Reference no: EM132461791

Problem - A company has been using a truck for eight years. For this year, this old truck requires repairs estimated at $7,000 to make it road worthy again. The company management is considering to replace the old truck and instead buy a 5-year-old used truck for $7,000 cash. The following costs are estimated for the two trucks:

	Old Truck	New Truck
Acquisition cost	$30,000	$7,000
Repairs	$7,000	-
Annual operating costs (Gas, maintenance, insurance)	$2,580	$1,700

During the year, the company is approached by a potential customer to fulfill a one-time-only special order for a product similar to one offered to domestic customers. The company has excess capacity. The following per unit data apply for sales to regular customers:

Variable costs:

Direct materials $130

Direct labour 60

Manufacturing support 105

Other costs 95

Fixed costs:

Manufacturing support 175

Marketing costs 65

Total costs 630

Markup (50%) 315

Targeted selling price $945

Required -

1. Which truck should the company choose if financial factor is the only consideration? Support your answer with computation of the cost savings amount.

2. What is the change in operating profits if the one-time-only special order for 1,030 units is accepted for $550 a unit by the company?