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    Mavis Machine Shop

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    Soni Kavitha
    Tom is considering replacing four manual lathes used to produce drill bits with one automatic lathe. The automatic lathe would perform all the necessary operations to produce bits at the same rate as the four manual lathes but require only one worker. The estimated cost of the new automatic lathe is $680,000 installed. It is estimated to save $15,000 annually in floor space costs and $20,000 in other expenses compared to the current manual lathes.

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    Mavis Machine Shop

    Uploaded by

    Soni Kavitha
    285 views1 page
    Tom is considering replacing four manual lathes used to produce drill bits with one automatic lathe. The automatic lathe would perform all the necessary operations to produce bits at the same rate as the four manual lathes but require only one worker. The estimated cost of the new automatic lathe is $680,000 installed. It is estimated to save $15,000 annually in floor space costs and $20,000 in other expenses compared to the current manual lathes.

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    Mavis M/C Shop

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    Tom is considering replacing four manual lathes used to produce drill bits with one automatic lathe. The automatic lathe would perform all the necessary operations to produce bits at the same rate as the four manual lathes but require only one worker. The estimated cost of the new automatic lathe is $680,000 installed. It is estimated to save $15,000 annually in floor space costs and $20,000 in other expenses compared to the current manual lathes.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    285 views1 page

    Mavis Machine Shop

    Uploaded by

    Soni Kavitha
    Tom is considering replacing four manual lathes used to produce drill bits with one automatic lathe. The automatic lathe would perform all the necessary operations to produce bits at the same rate as the four manual lathes but require only one worker. The estimated cost of the new automatic lathe is $680,000 installed. It is estimated to save $15,000 annually in floor space costs and $20,000 in other expenses compared to the current manual lathes.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    1980, Tom considering a project to modernize plant facilities

    The company operated out of converted warehouse; Product: assorted machined metal parts for
    the oil and gas drilling and production industry

    Major customer: Buckeye drilling- purchased specialized drill bits and replacement parts; annual
    contract for past 8 years

    1978 ad 1979 requirements: 8400 bits per year; 4 manual lathes devoted to buckeye, use of skilled
    workers, al bits pass through all 4 lathes

    Mavis thinking to replace manual lathes with automatic ones, capable of performing all 4 operations;
    the m/c will produce bits at same rate as 4 manual lathes and would require only one worker; job
    would require more skill in computerized automation

    4 lathes were 3 years old, cost of $5,90,000. Together they produced 8400 drill bits on a two-shift 5-
    day/week basis; useful life estimated to be 15 years; salvage value $5000 each; depreciation of
    $114,000 had been accumulated on 4 lathes; Cash for their purchase had been provided by 10-year,
    unsecured,10% bank loan, of which $180,000 was outstanding. The best estimate of current selling
    price is $2,40,000 after dismantling and removal costs

    Loss from sale is tax exempted, resulting in tax savings of 46% of the loss

    New machine: no catalogue price, estimated cost $6,80,000 delivered and installed, useful life 15
    years, Using a 12 yr life…., estimated salvage value: 10% of the cost

    Automatic lathe introduced in 1975 at a cost of $7,50,000; price decline in 1978 and 1979 by 18%

    Direct labor rate : $10 per hour including fringe benefits; new m/c would use less floor space; would
    save $15,000 annually on allocated space; misc cash expenses $20,000 less per year; purchase price
    was subject to the 10% investment tax credit which did not reduce the depreciation cost; would be
    financed by a secured bank loan at 14%

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