Cornerstone Bank's New Machine Proposal

This assignment examines a proposal by Cornerstone Bank to purchase a new optical scanning machine. The analysis focuses on the relevant costs and benefits of the proposal, considering both differential analysis over 6 years and a net benefit calculation. The student is also tasked with identifying additional factors that Cornerstone Bank should consider beyond just operating costs, such as time value of money, interest expenses, inflation, and technological obsolescence.

E 15-15
(a)
Monthly volume Fixed cost Variable cost Total cost Average cost per unit
100 $ 10,000.00 $ 30.00 $ 10,030.00 $ 100.30
1000 $ 10,000.00 $ 300.00 $ 10,300.00 $ 10.30
5000 $ 10,000.00 $ 1,500.00 $ 11,500.00 $ 2.30
10000 $ 10,000.00 $ 3,000.00 $ 13,000.00 $ 1.30
(b)
Average cost = 0.7
Let number of units is X
Total cost= 0.7X
As per given information, Total cost= 10000+0.3X
Equating both
0.7X= 10000+0.3X
X=25000
E15-16
(a)
1. with the current employee-assisted process
Photos per month Fixed cost Variable cost Total cost
20000 $ 7,000.00 $ 6,000.00 $ 13,000.00
50000 $ 7,000.00 $ 15,000.00 $ 22,000.00
2. With the proposed customer self-service process
Photos per month Fixed cost Variable cost Total cost
20000 $ 13,000.00 $ 1,000.00 $ 14,000.00
50000 $ 13,000.00 $ 2,500.00 $ 15,500.00
(b) Proposed process become preferable to current process when total cost under current process
becomes higher than the total cost of the proposed process. This could happen at a specific

monthly volume which can be calculated by equating costs under the both processes. Let at
monthly volume X costs under both process become equal. Calculation of that monthly volume
is,
7000+0.3X=13000+0.05X
.25X=6000
X=24000
Hence if at the volume from the 0-23999 current process is appropriate due to lower fixed cost
and at a volume of 24000 units both processes are indifferent and at the volume, more than
24000 units proposed process is suggested because at this level total cost under current process
become higher than the total cost of the proposed process.
E16-17
a. Contribution income statement
Per unit Number of units Total
Revenue $ 40.00 6000 $ 240,000.00
Less: Variable expenses $ 22.00 6000 $ 132,000.00
Contribution $ 18.00 6000 $ 108,000.00
Fixed cost $ 60,000.00
Net income $ 48,000.00
b. Cost-volume profit graph
1000 2000 3000 4000 5000 6000 7000 8000 9000 10000
0
50000
100000
150000
200000
250000
300000
350000
400000
450000 CVP chart
Revenue
Fixed cost
Total cost
Number of units
Cost or revenue
Break-even point

P16-28
a. Calculation of tax rate
Revenue $ 800,000.00
Less
Variable cost $ 540,000.00
Fixed cost $ 110,000.00
Total cost $ 650,000.00
Profit before tax $ 150,000.00
Less: Profit after tax $ 54,000.00
Tax expenses $ 96,000.00
Tax rate (96000/150000) 64.00%
b. Unit sales value required for after tax profit of $100000
Profit after tax $ 100,000.00
Profit before tax (100000/(1-.64)) $ 277,777.78
Add: Fixed cost $ 110,000.00
Contribution required $ 387,777.78
Contribution per unit (40-27) $ 13.00
Number of units require to sale 29829.06
c. Unit sales value required for after tax profit of $100000
Profit after tax $100,000.00
Profit before tax (100000/(1-.64)) $277,777.78
Add: Fixed cost $132,000.00
Contribution required $409,777.78
Contribution per unit (40-(27-3)) $16.00
Number of units require to sale 25611.11
d. There are no any specific assumptions only some general assumptions are taken for
above solutions. Those are,
i. The tax rate is applicable on profit before tax.
ii. Tax rate of last year remains same for the next years irrespective of
change in the level of profits.

