You were appointed the manager of Drive Systems Division (DSD) at Tunes2Go, a manufacturer of portable music devices using the latest developments in hard drive technology, on December 15 last year. DSD manufactures the drive assembly, M-24, for the company's most popular product. Your bonus is determined as a percentage of your division's operating profits before taxes. One of your first major investment decisions was to invest $6.2 million in automated testing equipment for the M-24. The equipment was installed and in operation on January 1 of this year. This morning, J. Bradley Finch III, the assistant manager of the division (and, not coincidentally, the grandson of the company founder and son of the current CEO) told you about an offer by Pan-Pacific Electronics. Pan-Pacific wants to rent to DSD a new testing machine that could be installed on December 31 (only two weeks from now) for an annual rental charge of $1,400,000. The new equipment would enable you to increase your division's annual revenue by 8 percent. This new, more efficient machine would also decrease fixed cash expenditures by 6 percent. Without the new machine, operating revenues and costs for the year are estimated to be as follows. Sales revenue and fixed and variable operating costs are all cash. Sales revenue $ 9,700,000 Variable operating costs 1,150,000 Fixed operating costs 4,330,000 Equipment depreciation 820,000 Other depreciation 800,000
You were appointed the manager of Drive Systems Division (DSD) at Tunes2Go, a manufacturer of portable music devices using the latest developments in hard drive technology, on December 15 last year. DSD manufactures the drive assembly, M-24, for the company's most popular product. Your bonus is determined as a percentage of your division's operating profits before taxes.
One of your first major investment decisions was to invest $6.2 million in automated testing equipment for the M-24. The equipment was installed and in operation on January 1 of this year.
This morning, J. Bradley Finch III, the assistant manager of the division (and, not coincidentally, the grandson of the company founder and son of the current CEO) told you about an offer by Pan-Pacific Electronics. Pan-Pacific wants to rent to DSD a new testing machine that could be installed on December 31 (only two weeks from now) for an annual rental charge of $1,400,000. The new equipment would enable you to increase your division's annual revenue by 8 percent. This new, more efficient machine would also decrease fixed cash expenditures by 6 percent.
Without the new machine, operating revenues and costs for the year are estimated to be as follows. Sales revenue and fixed and variable operating costs are all cash.
| Sales revenue | $ | 9,700,000 |
| Variable operating costs | 1,150,000 | |
| Fixed operating costs | 4,330,000 | |
| Equipment |
820,000 | |
| Other depreciation | 800,000 | |
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