Business at your design engineering firm has been brisk. To keep up with the increasing workload, you are considering the purchase of a new state-of-the-art CAD/CAM system costing $370,000, which would provide 6,500 hours of productive time per year. Your firm puts a lot of effort into drawing new product designs. At present, this is all done by design engineers on an old CAD/CAM system installed five years ago. If you purchase the system, 30% of the productive time will be devoted to drawing (CAD) and the remainder to CAM. While drawing, the system is expected to out-produce the old CAD/CAM system by a factor of 3:1. You estimate that the additional annual out-of-pocket cost of maintaining the new CAD/CAM system will be $190,000, including any tax effects. The expected useful life of the system is eight years, after which the equipment will have no residual value. As an alternative, you could hire more design engineers. Each normally works 1,950 hours per year, and 60% of this time is productive. The total cost for a design engineer is $55 per hour. There are five design engineers. Identify the net cash flows (benefits and costs) associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers. C... In year 0, the net cash flow associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers will be $-370000. (Round to the nearest dollar.) In years 1-8, the net cash flow associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers will be $ (Round to the nearest dollar.)
Business at your design engineering firm has been brisk. To keep up with the increasing workload, you are considering the purchase of a new state-of-the-art CAD/CAM system costing $370,000, which would provide 6,500 hours of productive time per year. Your firm puts a lot of effort into drawing new product designs. At present, this is all done by design engineers on an old CAD/CAM system installed five years ago. If you purchase the system, 30% of the productive time will be devoted to drawing (CAD) and the remainder to CAM. While drawing, the system is expected to out-produce the old CAD/CAM system by a factor of 3:1. You estimate that the additional annual out-of-pocket cost of maintaining the new CAD/CAM system will be $190,000, including any tax effects. The expected useful life of the system is eight years, after which the equipment will have no residual value. As an alternative, you could hire more design engineers. Each normally works 1,950 hours per year, and 60% of this time is productive. The total cost for a design engineer is $55 per hour. There are five design engineers. Identify the net cash flows (benefits and costs) associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers. C... In year 0, the net cash flow associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers will be $-370000. (Round to the nearest dollar.) In years 1-8, the net cash flow associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers will be $ (Round to the nearest dollar.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
Question
Transcribed Image Text:Business at your design engineering firm has been brisk. To keep up with the increasing workload, you are considering the purchase of a new state-of-the-art CAD/CAM
system costing $370,000, which would provide 6,500 hours of productive time per year. Your firm puts a lot of effort into drawing new product designs. At present, this is
all done by design engineers on an old CAD/CAM system installed five years ago. If you purchase the system, 30% of the productive time will be devoted to drawing
(CAD) and the remainder to CAM. While drawing, the system is expected to out-produce the old CAD/CAM system by a factor of 3:1. You estimate that the additional
annual out-of-pocket cost of maintaining the new CAD/CAM system will be $190,000, including any tax effects. The expected useful life of the system is eight years,
after which the equipment will have no residual value. As an alternative, you could hire more design engineers. Each normally works 1,950 hours per year, and 60% of
this time is productive. The total cost for a design engineer is $55 per hour. There are five design engineers. Identify the net cash flows (benefits and costs) associated
with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers.
In year 0, the net cash flow associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers will be $ - 370000.
(Round to the nearest dollar.)
In years 1–8, the net cash flow associated with the drawing activities if the CAD/CAM system is purchased instead of hiring more design engineers will be $
to the nearest dollar.)
(Round
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