Marginal cost-benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $566,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $357,000 (also in today's dollars) over that same time period. An initial cash investment of $226,400 would be required to install the new equipment. The manager estimates that the existing robotics be sold for $56,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following: a. The marginal benefits of the proposed new robotics. b. The marginal cost of the proposed new robotics. c. The net benefit of the proposed new robotics. d. What should Ken recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made? a. The marginal (added) benefits of the proposed new robotics is $ . (Round to the nearest dollar.) b. The marginal (added) cost of the proposed new robotics is $ . (Round to the nearest dollar.) c. The net benefit of the proposed new robotics is $ (Round to the nearest dollar.) d. Ken Allen should recommend the company (Select the best answer below.) to not replace the existing robotics because the net profit is positive. to replace the existing robotics because the net profit is positive
Marginal cost-benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $566,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of $357,000 (also in today's dollars) over that same time period. An initial cash investment of $226,400 would be required to install the new equipment. The manager estimates that the existing robotics be sold for $56,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following: a. The marginal benefits of the proposed new robotics. b. The marginal cost of the proposed new robotics. c. The net benefit of the proposed new robotics. d. What should Ken recommend that the company do? Why? e. What factors besides the costs and benefits should be considered before the final decision is made? a. The marginal (added) benefits of the proposed new robotics is $ . (Round to the nearest dollar.) b. The marginal (added) cost of the proposed new robotics is $ . (Round to the nearest dollar.) c. The net benefit of the proposed new robotics is $ (Round to the nearest dollar.) d. Ken Allen should recommend the company (Select the best answer below.) to not replace the existing robotics because the net profit is positive. to replace the existing robotics because the net profit is positive
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:Marginal cost-benefit analysis and the goal of the firm Ken Allen, capital budgeting analyst for Bally Gears, Inc., has been asked to evaluate a proposal. The manager of the automotive division
believes that replacing the robotics used on the heavy truck gear line will produce total benefits of $566,000 (in today's dollars) over the next 5 years. The existing robotics would produce benefits of
$357,000 (also in today's dollars) over that same time period. An initial cash investment of $226,400 would be required to install the new equipment. The manager estimates that the existing robotics
be sold for $56,000. Show how Ken will apply marginal cost-benefit analysis techniques to determine the following:
a. The marginal benefits of the proposed new robotics.
b. The marginal cost of the proposed new robotics.
c. The net benefit of the proposed new robotics.
d. What should Ken recommend that the company do? Why?
e. What factors besides the costs and benefits should be considered before the final decision is made?
a. The marginal (added) benefits of the proposed new robotics is $ . (Round to the nearest dollar.)
b. The marginal (added) cost of the proposed new robotics is $ . (Round to the nearest dollar.)
c. The net benefit of the proposed new robotics is $
(Round to the nearest dollar.)
d. Ken Allen should recommend the company (Select the best answer below.)
to not replace the existing robotics because the net profit is positive.
to replace the existing robotics because the net profit is positive
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