Module 10: Incremental Analysis: Relevant Costs and Models for Incremental Analysis
CRITICAL THINKING ASSIGNMENT (100 points): Differential Analysis There are two problems for this Module’s CT Assignment. Complete the following questions using Microsoft Word or Excel, as appropriate. Review the grading rubric to confirm you are meeting the assignment requirements. Boxx Corporation is considering the acquisition of new equipment. The equipment can be purchased from an overseas supplier for $8,500. The freight and installation costs for the equipment are $645. If purchased, annual repairs and maintenance are estimated to be $465 per year over the five-year useful life of the equipment. Alternatively, Boxx can lease the equipment from a domestic supplier for $2,200 per year for five years, with no additional costs. Required: Prepare a differential analysis to determine whether Boxx should lease (Alternative 1) or purchase (Alternative 2) the equipment. Indicate specifically whether the company should lease or buy the equipment after completing the analysis. Explain. Hint: This is a “lease or buy” decision, which must be analyzed from the perspective of the equipment user as opposed to the equipment owner. A condensed income statement by product line for Astronomy Baking Inc. indicated the following for Moon Cookies for the past year: Sales $550,000 Cost of goods sold 280,000 Gross profit 270,000 Operating expenses 297,000 Loss from operations ($27,000) It is estimated that 15% of the cost of goods sold represents fixed factory overhead costs, and that 30% of the operating expenses are fixed. Because Moon Cookies is only one of the many products, the fixed costs will not be materially affected if the product is discontinued. Required: Prepare a differential analysis to determine whether Moon Cookies should be continued (Alternative 1) or discontinued (Alternative 2). Should Moon Cookies be retained? Explain.