P17-22
a. Whether company should make or buy
Calculation of variable cost per unit
Total factory overhead for 10000 units $ 100,000.00
Less: Fixed overhead $ 80,000.00
Variable overhead $ 20,000.00
Variable overhead per unit $ 2.00
Calculation of total cost under the option of inside manufacture
Total Per unit
Direct material $ 90,000.00 $ 9.00
Direct labor $ 14,000.00 $ 1.40
Variable factory overhead $ 20,000.00 $ 2.00
Fixed factory overhead $ 80,000.00
Total cost $ 204,000.00
Calculation of total cost under the option of outsourcing
Per unit Cost under buy option
Direct material $ 12.50 $ 125,000.00
Direct labor $ 0.70 $ 7,000.00
Variable factory overhead $ 1.00 $ 10,000.00
Fixed factory overhead $ 80,000.00
Total cost $ 222,000.00
Loss due to outsourcing is $222,000.00-$204,000.00 i.e. $18,000.00. Hence it is recommended
to the company to choose the option of inside manufacture.
b. Whether company should make or buy
Calculation of total cost under the option of inside manufacture
Total Per unit
Direct material $ 90,000.00 $ 9.00
Direct labor $ 14,000.00 $ 1.40
Variable factory overhead $ 20,000.00 $ 2.00
Fixed factory overhead $ 80,000.00
Total cost $ 204,000.00

Calculation of total cost under the option of outsourcing
Per unit Cost under buy option
Direct material $ 12.50 $ 125,000.00
Direct labor $ 0.70 $ 7,000.00
Variable factory overhead $ 1.00 $ 10,000.00
Fixed factory overhead $ 20,000.00
Total cost $ 222,000.00
Less: revenue from rent $ 25,000.00
Net cost $ 197,000.00
Benefit due to outsourcing is $204,000.00-$197,000.00 i.e. $7,000.00. Hence it is recommended
to the company to choose the option of outsourcing.
c. Additional factors need to consider
 Capacity constraints
 Quality of product supplied by outside supplier
 Capacity constraints of outside supplier
 Regularity of outside supplier (FlatWorld, 2017)
P17-29
a. In the present case president of the of the bank considers both cost i.e. differential costs
as well as the sunk cost for making analysis regarding the relevant profit from the
proposal. However as per the relevant cost analysis sunk cost is not considered as a
relevant cost because this expense is past incurred expenses and unable to impact the cash
flows from the proposed projects (Relevant Cost and Decision Making, 2017). Hence the
appropriate analysis would be,
Savings $240,000
Cost of new machine $168,000
Net benefit $72,000
This analysis results that proposal for new optical scanning machine is for making profits
and is not on break even hence Cornerstone Bank could accept the proposal.
b. Differential analysis
Year Relevant cost under old machine Relevant cost after replacement Net increase in income
1 $ 110,000.00 $ 40,000.00 $ 70,000.00
2 $ 110,000.00 $ 40,000.00 $ 70,000.00
3 $ 110,000.00 $ 40,000.00 $ 70,000.00

4 $ 110,000.00 $ 40,000.00 $ 70,000.00
5 $ 110,000.00 $ 40,000.00 $ 70,000.00
6 $ 110,000.00 $ 40,000.00 $ 70,000.00
c. Other factors
In the present case, Cornerstone Bank considers only operating cost as relevant cost Cornerstone
Bank should also consider the time value of money in six years period, as well as Cornerstone
Bank, should also consider the interest of loan expenses that would increase due to acceptance of
the proposal. In addition to these factors, Cornerstone Bank should also consider other factors
like inflation and expectation of obsolesce of proposed machinery due to technological changes
etc.

Bibliography
FlatWorld. (2017). Retrieved October 9, 2017, from Managerial Accounting 1.0:
https://catalog.flatworldknowledge.com/bookhub/reader/4402?e=heisinger_1.0-ch07_s06
Relevant Cost and Decision Making. (2017). Retrieved october 9, 2017, from Accounting-
Simplified.com: http://accounting-simplified.com/management/relevant-costing/