EXERCISE 3-17 (30 MINUTES)

4. While it may have been a good idea to acquire the new equipment be-

cause of its greater capabilities, the calculations of the cost savings were

in error. The original calculations implicitly assumed that overhead

would decrease because of the reduction in direct labor-hours. In real-

ity, the overhead increased because of the additional costs of the new

equipment. A differential cost analysis would reveal that the automated

equipment would increase total cost by about $316,000 a year if the la-

bor reduction is only 2,000 hours.

Cost consequences of leasing the automated equipment:

Increase in manufacturing overhead cost:

Lease cost of the new machine ... $348,000

Cost of new technician/programmer ... 50,000