BUMT 3950: 14th Ed

Week 7 - Chapter 10

1.Wake Coffee Co. has a piece of equipment no longer needed for

production. The company purchased the equipment for $75,000 and has
accumulated depreciation of $10,000 related to the equipment. Wake
Coffee Co. has determined it can either lease the equipment for the next
ten years, for yearly revenues of $9,000, or sell the equipment for
$70,000. If leased, the company expects to incur repairs and other
expenses of $22,000 over the life of the lease. The equipment would also
have a $3,500 salvage value. If sold, the broker requires a 4% broker
commission. Prepare a differential analysis to determine if the company
should sell (Alternative 1) or lease (Alternative 2) the equipment.
Differntial Analysis
Sell - Alt 1 or Lease - Alt 2

Differential
Sell - Alt 1 Lease - Alt 2 Effect on Income
- alt 2
Revenues $70,000 $93,000.00 $23,500.00
Costs -2,800 -22,000 -19,200
Income (loss) 67,200 $71,000 $4,300

Revenue if Leased= $90,000 + $3,500

Wake Coffee Co, should lease the asset

2. Blair Designs produces 4,000 yards of Solid Fabric per batch, which
sells for $5 per yard. Each batch of Solid Fabric produced incurs $12,000
of costs. The company can incur an additional $3,000 in costs to process
the batch of Simple Fabric into 2,400 yards of Patterned Fabric, which
sells for $12 per yard. Prepare a differential analysis to determine if the
company should sell Solid Fabric (Alternative 1) or process further into
Patterned Fabric (Alternative 2).
Differential Analysis
Sell Solid Fabric (Alt. 1) or Process into Patterned Fabric (Alt. 2)
Differential
Process Further -
Sell - Alt 1 Effect on Income
Alt 2
- alt 2
Revenues $20,000 $28,800 $8,800
Costs -12,000 -15,000 -3,000

1
Income (loss) $8,000 $13,800 $5,800

Blair Designs should process further into Patterned Fabrics