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What is the net financial benefit (over the next 3 yrs) for using the new process? B. Should Jummy use the new process?

What is the net financial benefit (over the next 3 yrs) for using the new process? B. Should Jummy use the new process?

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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A. What is the net financial benefit (over the next 3 yrs) for using the new process?

B. Should Jummy use the new process?

168 Chapter 6 other expar Per vear oses comm The new model, introduced a year ago, has experienced a flickering problem. On average the firm has to rework 40 percent of the completed units. The firm still has to repair under. warranty is percent of the units shipped. The additional work required for rework and repair makes it necessary for the firm to add additional capacity with annual fixed costs of P1,800,000: The variable costs per unit are P2,000 for rework and P2,500, including transportation cost," for repair. The chief engincer, Ayen Anicete, has proposed a modified manufacturing process that will almost entirely eliminate the flickering problem. The new process will require P12,000,000 for new equipment and installation, and P3,000,000 for training. Anicete believes that current appraisal costs of P600,000 per year and P50 per unit can be eliminated within one year after the installation of the new process. The firm currently inspects all the units before shipment. Furthermore, warranty repair cost will be only P1,000 for no more than 5 percent of the units shipped. Jimmy believes that none of the fixed costs of rework or repair can be saved and that a new model will be introduced in three years. The new technology will most likely render the current equipment obsolete: The accountant estimates that repairs cost the firm 20 percent of its business.
Transcribed Image Text:168 Chapter 6 other expar Per vear oses comm The new model, introduced a year ago, has experienced a flickering problem. On average the firm has to rework 40 percent of the completed units. The firm still has to repair under. warranty is percent of the units shipped. The additional work required for rework and repair makes it necessary for the firm to add additional capacity with annual fixed costs of P1,800,000: The variable costs per unit are P2,000 for rework and P2,500, including transportation cost," for repair. The chief engincer, Ayen Anicete, has proposed a modified manufacturing process that will almost entirely eliminate the flickering problem. The new process will require P12,000,000 for new equipment and installation, and P3,000,000 for training. Anicete believes that current appraisal costs of P600,000 per year and P50 per unit can be eliminated within one year after the installation of the new process. The firm currently inspects all the units before shipment. Furthermore, warranty repair cost will be only P1,000 for no more than 5 percent of the units shipped. Jimmy believes that none of the fixed costs of rework or repair can be saved and that a new model will be introduced in three years. The new technology will most likely render the current equipment obsolete: The accountant estimates that repairs cost the firm 20 percent of its business.
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