative 2: Replace the existing equipment with a new piece of equipment that the company would rent for $157,000 per year. The new piece of equipment would be used to make 80,000 units per year and it would reduce Part As direct labor cost per unit by 20% and its variable overhead per unit by 30%. The direct materials cost per unit will remain constant. What is the financial advantage or (disadvantage) of renting the new piece of equipmen
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