Reference no: EM132507927

ATI Teck manufactures an electronic component for a high-end computer. The company currently sells 50,000 units a year at a price of $1 80 per unit. These units are produced using a machine that was purchased ?ve years ago at a cost of $1.2 million. It currently has a book value of $600,000; however, due to its specialized nature, it has a market value today of only $70,000. The machine, which is expected to last another ?ve years, will have no salvage value.

The costs to produce an electronic component are as follows:

Direct materials $ 15.00
Direct labour (4 hours >< $30.00/hour) 120.00
Variable overhead (4 hours X $2 .40/hour) 9.60
Fixed overhead (4 hours X $3.201'hour)é 12.80
Total cost per unit $157.40

Question1 : How to calculate contribution margin/incremental analysis given above info to determine whether or not the company should purchase the new machine given the above info and:

1. The company expects the following changes for next year:
2. The unit selling price will increase by 10%.
3. Direct labour rates will increase by 15%.
4. Sales are expected to increase to 52,000 units (within the capacity of present facilities) and remain at that level.
5. Management is currently considering the replacement of the company's old machine with a new one that would cost $2.5 million.
6. The new machine is expected to last five years and to have a salvage value of $60,000 (straightline depreciation is used).
7.  By using the new machine, management expects to cut variable direct labour hours to 3.5 hours per unit, but the company will have to hire an operator for the machine at $90,000 per year.