Gormley Precision Tools makes cutting tools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high- precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the regular machine and a high-precision machine. The following information is available: A6 EX4 $ 180 Selling price Variable manufacturing cost per unit Variable marketing cost per unit Budgeted total fixed overhead costs Hours required to produce one unit on the regular machine 280 2$ 110 190 20 60 $700,000 $1,100,000 1.0 0.5 Additional information includes the following: a. Gormley faces a capacity constraint on the regular machine of 50,000 hours per year. b. The capacity of the high-precision machine is not a constraint. c. Of the $1,100,000 budgeted fixed overhead costs of EX4, $600,000 are lease payments for the high- precision machine. This cost is charged entirely to EX4 because Gormley uses the machine exclusively to produce EX4. The company can cancel the lease agreement for the high-precision machine at any time without penalties. d. All other overhead costs are fixed and cannot be changed.
Gormley Precision Tools makes cutting tools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high- precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the regular machine and a high-precision machine. The following information is available: A6 EX4 $ 180 Selling price Variable manufacturing cost per unit Variable marketing cost per unit Budgeted total fixed overhead costs Hours required to produce one unit on the regular machine 280 2$ 110 190 20 60 $700,000 $1,100,000 1.0 0.5 Additional information includes the following: a. Gormley faces a capacity constraint on the regular machine of 50,000 hours per year. b. The capacity of the high-precision machine is not a constraint. c. Of the $1,100,000 budgeted fixed overhead costs of EX4, $600,000 are lease payments for the high- precision machine. This cost is charged entirely to EX4 because Gormley uses the machine exclusively to produce EX4. The company can cancel the lease agreement for the high-precision machine at any time without penalties. d. All other overhead costs are fixed and cannot be changed.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Suppose Gormley can increase the annual capacity of its regular machines by 15,000 machine-hours at a cost of $300,000. Should Gormley increase the capacity of the regular machines by 15,000 machinehours? By how much will Gormley’s operating income increase or decrease? Show your calculations
Transcribed Image Text:Gormley Precision Tools makes cutting
tools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high-
precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the
regular machine and a high-precision machine. The following information is available:
A6
EX4
$ 180
Selling price
Variable manufacturing cost per unit
Variable marketing cost per unit
Budgeted total fixed overhead costs
Hours required to produce one unit on the regular machine
280
2$
110
190
20
60
$700,000
$1,100,000
1.0
0.5
Additional information includes the following:
a. Gormley faces a capacity constraint on the regular machine of 50,000 hours per year.
b. The capacity of the high-precision machine is not a constraint.
c. Of the $1,100,000 budgeted fixed overhead costs of EX4, $600,000 are lease payments for the high-
precision machine. This cost is charged entirely to EX4 because Gormley uses the machine exclusively
to produce EX4. The company can cancel the lease agreement for the high-precision machine at any
time without penalties.
d. All other overhead costs are fixed and cannot be changed.
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